Anadarko And Exxon: Bride And Groom?

Exxon Mobil

, the Dow component and largest U.S. oil company, has lost some superlatives this year. Months ago, Apple

wrested the title of largest publicly traded company from the Texas-based oil giant. In May, PetroChina

announced 2011 production numbers that topped Exxon's. By acquiring BP's

interest in TNK-BP, Russia's OAO Rosneft will pump about 4.573 million barrels per day surpassing Exxon's 2011 average of 4.506 million,

. With Exxon's third-quarter earnings report scheduled for Friday, the possibility looms the company will report a sixth consecutive quarter of production declines. The current streak of five consecutive quarters with dwindling production is the company's longest in 13 years, Bloomberg reported. Plunging natural gas prices and faltering crude production explain why Exxon earlier this year agreed to a multi-billion accord with Rosneft to tap reserves in the Russian Arctic region. The project, expected to kick-off in 2014, is potentially lucrative. The Kara Sea is believed to be home to billions of barrels of reserves, making it one of the last great untapped frontiers of oil in the world. Extracting that oil in frigid temperatures will also be dangerous and expensive. Throw in the aforementioned declining natural gas prices, something Exxon must contend by way of its 2010 $39 billion purchase of XTO Energy, and it is easy to see why Exxon's next big move might be a big acquisition aimed at bolstering oil reserves.

Exxon's balance sheet is pristine and the company's credit rating is deep in investment-grade territory. Combine Exxon's

at the end of the second quarter with its ability to issue debt at low interest rates and plenty of companies could be legitimate targets for Exxon. First, some candidates need to be eliminated. By way of the XTO deal, Exxon is the largest U.S. natural gas producer. When the chart of the U.S. Natural Gas Fund

, it is easy to see why Exxon will not be acquiring Chesapeake Energy

or Range Resources

anytime soon. Both have been mentioned as takeover targets. The latter has been tied to Royal Dutch Shell

in years past, but the reality is Exxon has a gas problem and more gas will make it worse. Shareholders would be apt to stage a coup if Exxon committed to a big acquisition that added to its gas exposure. Bottom line: It is safe to rule out any company that produces more gas than oil as an Exxon target. The list includes, but is not limited to Chesapeake, Range and Cabot Oil & Gas

.

The Bloomberg piece offered up Anadarko Petroleum

as a possible target for Exxon. Anadarko, the second-largest U.S. independent oil and gas producer behind ConocoPhillips

, is no stranger to takeover rumors. In late 2010, a rumor started that BHP Billiton

, fresh off its rejected overture for Potash Corp.

, would make a run at Anadarko. That move has yet to materialize, but it Anadarko is an attractive target for any large oil company to consider. Anadarko's reserve replacement ratio last year was 148 percent compared to just 107 percent for Exxon, according to Bloomberg. The company had total reserves of 2.5 billion barrels at the end of 2011 and is targeting 3 billion by the end of 2014. There are some sticking points in a possible Exxon/Anadarko marriage. An analyst cited by Bloomberg said the takeover price for Anadarko would be $102 per share. That translates to a market cap of about $52 billion, or a bit more than 50 percent above Anadarko's market value at the close of U.S. markets on October 26. Still, Exxon could afford that price tag. The company repurchased about $128 billion in stock from

. Some of that was used on XTO, but between Exxon's cash on hand and stock sitting in the company's treasury, Anadarko is by no means off limits. The bigger strike might be Anadarko's gas exposure. During the first quarter, Anadarko's production was 57% gas, 31% oil, and 12% gas liquids,

. On the other hand, Anadarko's gas exposure is not confined strictly to the U.S. International natural gas prices are higher than what is seen here in the U.S. The company holds a 36.5 percent in a Mozambique gas field that could be worth an added $20 to the stock price, Barron's reported. Anadarko has only started drilling there, so it is fair to say that $20 is not close to being accurately reflected in the current stock price.

Anadarko, known in part, for a treasure trove of high risk/high reward offshore oil plays, also has significant footprints in the Eagle Ford and Niobrara shales, two of the oilier shale formations. Exxon's recent add-on purchases have shown the company is looking to increase its exposure to unconventional energy plays. The September purchase of 196,000 acres in the Bakken Shale for $1.6 billion from Denbury Resources

indicates as much. Adding everything up, including the gas exposure, Anadarko does make for a credible Exxon target and one Exxon shareholders would likely be OK with. That said, Anadarko's ongoing $25 billion lawsuit with Tronox pertaining to environmental liabilities could keep normally prudent Exxon at bay. Anadarko's has no loss-liability contingency for this case,

.