Chevron Seen Eyeing Cobalt to Kosmos in Oil Hunt:Real M&A

(Bloomberg) — Chevron Corp., the U.S. oil giant
facing its longest slide in energy output in four years, could tap record cash to reignite growth by acquiring Cobalt
International Energy Inc. or Kosmos Energy Ltd.

Oil and natural gas production from Chevron’s wells during
the third quarter dwindled to the lowest since 2008, slashing profit by one-third and adding to declines that had already
forced the world’s fourth-largest energy company to abandon its full-year output target. Even after the earnings drop, Chevron’s cash stood at an all-time high of $21.3 billion, exceeding that of bigger rivals Exxon Mobil Corp. and Royal Dutch Shell Plc, according to data compiled by Bloomberg.

While Chevron is spending more than $45 billion to harvest
Australian natural gas fields that will produce enough of the fuel to supply all of China’s gas-import terminals, Phoenix
Partners Group LP says the company still has ample resources to expand into nascent oil-exploration regions. Cobalt’s billion- barrel discovery off the coast of Angola could bolster Chevron’s deep-water African reserves, and Kosmos and Ophir Energy Plc control “significant” untapped deposits from Tanzania to
Morocco, according to Tudor Pickering Holt & Co.

“Chevron is going to have to grow through acquisitions,”
Chris Kettenmann, chief energy strategist at Phoenix Partners in New York, said in a telephone interview. “They are going to
have to come to the market because they haven’t returned the $21 billion on the balance sheet to shareholders.”

‘Heavy Investment’

Lloyd Avram, a Chevron spokesman, said in an e-mailed
statement that the San Ramon, California-based company’s “cash position supports our long-held financial priorities,” and
declined to comment on any acquisition plans. He referenced a March presentation to analysts in which Chief Financial Officer Pat Yarrington listed the company’s priorities, which included paying dividends, funding capital projects and returning surplus cash to shareholders.

“We are in a period of heavy investment and our cash
balance allows us to weather lower commodity prices,” Avram
wrote. “We view a strong balance sheet as a risk mitigation
tool.”

Chevron, with a market value of $206 billion, said last
month that it pumped 3.2 percent less oil and gas from its
56,000 wells during the third quarter compared with a year
earlier, extending the company’s streak of production declines to a seventh straight quarter, the longest since a nine-quarter stretch that ended in 2008. Shutdowns related to weather and repairs contributed to the recent drop, the company said.

Lagging Behind

Chevron and other international oil producers have also
seen production eroded as higher crude prices triggered
contractual clauses in nations such as Nigeria that reduce
foreign operators’ share of output from wells. Brent oil
futures, the benchmark for two-thirds of the world’s oil,
averaged about $111 a barrel since the end of 2010, a more than 55 percent increase from the prior two-year period.

Still, Chevron has underperformed competitors squeezed by
the same global pricing mechanisms. Chevron’s production slide began in January 2011, six months before Exxon began registering a falloff in output and 18 months before Shell’s oil and gas volumes began to slip, according to data compiled by Bloomberg

Chevron, which said in March that it’s aiming to raise
daily production by one-fifth by the end of 2017 to the
equivalent of 3.3 million barrels of crude, has since said it won’t meet this year’s output goals. It’s spending almost $90 million a day this year to search for untapped reserves and
build gas-export plants from the Indian Ocean to the Baltic Sea.

Cash Pile

“Chevron is trying to grow through the drill bit, but when
you can’t do that, you need to go get someone,” said Brian
Youngberg, an analyst at Edward Jones & Co. in St. Louis.

Chevron has swelled its reserves of cash by more than 60
percent since the beginning of last year, in part to finance its share of costs for the construction of the sprawling Gorgon and Wheatstone gas-liquefaction complexes in northwest Australia. Its $21.3 billion in cash and equivalents as of Sept. 30
compared with $13.1 billion for Irving, Texas-based Exxon and $18.8 billion for The Hague-based Shell, according to data
compiled by Bloomberg.

“Chevron certainly has the balance sheet to do large-scale
M&A,” said Pavel Molchanov, an analyst at Raymond James
Financial Inc. in Houston. “They have always used a blend of organic growth and acquisitions, it’s never been an either-or thing with them.”

Shelf Filing

Oppenheimer & Co. analyst Fadel Gheit wrote in a Nov. 14
note that he was “intrigued” when Chevron filed with
regulators earlier in the month to issue debt, given the
company’s cash hoard. The so-called shelf registration “leads us to think that Chevron may be prepared to make a large
acquisition of a highly leveraged company and needs the
additional cash to wipe out this high cost debt.” On Nov. 28, the company raised $4 billion in the bond market.

