Exxon Mobil’s planned $40 billion, all-stock purchase of XTO Energy is all about unconventional natural gas, say analysts (over and over again), and represents a classic Exxon strategy: watch and wait while others make early moves on a prospect then make a bold, decisive move to get a key piece of the pie. Oh yeah, and pay in cash.
Was this expected? Not exaclty. “WOW! Didn’t see this coming,” say the folks at Tudor Pickering & Holt.
How serious is Exxon about making stuff like shale gas a bigger part of its future? According to their release:
Following the transaction closing, ExxonMobil intends to establish a new upstream organization to manage global development and production of unconventional resources, enabling the rapid development and deployment of technologies and operating practices to increase production and maximize resource value. The new organization will be located in Fort Worth, Texas, in XTO’s current offices.
What does it mean for other E&P companies? Simmons & Co. asks:
“This transaction will likely set a bid under the E&P group today as the best capitalized and historically most conservative company moves decisively further into unconventional NAM natural gas. The transaction can’t help but imply a vote of confidence in both the potential resource size in shale gas and in the majors outlook for North American natural gas prices (XOM holding more exposure to swing Qatari LNG of any major). Companies that will likely garner immediate attention as take out candidates are CHK, EOG, SWN, RRC, APC, DVN, etc.”
What does it mean for services firms (drillers etc.)? they also ask:
“Negative, particularly if today’s transaction becomes a trend. Unlike JV’s, where the majors bring capital to continue development, an outright company-level acquisition of this magnitude is typically followed by slowed development in the midst of portfolio high grading; a negative for NAM drilling and service companies.”
Simmons also observes that XTO has hedged 53 percent of its 2010 production at $9.62/mcf. Exxon generally doesn’t use such hedges, so it will be interesting to see if they stick or are liquidated.
CreditSights notes the deal “removes one of the five largest independent North American E&Ps, leaving only four independents remaining who have the scale that would likely be attractive to the Integrateds/Super Majors – Anadarko (APC), Devon (DVN), EnCana (ECA), and Chesapeake (CHK).” Tudor Pickering & Holt says the deal will “probably” kick off a major consolidation trend because “majors tend to be lemmings around trends like jvs/consolidation“. Their list of likely targets includes EOG, SWN, HK, ECA, DVN, CHK, APC.
But as always, TPH notes, it’s rare a big oil and gas merger goes smoothly:
“When was last “really good” merger between major and independent E&P? Can’t really remember..maybe BP-Vastar? Keeping people critical. COP bought Burlington and everyone left. XTO is top-tier, acquisition-capable, blocking-and-tackling organization that grinds out good returns. Not exploration gurus..good executors. Will XOM keep buying?