ExxonMobil: Pushes Further Into Carbon Capture With Denbury Acquisition; Fair Value Unchanged

ExxonMobil XOM announced the purchase of enhanced oil recovery specialist Denbury in an all-stock transaction for $4.9 billion. The exchange ratio of 0.84 Exxon shares for each Denbury share implies essentially no premium as Denbury shares had risen over the last year on rumors of a potential acquisition. Given the relative size of the deal at about 1% of Exxon’s market capitalization, our $118 fair value estimate and narrow moat rating are unchanged.

With this deal, Exxon adds Denbury’s 47 mboe/d of production and over 200 million boe of reserves, both nearly all oil. However, the real target is Denbury’s carbon capture and storage assets including 1,300 miles of CO2 pipelines, 925 miles of which are strategically located in Louisiana, Texas, and Mississippi, and 10 onshore sequestration sites. Given the abundance of refineries, chemical plants, and other hydrocarbon-related infrastructure and processing, the Gulf Coast offers an abundance of opportunities for decarbonization investment, particularly carbon capture and storage. This is where Exxon has focused its initial efforts and the addition of Denbury’s assets opens opportunities for the firm to ultimately achieve 100,000,000 tons per year of CO2 reduction with additional investments.

Importantly for shareholders, the small size of the deal, cash flow from existing assets, and strategic fit means Exxon is not breaking its commitment to capital discipline, a key element of its recovery from 2020 lows and part of our investment thesis. Furthermore, we would not be surprised if Exxon ultimately divests its higher-cost-producing assets and reserves if they can be separated from the CO2 business.