Oil explorers Cobalt, Ophir and Kosmos, which have stakes
in untapped oil fields in some of the world’s most-promising offshore regions, could be appealing targets, said Matthew
Portillo, Tudor Pickering’s vice president of exploration and production research in Houston.

Cobalt, the Houston-based deep-water oil explorer,
announced a “significant” discovery in the Gulf of Mexico
yesterday at a well in which it owns a 60 percent interest. The $11.6 billion company also has projects off Angola that Tudor Pickering estimates hold more than 1 billion barrels of crude.

Lynne Hackedorn, a Cobalt spokeswoman, declined to comment
on whether the company has been approached by Chevron or would consider a sale.

‘Attractive Assets’

Today, Cobalt shares climbed 1.3 percent to $28.57 after
jumping 19 percent yesterday on news of its oil discovery.

Kosmos, with a market value of $4.6 billion, continues to
amass “very attractive” assets in oil-rich coastal zones of
Ghana, Cameroon and Morocco and could be a good takeover
candidate for an international oil producer such as Chevron, Portillo said. The Dallas-based company is led by the management team that scored a series of exploration triumphs off the
African coast in the 1990s for Triton Energy Ltd., which later sold to Hess Corp.

Brad Whitmarsh, a spokesman for Kosmos, didn’t return a
phone message seeking comment.

“Kosmos has a lot of potential,” Portillo said in a phone
interview. The company “has a lot of very attractive assets and high-impact exploration prospects.”

Seeking Partner

Today, Kosmos climbed 2.4 percent to $12.16, its highest
closing level in seven months.

London-based Ophir, the biggest holder of drilling rights
in East Africa, has gas holdings in Equatorial Guinea and
Tanzania ripe for export to European and Asian markets.

Ophir is seeking a partner with deep pockets to help build
a liquefaction plant for its Equatorial Guinea gas, Chief
Executive Officer Nick Cooper said in a Nov. 28 interview. The $3.3 billion company may seek a buyer for as much as half of its 80 percent stake in the offshore zone known as Block R, Cooper said then.

Cooper’s office directed requests for comment for this
story to an outside spokesman, who didn’t return a phone
message.

Today, Ophir shares fell 0.1 percent to 507.50 pence.

Hefty Expenses

The hefty outlays required at the Gorgon and Wheatstone
projects may temper Chevron’s appetite for acquisitions, said Robert Sweet, who helps manage $150 million at Horizon
Investment Services in Hammond, Indiana. The facilities, which will chill gas to a liquid form so it can be transported by
tankers to China, Japan and other markets, are scheduled to
begin operations in 2014 and 2016, respectively.

Chevron’s 47.3 stake in Gorgon means it will likely pay
about $25 billion of the total estimated cost of just over $50 billion. Its stakes in various segments of the Wheatstone
project indicate Chevron will be on the hook for more than $20 billion.

Chevron has another $7.6 billion committed to four deep-
water developments in the Gulf of Mexico and off the
Newfoundland coast, all of which are scheduled to commence
production in 2014.

While Chevron may have the resources to pursue a takeover,
shareholder Toronto-Dominion Bank said it doesn’t want the
company to feel it needs to make an acquisition just to boost output.

‘Right Things’

“They’ve been bolstering their cash balance and doing all
the right things that a disciplined company should do,” Ari
Levy, Toronto-based manager of the TD Energy Fund, said in a phone interview. “We wouldn’t want to see them deviate from
that for the sake of an opportunistic acquisition. The focus should be on adding value as opposed to pure production growth for production growth’s sake.”

Still, Chevron could use some of its cash pile to buy
oilfield-services provider Weatherford International Ltd. and take the sting out of its surging costs for such services and well equipment, said Laurence Balter, who helps manage $100
million, including Geneva-based Weatherford and Chevron shares, at Oracle Investment Research in Fox Island, Washington. Karen David-Green, a Weatherford spokeswoman, didn’t return a phone message seeking comment on a possible takeover by Chevron.

Today, Weatherford shares rose 1.2 percent to $10.86.

“With Weatherford, Chevron could control costs and extend
their tentacles,” Balter said. “It would be an ‘out-of-the-
box’ move.”

To contact the reporter on this story:
Joe Carroll in Chicago at
jcarroll8@bloomberg.net

To contact the editors responsible for this story:
Sarah Rabil at
srabil@bloomberg.net ;
Susan Warren at
susanwarren@bloomberg.net
[end]

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