Editor’s Notebook: ExxonMobil and XTO: A New Player in Gas

January 2010 Vol. 237 No. 1

Jeff Share, Editor

There are two takes on ExxonMobil’s $31 billion or $41 billion takeover of XTO Energy. One is an obvious Wall Street bias in terms of immediate results, while the other analyzes the long-term aspects.

In his online column “TheStreet,” Don Dion suggests the natural gas industry has taken a “gut-wrenching nosedive” because of drastic oversupply and writes that the rate of gas production is expected to hurt prices into the next decade. He describes the future of natural gas as “looking dire” but is intrigued that ExxonMobil, which long considered gas as a distant cousin, is making a big bet.

XTO is a leader in shale gas development so ExxonMobil is now a key player in alternative natural gas besides acquiring 14 Tcf of reserves, 80% being natural gas. This boosts ExxonMobil’s unconventional natural gas acreage to 8 million acres, the largest in the industry. We might see some consolidation and standardization to the U.S. natural gas market, Dion says, especially since ExxonMobil adds its own expertise and much deeper pockets to XTO.

For more perspective, I turned to Bruce Bullock, director of the McGuire Energy Institute at Southern Methodist University, who says ExxonMobil and XTO are ideal partners.

“XTO is a very well-run company and a good executor. ExxonMobil is probably the best of the majors in executing, so you’re not going to have significant cultural issues. There probably will be more M&A activity and further consolidation but maybe not in the next couple months,” Bullock says. XTO CEO Bob Simpson also did extremely well creating value for shareholders–another important consideration for ExxonMobil, Bullock adds.

It’s hard to identify any independent natural gas producers not at play, but for the prospective buyer the big question will be how well they match up strategically, Bullock adds. Some will want to buy up properties merely to increase their own reserves while others look for a company with a talented technical staff such as XTO.

XTO has been a prominent producer in the Barnett Shale and has expanded into other shale plays including the red-not Marcellus development in Pennsylvania and New York. These assets will prove vital in helping ExxonMobil refocus its domestic production, particularly in natural gas. For its part, ExxonMobil has sizable R&D under way in Colorado concerning gas from tight sands, some of which will also be applicable to shale.

“They’re reading the tea leaves in Washington and figuring that natural gas is going to be a larger component in the national energy equation going forward regardless of what comes out of this climate change initiative and positioning themselves accordingly,” Bullock says.

The move also complements ExxonMobil’s decision to team with TransCanada in building the Alaskan gas pipeline and helps create a clearer picture of overall corporate strategy, short and long term.

“They’ve quietly been putting together some technologies including some in shale; now this acquisition plus the pipeline initiative is part of in an effort to build their overall gas presence in the United States,” Bullock says. Their more immediate returns will be provided by the XTO production, then bolstered by the start-up of the pipeline around 2018-2020. Longer term, advanced shale gas technology will be useful for ExxonMobil and majors to exploit many of their natural gas properties overseas.

Now for the big question: What does this mean for pipelines?

“Consolidation is better than the alternative, which is that some of these players not being able to get credit, shut production in and go out of business. When you can get a supermajor to step in and finance expansion out of cash flow, invest in more technologies, and develop these fields which we’re going to need to get the gas to market, it’s going to be good for pipelines in the long run,” Bullock concludes.