ExxonMobil's announcement on Thursday that it had finalized a deal to acquire InterOil may not have grabbed the top business headlines, understandable since Exxon is paying about $2.5 billion in stock to acquire IOC and Exxon's market capitalization is $387 billion. This transaction, however, is a perfect example of Exxon's position as a core long-term hold in any diversified portfolio.
By buying IOC, Exxon gains control of a massive amount--the final reserves are still being calculated but it could be as much as 10 trillion cubic feet--of gas reserves in Papua New Guinea. Exxon shareholders will benefit for decades from the cash flows produced from producing that gas.
I really can't state the investment thesis any more simply: the world needs more energy and ExxonMobil provides energy.
That so much of the supply of carbon-based fuels is far from the areas showing the most demand grwoth is a simple fact of life for energy companies, and the reason why the scale of the global integrateds--Exxon, Chevron, Total, Royal Dutch Shell, Pertrobras, etc.--is so important.
Energy demand is robust, as the International Energy Association confirmed in its most recent oil market report. The IEA has already lifted its forecasts twice this year, and now forecasts world oil demand growth in 2016 of 1.4 million barrels, implying a total global market for oil of 96.1 million barrels per day. That growth is most acute in China and India, but, really, every major region (including the U.S.) is showing solid demand grwoth this year, with the exception of flatness in Europe. Demand strength is what brought the oil markets out of their historic funk in mid-February and has brought oil futures back to the mid $40/barrel range from the $27/barrel nadir that was hit in both January and February of this year.
Oil prices are still much lower than recent averages, though, and that is the other benefit for ExxonMobil. The massive amount of capital that has moved away from oil and gas exploration virtually assures that supplies will fail to keep up with that 1.4 million barrel/day growth rate. The IEA forecasts oil demand to meaningfully outstrip supply beginning around mid-year next year, and I believe the crude markets will reach the balance point much sooner than the IEA's forecast. So, if you liked $100/barrel oil in 2014, you're going to love it in 2017. If you own XOM, that is.
Exxon's dividend, now at a $3.00 annual rate or a 3.2% yield, provides a return tailwind in markets that I believe are overvalued and have been driven, for the past couple weeks, anyway--by the relatively low-yielding Nasdaq.
Those dividends are supported by cash flows, of course, and that brings me back to Exxon's purchase of IOC. Since mid-2014, Exxon has operated a project in Papua New Guinea--PNG LNG--that produces 6.9 million tons of gas per year. PNG LPG supplies four main customers, two in China and two in Japan, and Asia's demand for natural gas shows no signs of waning.
The success of that project drove Total to build another terminal--Papua LNG--about 20km from Exxon's existing terminal. Total's local exploration partner Oil Search tried to acquire its other local partner InterOil, and that's where Exxon stepped in with a better offer. In the process Exxon doubles its acreage in Papua New Guinea and increases its stake in the Asian LNG market.
It's a small deal, but it's just further evidence of Exxon's ability to grow shareholder value through access to capital and incredibly detailed knowledge of global energy markets. XOM's one to own.
