Guest Post: The Exxon Purchase Of XTO Is Interesting
Submitted by Bulldog
XOM is the world's best investor in the energy business, and has a multi-decade track record and the returns on capital to prove it. This is undeniable. But, Exxon looks out 20 years when evaluating acquisitions and investments. Natural gas investors should not look too much into this bet, because Exxon's time horizon is longer than most of our careers, and perhaps lives, will be.
To say the least, it is very surprising that XTO sold given how bullish it was when it levered up and issued shares to buy two large E&Ps in 2008 and when it got annoyed with investors in meetings earlier this year when it suggested that it was significantly undervalued. Having said that, its recent addition of 2010 hedges <$6 a couple of months ago suggested that it perhaps wasn't so bullish. So why did it sell the company if it is so positive longer term on the outlook for the commodity and its own resource potential when its currency (its shares) would surely appreciate far more than the premium it is receiving from Exxon? Especially given that fact that it is accepting the currency/stock of Exxon that is much less levered to commodity prices and typically a flight of safety stock for the market when it flees beta in order to find comfort in the arms of Exxon? When one works through the machinations of the current industry dynamics, XTO hitting the bid is not bullish. Not near-term anyway. This is a very bearish signal that the world's most sophisticated natural gas E&P is selling for only a 25.9% premium ($49.30/share), which is far below (33% below) its previous high of $73.40 on 6/23/08. Why would XTO do that and accept the shares 'structurally challenged' (to use the sell-side's oft-used description) suitor Exxon when it materially reduces the upside leverage to North American natural gas? I for one cannot figure it out, unless XTO threw in the towel given how challenging the near- and intermediate-term outlooks are for natural gas and knowingly went long the long-term outlook while shorting the period between now and then
The flip side, and a special note to shale gas industry nemesis Arthur Berman. A special note to Arthur Berman--you have been trumped and made to look foolish, Mr. Berman. Now your analysis feels a bit like peeing in the wind, doesn't it? The worlds greatest energy company and investor has just made a big bet on natural gas, more specifically shale gas. They know a lot more than you do, and they are putting their money where their research suggests the opportunity will be.