ExxonMobil bets on natural gas boom with largest merger agreement in years
Purchase of XTO gives Exxon access reserves of nearly 45 trillion cubic feet of gasIn an effort to enhance its position in the development of unconventional natural gas and oil resources, the world's largest publicly traded oil company, Exxon Mobil Corp. has agreed to buy XTO Energy Inc. in an all stock transaction valued at $41 billion, including $10 billion of existing XTO debt.
ExxonMobil has agreed to issue 0.7098 common shares for each common share of XTO, representing a 25% premium to XTO stockholders.
Photo courtesy of XTO.
XTO's resource base is the equivalent of 45 trillion cubic feet of gas and includes shale gas, tight gas, coal bed methane and shale oil. The 45 tcfe includes 13.9 in proved reserves, 14.2 in low risk upside and 17.0 tcfe of additional potential. XTO puts its resource potential at growth above 30% since 2007 and 20% CAGR growth since 1993. Most of the growth has been through acquisitions as the company made over $11 billion of acquisitions in 2008.
The November issue of Oil & Gas Financial Journal showed both ExxonMobil and XTO as top performers in the OGJ150 Quarterly Report.
ExxonMobil was the leader in four of the five categories highlighted – assets, revenue, income, and stockholder equity. XTO Energy, which showed a 9.3% revenue gain ($200 million), was the biggest gainer of the group and moved from 11th place to 8th place in the revenue rankings.
Timing
The announcement has the industry excited, as ExxonMobil is known to be slow and deliberate in its actions—the most notable being its $74 billion purchase of Mobil that closed in 1999. At the time, the merger was the biggest in US history.
With advances in technology and the current administration's push for cleaner energy, excitement surrounding North America's natural gas sector has grown wildly and ExxonMobil is the first super major to make such a commitment to the movement.
ExxonMobil is making the push while gas prices are low. Before press time, natural gas prices for January delivery closed at $5.33 per million British thermal units, up 16.9 cents, in trading on the New York Mercantile Exchange. Not long ago, in the summer of 2008, natural gas prices passed $13.
Future of XTO
Rex W. Tillerson, chairman and CEO of Exxon Mobil Corp. noted, "XTO is a leading US unconventional natural gas producer, with an outstanding resource base, strong technical expertise and highly skilled employees." He continued, saying the deal was good news for the US as it will "enhance opportunities for job creation and investment in the production of America's own clean-burning natural gas resources."
After closing, ExxonMobil plans to turn XTO, and its current headquarters in Fort Worth, into a new upstream organization to manage global development and production of unconventional resources.
The transaction is also expected to create jobs, a departure from other oil giants like BP, ConocoPhillips, and Shell—which has publicly announced a cut of 10% of its global workforce by year end and, is reportedly migrating finance and other office jobs to India and the Philippines. The thought its that Exxon has the capital to develop the shale plays at a faster pace than is possible for XTO, thus creating jobs for engineers, managers, and on down to field-level employees.
Bob R. Simpson, chairman and founder of XTO commented, "As the world's leading energy company, ExxonMobil will build on our success and open new opportunities for the development of natural gas and oil resources on a global basis."
Standard & Poor's echoed Simpson's statement saying "XTO's assets will compliment ExxonMobil's growth plans in unconventional gas, and ExxonMobil's technical expertise will unlock additional XTO resource potential."
Analysis
Based on Madison Williams' (formerly SMH Capital) year-end proved reserve estimate of 15.3 Tcfe and 4Q09 production estimate of 2.9 bcfepd, basic metrics are $2.69 per proved Mcfe and $14,099 per flowing Mcfe.
Dahlman Rose & Co. points out that XTO has "significant exposure to all major unconventional plays," with shale gas comprising 30% of XTO daily gas production, and tight gas is 45% of daily gas production.
The firm sees the transaction as a positive. XTO provides ExxonMobil with both the unconventional resource expertise and a long term inventory of unconventional potential. ExxonMobil can leverage XTO's unconventional expertise in the US and apply its techniques to ExxonMobil's global assets.
Dahlman Rose notes the take out multiples have positive implications for XTO peers and other independents that have the experience and technology to operate unconventional assets. The acquisition is occurring at just under $3/Mcfe, $13,265/mcfepd, and 7.2x EV/2010 EBITDAX, while Dahlman's group is at $3.26/Mcfe, $17,611/mcfepd, and 8.7x EV/EBITDA.
While industry insiders are looking at the proposed transaction as a positive, Rep. Edward Markey, chairman of the House Energy and Commerce Committee's electricity subcommittee has voiced his intent to hold hearings next year—before the transaction's anticipated close in 2Q10—to take a closer look at the transaction, including industry practices and the role of natural gas and unconventional extraction techniques.
JP Morgan Securities Inc. is acting as financial advisor to ExxonMobil and Barclays Capital Inc. and Jefferies & Co. Inc. are acting as financial advisors to XTO.
— Mikaila Adams
