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Exxon buying Shell?

Analysts think Exxon Mobil will buy Royal Dutch Shell

Monday, January 5th 2009, 3:29 PM

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Exxon Mobil is sitting on a massive pile of money.

Thanks to record oil prices over the last few years and a cautious investment strategy that drew fire from critics, the company has nearly $40 billion in cash reserves. It has another $225 billion in repurchased stock tucked away for a rainy day.

That's enough money to pay a nearly 60 percent premium, in cash, for every share of its next largest competitor - Royal Dutch Shell.

''When Exxon came calling last time, they didn't dial the little guys,'' he said, referring to the 1999 takeover of Mobil, then the country's second-largest oil company. ''It has to be a big one in order to move the needle.''

Exxon management: Tough as nails

Shrewd management has put Exxon in this position to buy. Over the last five years oil companies worldwide scrambled to develop new projects to take advantage of oil's rising price - often paying exorbitant sums for leases, drilling rigs and other assets needed to bring crude to market.

But not Exxon. Although criticized for not doing enough to pump more crude, the company maintained the price spike was temporary, and that it wouldn't overpay for projects.

The position has paid off. With crude prices crashing, many oil firms are now deep in debt and stuck with expensive projects.

Share prices of the majors have fallen in-line with the broader stock market.

Shell is down 35 percent in the last 6 months. Chevron and BP are off about 30 percent.

Shares in many other oil firms that rushed to expand over the last few years are down even more.

But Exxon has lost just 10 percent.

''It's hard to question their management style and expertise,'' said Ken Carol, an oil company analyst at the investment bank Johnson Rice & Co.

''They've been proven absoultly correct.''

For Exxon, taking over another big firm would give it much needed oil reserves in a time when the multinational oil companies find themselves increasingly locked out of the best new oil plays by national firms like
Russian's Gazprom, Saudi Arabia's Aramco, or Venezuela's PDVSA.

It would also give it more financial muscle when negotiating with these governments.

Is Shell in Exxon's sights?

A deal with Shell might be particularly sweet for Exxon's ego.

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