My point was this. When the world fell apart in 2008, Buffett was sitting on billions of dollars of capital that he was able to deploy as follows at extremely high rates of return:
· Mars/Wrigley Acquisition Financing - $6.5 billion
· Auction Rate Securities - $6.5 billion
· Goldman Sachs - $5.0 billion
· Constellation Energy - $5.7 billion
· Marmon - $4.5 billion
· Dow/ Rohm & Haas - $3.3 billion
· General Electric - $3.0 billion
Combined with various other smaller investments and common stock purchases, Buffett put to work $46 billion in the 2008/2009 time period. He didn't pick the bottom of the stock market and hit homeruns, but he made a series of lower risk and very high return investments for Berkshire Hathaway (BRK.A).
Buffett sits on cash when bargains are not plentiful, and then buys aggressively when they are.
Compare that with Exxon Mobil's history of using its cash to buy back its own stock:
2006 - $29.5 billion (stock price range $52 to $69)
2007 - $31.8 billion (stock price range $64 to $85)
2008 - $35.7 billion (stock price range $68 to $85)
2009 - $19.7 billion (stock price range $62 to $71)
2010 - $13.1 billion (stock price range $55 to $72)
I like share repurchases, but unlike Buffett who picks his spots to deploy his cash, Exxon Mobil is much more methodical in its approach. When the company has excess cash, it buys back stock. That seems to be Exxon's default use for excess cash. There doesn't seem to be any consideration given to the actual price being paid for that stock.
When the stock price of Exxon went down in 2009 and 2010, the company actually bought considerably less of it. Why? Because the company didn't let the cash build up during high commodity prices of 2006, 2007 and 2008 and instead spent almost $100 billion buying Exxon shares. Does it make sense to maximize share repurchases when the stock price is high? Of course not, but that is what Exxon has been doing.
A Recent Wave of Unconventional Acquisitions
Let's be honest. Exxon Mobil is the bluest of the blue chips. It is widely held by institutions and the stock price simply never strays that far from its intrinsic value. It can't when everyone is looking at it and its operations are always rock solid. Buying back shares is accretive to Exxon's shareholders, but those shares are hardly ever significantly undervalued. Wouldn't it make even more sense to, rather than buy back stock, spend that money acquiring smaller companies which trade at bigger discounts to intrinsic value?
If I was able to form Exxon's corporate strategy, what I would do is curtail all share repurchases, build up a massive cash hoard, and then wait for the stock market to put energy companies on sale. Then rather than buy back Exxon stock at 90% of intrinsic value, I'd pick off smaller energy companies at much better prices. I believe that would create more value for shareholders.
My specific focus for acquisition targets would be on unconventional resource producers in North America. Acquisitions of these companies could set Exxon on up with decades worth of low risk development drilling opportunities from which it could grow production within North America. Certain production growth and little to no exploration risk inside of North America. It beats trying to get operations up and running in Iraq doesn't it?
The good news for Exxon is that right now Mr. Market already has a sale (in my opinion) on in the energy sector, and in the unconventional sector in particular.
And it seems that Exxon has noticed:
October 18, 2012 - Exxon announces its $3.1 billion acquisition of Canadian unconventional gas producer Celtic Exploration (OTC:CEXJF) and picks up key positions in the Duvernay (104,000 acres) and Montney (545,000 acres) shales.
Even for Exxon, $5 billion is a decent amount of money. And if I was Exxon, this would just be the start of my acquisition spree.
Get Out In Front of Consolidation in the Energy Sector
As an investor, I'm not interested in buying shares of Exxon which I don't think ever get especially undervalued. Instead, I've been buying shares of the unconventional producers that I think Exxon should be buying.
These unconventional producers (in Canada especially) trade at low multiples of cash flow, have good balance sheets and most importantly have very large land positions in unconventional plays that assure them of growth for years to come.
One of my favorites continues to be Petrobakken (PBKEF.PK), which is a pure play on unconventional oil production. Here is why:
- Petrobakken trades at half the cash flow multiple of its nearest competitor Crescent Point Energy (CSCTF.PK)
- Petrobakken pays a dividend that yields over 7%
- Petrobakken has a decade of drilling locations in the Cardium and Bakken oil resource plays
- In the next six months, Petrobakken will be providing results from an Enhanced Oil Recovery pilot project which has the potential to double the company's Bakken reserves
- Petrobakken is currently drilling the company's first development oil wells in four emerging resource plays in Northern Alberta
I think there is going to be a lot of consolidation in the North American energy sector over the next few years. Based on activity over the past couple of months it appears Exxon may be a major player in that consolidation.