XTO Proves Unconventional Growth Machine for ExxonMobil

March 2015, Vol. 242, No. 3

Richard Nemec, Contributing Editor

In summer 2011, executives at super-major ExxonMobil were telling financial analysts during a quarterly earnings conference call about an amazing 70% boost in a year’s time of the energy giant’s unconventional natural gas-weighted portfolio to 76 Tcfe. The reason was simple, according to David Rosenthal, the current controller at ExxonMobil and at the time its investor relations chief. He summed it up in three letters, X-T-O.

Fort Worth, TX-born and raised, XTO Energy Inc. was founded 30 years ago as Cross Timbers Oil Co. before changing its name in 2001. Six years later, it paid Dominion Resources $2.5 billion for 1 Tcfe of oil and natural gas reserves in the Rocky Mountains, Texas and southern Louisiana. Then, as a further growth spurt, it acquired Hunt Petroleum Corp. for $4.2 billion, quickly becoming the largest U.S. producer of natural gas before ExxonMobil bought the company in 2010.

The company, which operates as an independent within the ExxonMobil corporate umbrella, has continued on its steep growth curve that makes it by far still the largest U.S. gas producer – soon-to-become the nation’s largest producer of natural gas liquids (NGL). In its first year under Exxon, it made a $1.69 billion purchase of Pennsylvania Marcellus shale gas reserves from Phillips Resources Inc. and TWP Inc., obtaining 317,000 net acres to double its holdings to more than 700,000 net acres in the heart of that gas-rich area.

As XTO Energy Inc., the newly created ExxonMobil subsidiary, was characterized as focusing on global development and production of unconventional resources, but as veteran executives still guiding the company will readily say, the global focus has been narrowed to concentrate almost exclusively on North America, and U.S. shale plays particularly, including midstream infrastructure, as well as exploration and production (E&P).

While pointing out ExxonMobil is loathe to divulge much about individual parts of it global business, one veteran of the Houston-based energy sector said the XTO unconventional model of success in North America is being used globally. Underscoring this is the fact that in early 2015 XTO was leading the parent company’s efforts to unlock a potential shale bonanza in onshore Argentina.

“The assets we have in place are very strategic to the integrated [corporate ExxonMobil] model we have linking the upstream, downstream and midstream businesses we have,” said Jeff Woodbury, vice president for investor relations, on a quarterly earnings conference call, while also telling analysts that ExxonMobil had no interest in creating a master limited partnership (MLP) out of some of its growing North American assets. “We are focused on the U.S. shale area.”

Indications are that XTO is thriving, according to Ben Tsocanos, an analyst following ExxonMobil for Standard & Poor’s Ratings Services (S&P) in New York City.

“XTO was mainly a natural gas company when it was acquired as a producer. It seems like that company has done a good job of transferring its gas expertise into oil also. So on that basis, I would say it has been a successful, albeit a pricey ($41 billion) acquisition for a supposed ‘gas buy’ [by ExxonMobil],” Tsocanos said.

“Certainly if you look at XTO as only a natural gas asset, then ExxonMobil paid a high price. If you think about it in terms of ExxonMobil acquiring expertise, it is a little hard to valuate, although there is clearly some [added] value there,” he said.

He said he thinks XTO has clearly become something more than a gas asset.

According to Ken Kirby, senior vice president for development and a 26-year veteran with XTO, the company has been “evolving” steadily since the 2010 merger.

“What XTO and ExxonMobil thought was going to happen right after the merger has evolved a little bit differently,” Kirby said. “Back in 2010, I think the CEO said we would be the ‘unconventional arm’ of ExxonMobil [worldwide], but what we have become is the North American or U.S. subsidiary of ExxonMobil. And now we’re trying to carefully move into some of the unconventionals worldwide.

“It’s a struggle to make the unconventionals work in the rest of the world. It is mostly because the infrastructure isn’t there, and the costs are just so high to make this work in the rest of the world,” Kirby said.

Generally, ExxonMobil does not disclose specific statistics on XTO or any of its units’ performances from quarter to quarter.

“The most specific they will get is to give results of oil/gas production for all of North America,” Tsocanos said. However, he said XTO ranks as one of the leading producers in the Bakken and Permian plays in North Dakota and West Texas, respectively.

Although he said it is difficult for an external observer to get a clear picture of what’s ongoing in ExxonMobil, Tsocanos said, “The concept is to let XTO operate independently within the super-major, giving it a fair amount of autonomy in terms of how to operate and maintain some of the innovation that has characterized the company before the 2010 acquisitions. XTO is trying to test new ways of optimizing the hydraulic fracturing [fracking] process and that sort of thing.”

One of its biggest areas of activity is in the Bakken in North Dakota where at the end of 2014, XTO had a net acreage position of 845,000 acres and 13 rigs operating. It made a big splash back in 2012 with the acquisition of nearly 200,000 net acres in the Bakken, absorbing Denbury Resources Inc.’s entire stake in the play.

“We’re in almost every meaningful play in the United States with the exception of the Eagle Ford,” XTO’s Kirby said. “Most of our interest and money right now is going to the Permian, Bakken, southern Oklahoma [Woodford], and the Northeast would be a real close fourth. We’ve got rigs in east Texas, Louisiana, Arkansas, the Rockies, all over.

“Our strategy has remained to hold gas pretty flat and grow the liquids,” Kirby told P&GJ, adding this is fairly well known in the industry. “That has been the XTO strategy for the last few years.”

