What should Chevron do with its cash?

Although the oil giant is in an attractive position to make acquisitions, obvious candidate Chesapeake Energy most likely won't be a target.

By Benzinga Aug 29, 2012 1:12PM
Oil derricks copyright Comstock CorbisBy Gordon Wilcox

The energy patch has been abuzz over the past couple of days with speculation that Dow component Chevron (CVX), the second-largest U.S. oil company, will be in an acquisitive mood. Chevron has $21 billion in cash, a large enough sum that puts plenty of companies in play.

Eager investors in the companies that would make for logical takeover targets for Chevron may dream the oil giant will come calling, but there are no guarantees. The company might be hoarding cash to deal with its legal woes in Ecuador and Brazil.

That is one factor to consider, but assuming the amounts Brazil and Ecuador are seeking from Chevron dwindle significantly, which should happen, the California company could do some shopping. If it does, the candidates could surprise analysts and investors.

Not the usual suspects 

The names popping up as the most have been Chesapeake Energy (CHK) and Hess (HES). Chesapeake's status as a takeover target is nothing new. Neither is how much some market observers are missing the mark on what companies would really be willing to get involved with the tangled web that is Chesapeake.

Chesapeake has a market capitalization of $12.44 billion, but getting CEO Aubrey McClendon to go along with a takeover bid would be easier said than done. Yes, financier Carl Icahn holds more Chesapeake shares than McClendon, but both men could demand a premium that values Chesapeake closer to $20 billion.

That is a lofty valuation at a time when U.S. natural gas prices are depressed. Chevron has been preferred by some investors because it is viewed as "oilier" than Exxon Mobil (XOM). In other words, Chevron has plenty of international gas exposure and does not need Chesapeake. For that matter, neither does Exxon Mobil, the largest U.S. gas producer.

Regarding Hess, Chevron could afford the company and Hess' Bakken Shale footprint is certainly alluring. If nothing else, it makes more sense for Chevron to target a deal that brings in more oil than one that is gas-focused, as acquiring Chesapeake would be.

There is a sticking point with Hess, though, and it is one Chevron probably will not gloss over. Hess has been on the wrong end of controversy in Russia, Forbes reported earlier in 2012.

Chevron, no stranger to the complexities of Russia's energy industry, might not want to take on Russian problems, no matter how much oil the country has.

Easily affordable 

In terms of companies that Chevron could afford easily without straining the balance sheet too much, Range Resources (RRC) is an idea. The company has been mentioned frequently as a possible target for one of Chevron's big rivals, and Chevron could use Range Resources as an avenue for bolstering shale acreage acquired in the 2010 purchase of Atlas Energy.

On the other hand, Chevron's U.S. shale profile is by no means small (3 million acres), and Range is a "gassier" play than Chevron might be willing to take on. Cabot Oil & Gas (COG) and Noble Energy (NBL) also fit the affordability profile for Chevron, but both are heavy on natural gas as well.

For bolstering oil production and reserves through acquisition, one name stands out as a logical target for Chevron. It is one Chevron shareholders would approve of not only because the company could be acquired for a decent price but also because of what the company would add to Chevron's petroleum profile.

That company is McMoRan Exploration (MMR). With a market cap of just over $2 billion, McMoRan resides barely outside of small-cap territory. The two are partners on potentially lucrative projects in the Gulf of Mexico. In recent years, the Gulf has turned into one of Chevron's most important areas of production.

McMoRan is one of the dominant players in the Gulf's Davy Jones prospect, a shallow water ultra deep field in which is Chevron holds a royalty interest. Getting Davy Jones to payoff has not been easy for McMoRan and investors have had nagging questions about the company's financial ability to do so, according to Forbes.

In 2011, rumors swirled Chevron might shell out $26 a share for McMoRan. That would be more than double the stock's closing print on Tuesday, but with McMoRan down almost 15% this year, Chevron might not need to pay a 100 premium to get its hands on operational control of Davy Jones. Amid speculation McMoRan cannot afford the per well costs it needs to absorb to truly exploit Davy Jones, a takeover of the company by an oil major such as Chevron appears all the more likely.

Noteworthy is the fact that legendary energy investor T. Boone Pickens loaded up on McMoRan in the second quarter, acquiring more than 678,000 shares of the stock. Perhaps Chevron will be the next big energy name to see value in McMoRan. Bottom line: A Chevron acquisition of McMoRan delivers attractive assets at a better price than a deal for Chesapeake would.

More from Benzinga

Aug 29, 2012 2:45PM
What about building a new refinery. All our current refineries are old and we keep seeing various refinery shutdowns for major maintenance and repairs. I'm sure we could use the extra capacity, even if it is for export.
Aug 29, 2012 1:31PM
This isn't the United States of Apple but if it walks like a duck.......   Monopolies are ILLEGAL in the USA and that is what Apple is running.  This is a great example of why Monopolies are illegal.  Apple has been ripping off Americans over this IPod crap for years.  Americans need an economical alternative to Apple's overpriced products and services and Samsung offers that.  Plus, Samsung actually pays IMPORT TAXES on it's products and Apple gets it's Chinese slave made IPOD products shipped FREE to the USA.  Apple spends approximately $2.00 US to produce an IPOD in China and charges Americans $500 - $600 US for that product.   Now that Steve is working as a laborer in the the FoxxConn division of Hell, I believe it is time to rip the wool of the American Sheeple who worship Apple and let them know that they are in America, the land of capitalism, competition and opportunity and China is producing their own Apple products and Apple, cowards that they are, beat up on somebody smaller then they are.  Apple has been granted a monopoly by the justice system of these United States, apple received a $750 MILLION dollar TAX REFUND straight off the backs of the middle class.  How?  By off shoring the Patents for IPOD to the Cayman Islands, reporting ALL PROFITS for IPOD in the USA as a ROYALTY  EXPENSE (o themselves in Cayman) and getting a hefty refund for those profits.   Yep, Apple is a true American 1% Corporation stealing from their customers while MSM feeds us cut n paste Apple approved articles such as these.   MSM, Apple - same agenda, keep em dumb.   What I've said here is worth hundreds of these 1% kiss up articles that MSN produces under their 'Money' moniker.  This information alone is worth researching a producing some worthwhile journalism.  
Aug 30, 2012 12:56PM
give credit card customers a credit of $1000 each
Aug 30, 2012 12:46PM
Pay dividends to shareholders and do more drilling for oil and refining when and if Big Government and the Save-The- Earth crowd lets them.  We will never become energy independent any other way.
Aug 30, 2012 10:50AM
No buy-outs!!! With no refineries being built since the '70s, and a hand full down/damaged, the status Quo only guarantees control of Supply and Demand lies continuing to carry the $21 Billion cash flow. Really, $21 Billion Cash, and they're only talking about buy-outs? We have Oil in abundance with no way to bring it to market as gasoline.
Aug 30, 2012 10:14AM
How about give some of it it to the shareholders before rates go up.  
Aug 29, 2012 2:57PM
Wasn't homeland energy exploration the Idea with the Bush tax cuts and Bushes additional sweetheard corporate welfare for big oil? F...er's!!!! 
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