eirmoney | Exxon Mobil's Buy Out Of XTO Energy

Exxon Mobil's Buy Out Of XTO Energy

Posted by Anil Bagra | 23 January 2010

While the debate is going on if we have already crossed the peak oil or not, oil firms are busy hedging their risks. Exxon Mobil is the latest to join the fray.

Exxon Mobil Corporation, world’s largest corporation by profits, is shifting its focus away from oil. The Irving Texas (US) based company bid US$31 billion to acquire domestic natural gas player XTO Energy in an all stock deal. In addition, the oil giant announced to assume US$10 billion of XTO’s debt. With the acquisition, the parent of Esso, Mobil and ExxonMobil brands hopes to secure a presence in the natural gas market.

However, analysts point that Exxon Mobil has been generous with the valuations of XTO, not to mention its plans of going ahead with the stock deal rather than a cash buyout. While the valuations appear slightly on the higher side, Exxon Mobil has good reasons to offer 25 percent premium to XTO shareholders. The Texan company plans to give 0.7098 Exxon Mobil shares for every share of XTO. In the US, natural gas prices are still significantly depressed and the likelihood of appreciating natural gas prices offers significant upside. After peaking last year, natural gas prices are currently down by around 60 percent in the US. In the long run, natural gas is likely to replace coal as a clean fuel in majority of industrial applications.This provides a good peg for the company to offer the significant premium over the market valuations.

XTO has rights to large reserves of natural gas in shale, coal bed methane and tightly compressed sands. By acquiring XTO, Exxon Mobil will be effectively competing with foreign oil giants who have recently invested in the sector. Major oil producers including BP, BG Group, StatoilHydro and Eni have made investments in the US gas industry in the past 18 months. In fact, Exxon has been ramping up its natural gas portfolio in global markets, but this is the first big deal for Exxon in domestic market. Natural gas industry participants have reported significant positive revisions in the US supply estimates owing to the technology advances. Due to these advancements in technology, extraction of gas in an economic manner has become a possibility.

The US regulators have received complaints from environmentalists that attract attention towards the ecological damage brought about by breaking the rock formations to extract shale gas. Although the takeover has run into rough waters lately with Exxon Mobil threatening to pull out of the acquisition in light of the proposals to ban hydraulic fracturing, the company seems to have got support from Energy secretary Steven Chu. Instead of an outright ban on hydraulic fracturing, Chu has supported the view of finding a way to extract gas without harming the environment.

The acquisition, in all probability to go through, is likely to change the US hydrocarbon markets fundamentally. Notwithstanding the smaller investments by other firms, Exxon Mobil’s acquisition is the biggest investment in the unconventional natural gas market.