ConocoPhillips is no stranger to megamergers. The company got its name when Conoco and Phillips Petroleum agreed to a $35 billion merger of equals in 2001. Then in 2005, the company bought Burlington Resources for $35.6 billion. Today, however, the company isn't interested in pursuing another deal even as lower oil prices are focusing producers to look at every option to reduce costs, including mergers. Instead, the company plans to sit out any merger wave within the industry, as it already has everything it needs internally.
We have everything we need At a recent conference, ConocoPhillips CEO Ryan Lance spent some time talking about the company's vast resource base and how important that was to the company's future. He pointed listeners to the following slide:
Source: ConocoPhillips investor presentation.
And then he said:
As Lance notes, the company is currently sitting on 44 billion barrels of oil equivalent resources, more than a third of that, or 16 billion BOE, has current supply costs of $60 per barrel or less. That's an enormous resource base as it will keep the company going for decades. Because of this vast resource base, Lance said:
In other words, the company has more than enough oil and gas right now that it simply doesn't need to do a deal to add to its resources. Nor does it need to pursue a merger in order to drive its supply costs lower as it has plenty of low-cost supply. That's why the company is likely to sit out any merger wave as it just doesn't have any glaring needs. Having said that, it isn't going to ignore the M&A market totally.
Herearethe deals ConocoPhillips will considerAt that same conference, an analyst pressed Lance to see what typeof M&A deals the company might consider under the right circumstances. Lance responded by saying: "If we go acquire something and do that, it has to compete for capital within the portfolio in a world we think that's informed by lower mid-cycle prices and more volatility. So, with less cash and less capital, the hurdle for competition is pretty high in our company, given the 16 billion barrels of resource base that we have that has a cost of supply that's less than $60 a barrel."
In other words, ConocoPhillips would only be interested in making an acquisition if it found a company or an asset that was materially better than what it already owned. That's because that asset would have to compete against its already strong supply base.
Lance would go on to note that the company is already "doing asset deals, land swaps, trades every day, every month, of every year. So we look for those opportunities, for distressed opportunities." That's because these smaller bolt-on deals enhance its position in key resource basins.
However, what interests it the most right now aren't acquisitions, but divestments. Lance said:
As Lance notes, it is more interested in selling some of its assets than in acquiring more because it has so much on its plate already. Sales would only enhance its financial position during the downturn, giving it more money to invest in its best opportunities.
Investor takeawayDespite its history of being a deal-maker, ConocoPhillips doesn't see it participating in any merger wave this time around. That's because the company simply has more than enough resources to develop organically. Instead, it would more than likely sell some of its assets to enable it to reinvest back into its asset base than to seek to grow that base any further.
The article Why ConocoPhillips Isnt Interested in a Merger originally appeared on Fool.com.
Matt DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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