At the start of 2015, Kirby envisioned that XTO would be the U.S. leader in both natural gas and liquids production with 55 rigs operating in the Permian, Bakken and Northeast (Utica/Marcellus) shale plays.

Kirby said XTO remains a “growth engine” for ExxonMobil, adding the independent-within-the-major is by far the largest U.S. natural gas producer. So big, that even if the company’s strategy to hold gas production flat ends up being a long-term approach, the overall numbers will still be extremely large each year in terms of production relative to the other leading Lower 48 gas producers.

Since the merger with Exxon Mobil, XTO has gotten a lot bigger, according to Kirby, who said the 3,300 employees five years ago have mushroomed to 5,000 employees today. In that short time period gas production has risen 30% and NGLs have ballooned by 140%,

“We already saw ourselves as a very large independent at the time of the merger, but we’ve grown considerably since then,” Kirby said.

Part of the dramatic liquids growth is attributable to ExxonMobil transferring many of its U.S. properties to XTO. In 2010, ExxonMobil was sitting on a lot of operated and non-operated properties in the United States, and many of them were incorporated into XTO, Kirby said. “They were a lot more oily than XTO was at the time; we were about 90% gas at that time.”

For comparison, in less than five years, the breakdown for XTO is now 70% gas and 30% liquids. That amounts to an overall portfolio of 4.5 Bcfe/d production with 3.1 Bcf/d being natural gas and the rest (1.4 Bcfe/d) being liquids. “We’ve gone from less than 10% liquids four years ago,” he said.

Following robust production growth, of course, is midstream infrastructure expansions, and XTO does a good bit of that sort of work itself. In places such as the Haynesville shale play or Freestone Field in Texas, XTO provides its own midstream services. S&P’s Tsocanos said most large E&Ps acquire midstream units as they grow and XTO had some such units in its portfolio when ExxonMobil bought the company.

“We have a very large midstream department [for both gas and liquids], so in a lot of our fields we gather all of our own production and have our own processing plant,” Kirby said. “Then, when it comes to going with a third party, our marketing department handles those negotiations.”

It is clear that between XTO and its parent, ExxonMobil, just about any resources needed are found in-house. That’s the difference between how XTO, an independent, handles things like that, and how ExxonMobil, a super-major, handles it, according to Kirby.

At XTO the midstream unit and everything else reports in through the president, but in the parent, many of those services are siloed out. “We think our way is a good, efficient way to do it,” Kirby said, adding that is how XTO did it before becoming part of ExxonMobil.

“A lot of XTO is still run like it was before the merger,” said Kirby, pointing out there is probably more growth for the midstream work in the NGL end of the business. “A few years ago, we had very little midstream work in liquids, but now it is just part of the Exxon mix. We can marry our midstream efforts along with ExxonMobil’s. It has gotten to be a bigger deal since the merger.”

He emphasized that in the Bakken, XTO does a little bit of both. It has its own gathering systems for both gas and liquids in part of the Bakken, and in another part it goes through third parties.

“It just depends on what makes sense in a given area,” said Kirby, adding that the opposite is true in southern Oklahoma. There, XTO does all of its own gathering, and then takes supplies to third parties for processing.

From XTO’s viewpoint, unconventionals are the name of the game for a long time to come, domestically and worldwide. And staying in an independent’s mindset is part of the corporate DNA, even after four-plus years in ExxonMobil. Competitors? They both have them, but XTO concentrates on independents and the parent worries about the other majors.

“That’s the model [that even housed inside of a super-major], we still run XTO as an independent, and we compete against independents,” Kirby said. “It’s a great model, and pretty much any independents you want to throw out there, we compete against. As I have said, we are operating in just about every meaningful basin in the United States.”

Even in the aftermath of rapidly declining global oil prices in the last half of 2014, Kirby expressed confidence XTO and ExxonMobil will plough through the adverse times, keeping a long view, executing on its strategies where it has considerable assets and leveraging a world-class research facility in Houston.

As part of the research resources, huge data models are available to XTO, allowing it to compare the effectiveness of different completion techniques for use in different parts of the Bakken shale play, for example. “They can put in tons and tons of data and model it, so it is something that ExxonMobil’s research department has been doing for us,” Kirby said.

From the large and experienced research staff, XTO has refined and perfected a completion technology, “X-frac,” which is a combination of an older technology, “Just-in-Times Perforating” and more recent advancements. It has been used with great success in the Bakken, particularly on longer 10,000-foot laterals. It is used selectively in other shale plays, such as the Haynesville, Kirby said.

“It is not anything all that technical [or arcane],” Kirby said. “It is all about being efficient, taking this manufacturing model [for unconventionals] and getting good enough at it so it gets to a mature state like in the Bakken or Barnett, and then it becomes the type of thing we’re trying to take to Argentina’s onshore unconventional oil and gas play.

“I don’t think there is any doubt that unconventional plays in the United States and eventually anywhere around the world are here to stay,” Kirby said. “The United States and rest of the world went from being what I call ‘prospects-poor’ in the mid-2000s to being ‘prospects-rich’ with the shale and tight plays. Now just about everybody has a good prospect to drill.”

Even at relatively low pricing, Kirby said he thinks there are prospects to develop. “If you’re in the heart of the Bakken, it’s going to be economic, even at very low oil prices, while in another area that may not be the case, and the same is true for West Texas. We think we are in a very good spot for a lot of our plays.”

Richard Nemec is a Los Angeles-based West Coast correspondent for P&GJ. He can be reached at: rnemec@ca.rr.com.

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