ExxonMobil Corp. advanced the cause for North American natural gas Monday after agreeing to pay $41 billion to acquire unconventional gas powerhouse XTO Energy Inc.
The agreement, subject to XTO stockholder and regulatory approval, would add around 45 Tcfe to ExxonMobil's resource base and lift its gas weighting to 45%. The Irving, TX-based supermajor would have a substantial unconventional gas and oil resource base in the United States to complement its holdings in Canada, Germany, Poland, Hungary and Argentina.
The deal makes more significant ExxonMobil's newly released "Outlook for Energy: A View to 2030," in which the producer forecast that unconventional gas would satisfy more than half of U.S. demand by 2030 (see Daily GPI, Dec. 9). The company in September said it had no plans to slow its North American development, even during challenging times (see Daily GPI, Sept. 10).
"We have illustrated the very strong growth in natural gas demand that we anticipate to occur over the next several decades, certainly at a much higher rate of demand growth than oil or coal," CEO Rex Tillerson said during a conference call with financial analysts Monday. "That's driven largely by a significant growth in demand for power generation. Natural gas is really well suited to meet that growing power generation demand, both from the standpoint of its lower environmental impact, but also its capital efficiency and its flexibility.
"As various parts of the world are trying to meet that demand, gas gives them a lot of flexibility in terms of the increments they can add and the way they can handle varying load demands; gas is really a well suited fuel choice. And that's what underlies that outlook for a very strong growth in gas demand all over the world..."
The resource-rich XTO agreed to a stock deal that would give shareholders a 0.7098 share of ExxonMobil for each share of XTO, which values XTO at $51.69/share, which is a 25% premium to Friday's closing price. XTO management wanted the stock deal instead of cash because of the tax implications for its shareholders, said Tillerson. ExxonMobil had the cash to pay for the deal, he said, but ExxonMobil went along with the stock deal at XTO's request.
"We think there's going to be significant demand for natural gas in the future. It's not a price play, obviously because we never do that. It's an efficiency play. And as you know, we believe you get a lot of efficiency benefits out of scale, out of leveraging best practices and delivering them rapidly into the global portfolio. And that's, really -- that's the important element. That's the opportunity for us -- now...we have to go out and capture it. And that's where the value creation will occur."
During the conference call an analyst suggested that based on the offer price for XTO, ExxonMobil's implied price for gas was "above $7/Mcf to make a good return," which in turn signified that the supermajor was "long-term bullish physically on the natural gas market."
However, Tillerson made no forecasts on near-term gas prices.
"We didn't create a different price deck for this deal, if that's what you're implying," said the CEO. "If you just look back at the unit cost here, on a proved reserve basis, it's under $3 an Mcf equivalent. If you look at that resource base, the 45 Tcf; it's less than $1. And obviously where we're going to extract that value is -- and as you have heard us talk many times, we test our things against a range of possible price environments, but what we know is we have to go out and create efficiencies.
"We have to go out and create added value through technology and extraction techniques and continue to work at that to get better and better and better, so that we create the value. We don't wait on the market to create it."
In the longer term, "we think this is a great transaction for the United States and for the consumers of the U.S. and [it] addresses many of the energy security concerns they have," he said. "The ultimate value of the transaction will be measured over decades. It's not likely to be accretive to near-term earnings per share because of the current price of natural gas."
How long ExxonMobil may have been eyeing XTO remained a question for some analysts. Tillerson noted that ExxonMobil is constantly on the look-out for attractive acquisitions, but it's never been quick to pull the trigger on a possible deal. Predecessor company Exxon Corp. paid $77.2 billion to acquire Mobil Corp. in 1998 (see Daily GPI, Dec. 2, 1998).
Since then ExxonMobil has quietly acquired properties across the world and established a substantial gas position in the Piceance Basin of Colorado, where up to now its primary onshore U.S. focus has been (see Daily GPI, July 31) In 2005 XTO agreed to farm-in almost 70,000 gross acres in ExxonMobil's Piceance leasehold (see Daily GPI, July 1, 2005).
What made XTO a suitable target for ExxonMobil was not only its solid resource, said the CEO. He also pointed to XTO's "strong technical expertise and highly skilled employees," which, when combined with ExxonMobil's "advanced research and development and operational capabilities, global scale and financial capacity, would help with a technology transfer to emerging unconventional resources across the globe."
ExxonMobil is banking on XTO's staff remaining in place to move the combined company forward, said Tillerson. Once the transaction is completed, a new upstream organization would be established to enable "the rapid development and deployment of technologies and operating practices to increase production and maximize resource value," he said. The new organization would be located in Fort Worth, TX, where XTO is now headquartered.
XTO Chairman Bob R. Simpson founded predecessor company Cross Timbers Oil Inc. in 1986; it became XTO Energy Inc. in 2001 (see Daily GPI, May 16, 2001). The name change followed questions about why the company called itself an oil company when it concentrated on natural gas, Simpson said at the time.
Completion of the transaction is expected by the end of June. In connection with the transaction, J.P. Morgan Securities Inc. is acting as financial adviser to ExxonMobil, and Barclays Capital Inc. and Jefferies & Co. Inc. are financial advisers to XTO.
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