Exxon Mobil to buy XTO Energy in $41 billion deal

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Exxon Mobil Corp. said Monday that it will buy domestic energy company XTO Energy Inc. in an all-stock deal valued at $41 billion as the blue-chip giant moves to boost its presence in the unconventional-natural-gas business.

The transaction value includes $10 billion of existing XTO debt and is based on Friday’s closing share prices of Exxon Mobil and XTO.

Exxon Mobil has agreed to issue 0.7098 of a share of common stock for each common share of XTO. The deal represents a 25 percent premium to XTO stockholders.

Wall Street voiced optimism about the transaction, with S&P Equity Research reiterating its strong buy rating on Exxon Mobil.

“We like the deal, which we view as fairly valued at $2.96 per thousand cubic feet of proved reserves, in line with recent deals,” S&P analyst Tina Vital said in a note to clients. “We believe XTO assets will compliment Exxon Mobil’s growth plans in unconventional gas, and Exxon Mobil’s technical expertise will unlock additional XTO resource potential.”

Evan Smith, co-manager of the U.S. Global Investors Global Resources Fund, said XTO’s stock has been cheap for some time now, lagging a number of others in the sector with a year-to-date gain of 18 percent prior to the deal.

“People have been wondering which direction oil is going to go and I think it says something when a company like Exxon steps in at this point,” Smith said. “It should be strong support for the sector.”

The agreement, which is subject to XTO stockholder approval and regulatory clearance, will “enhance Exxon Mobil’s position in the development of unconventional natural gas and oil resources,” Exxon Mobil said.

The move marks a major bet on gas as a cleaner-burning fuel than oil, as governments around the world look to Copenhagen climate-change talks this week to stem the flow of greenhouse gases into the atmosphere to combat global warming.

Known as a wildcat, or independent energy producer, 23-year-old XTO has vied for supremacy with Chesapeake Corp., Southwestern Energy Co. and others in the U.S. natural-gas business, which has boomed with the onset of horizontal drilling and well fracturing to extract energy from older oil fields.

Traditionally, energy companies have extracted natural gas by drilling vertical wells into pockets of methane often trapped above oil deposits. For years, it was often burned off as a waste product, before its value grew as an energy source.

With newer technology from the last 20 years, energy companies now drill horizontal wells and fracture them with high-pressure water, a practice known as fracking. That technique has proven a bonanza for freeing up natural gas trapped in the vast shale-oil fields of the U.S. as well as aging oil fields previously thought to be depleted.

Both Exxon Mobil and XTO have both established a presence in the Piceance Basin in Colorado. Other huge unconventional resources include the Haynesville Shale in Louisiana and Texas, the Barnett Shale in Texas, the Bakken Shale of North Dakota, the Marcellus Shale of Pennsylvania, New York and Ohio, and the Fayettville Shale of Arkansas.

Exxon Mobil said XTO’s resource base is the equivalent of 45 trillion cubic feet of gas and includes shale gas, tight gas, coal bed methane and shale oil.

“These will complement ExxonMobil’s holdings in the United States, Canada, Germany, Poland, Hungary and Argentina,” Exxon Mobil said.

Chief Executive Rex Tillerson said the oil major’s acquisition of XTO Energy represents a big move into unconventional natural gas as a “material new resource for us.”

The Irving, Texas, energy giant has already made various acquisitions in the unconventional arena around the world, and the XTO deal will help it knit those pieces together, Tillerson said in a conference call with reporters.

XTO will boost the oil major’s resource base by about 10 percent.

XTO Chairman Bob Simpson said tapping into Exxon Mobil’s resources will allow it to “unlock more value than we can do on our own.”

Tillerson said natural gas is the fastest-growing major energy source globally.

He said the company’s all-stock transaction offer was helped by its billions in equity buybacks in recent years.

The deal also provides a way for a company as big as Exxon Mobil to offer production growth to its investors.

In the third quarter, XTO said it managed to boost production by 23 percent, despite a lower profit tied to a drop in natural-gas prices. By contrast, Exxon Mobil’s production grew 3 percent in the third quarter as it ramped up its liquid natural-gas business.

Tillerson said the agreement amounts to “good news for the United States economy and energy security, as it will enhance opportunities for job creation and investment in the production of America’s own clean-burning natural gas resources.”

A major merger had been expected in the energy business as oil and commodity prices dropped, but industry experts has talked down the possibility of a tie-up between the Western super-majors, which include Chevron Corp., Royal Dutch Shell Plc, ConocoPhillips, BP Plc, Total SA, StatoilHydro and Eni SpA.

Among the oil majors, Statoil has made a major push recently into U.S. natural gas via a transaction with Chesapeake.

The deal for XTO has now sparked more merger talk in the energy business.

Houston research firm Tudor Pickering Holt said possible targets for acquisitions could include EOG Resources Inc., Southwestern Energy, Petrohawk Energy Corp., EnCana Corp., Devon Energy Corp. and Anadarko Petroleum Corp.

J.P. Morgan Securities Inc. acted as financial advisers to Exxon Mobil, and Barclays Capital Inc. and Jefferies & Co. acted as financial advisers to XTO.

ExxonMobil plans to set up a new upstream organization to manage global development and production of unconventional resources in Fort Worth, in XTO’s current offices.


(c) 2009, MarketWatch.com Inc. Source: McClatchy-Tribune Information Services.