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Exxon and Chevron Flex Financial Muscle, Utilize Stock for Major Deals Amid Energy Market Uncertainty

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As the energy market faces uncertainty, Exxon and Chevron strategically leverage their cash-rich position by utilizing stock for mega deals, showcasing their resilience and adaptability in a rapidly changing industry.

Exxon Mobil and Chevron, two of the largest energy companies in the US, have been using stock as the only form of payment in their recent acquisition deals. This arrangement allows them to secure transformative deals despite the volatility of oil and gas prices. Chevron recently announced its acquisition of Hess in a $53 billion all-stock deal, while Exxon is set to acquire Pioneer Natural Resources for $59.5 billion in stock. This strategy has been utilized by both companies in previous deals as well.

Using stock as currency helps to reconcile price disagreements with acquisition targets in a volatile energy market. With geopolitical turmoil and fluctuating energy prices, cash deals can be risky for both the acquiring and acquired companies. By accepting stock as payment, the acquired company’s shareholders can benefit from the combined company’s upside and defer taxes by holding onto their new shares.

The CEOs of the acquired companies have been reluctant to agree to cash deals, as it would crystallize a price that they may end up regretting if energy prices rise. Selling for stock allows them to participate in the potential growth of the combined company and receive higher dividends.

Exxon and Chevron are pursuing these deals to mitigate the risk of exploring unproven reserves as oil and gas become scarcer. They are under pressure to acquire skilled operators in lucrative oil and gas regions, such as the Permian Basin and Guyana.

While the acquisition deals with Hess and Pioneer involved small premiums to their undisturbed share prices, previous cash deals required larger premiums. Chevron’s bid for Anadarko in 2019, which involved cash, required a 39% premium.

With their cash piles growing, Exxon and Chevron will need to decide what to do with the excess cash. One option is to return it to shareholders, including those of the acquired companies. Maintaining strong dividends and share buybacks helps compensate existing shareholders for the dilution caused by the all-stock acquisitions.

Chevron has announced an 8% dividend increase in the first quarter and plans to buy back $20 billion worth of stock annually. Exxon has not updated its dividend plans since the Pioneer acquisition but has expressed the possibility of buying back $17.5 billion worth of shares each year for the next two years.

Overall, using stock as the sole form of payment in acquisition deals allows Exxon and Chevron to navigate the volatile energy market and secure transformative deals. The excess cash can be used to support shareholders through dividends and share buybacks.

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