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.
(1 vote)
on Tue, 12/15/2009 - 14:10
#164811
The growing threat of imported LNG
at "fire sale" pricing might make
XTO insiders nervous - especially
if they had heard something.
Now many of us thought the spectre
of imported LNG was killed in the
early eighties because of the large
and unique risks it posed.
It has been put back on the table.
on Tue, 12/15/2009 - 14:20
#164824
I wish guess posters would learn how to write... First, present a subject, give the reader some background so they understand the problem, then outline your solution to the problem or some recommended course of action. This is an excellent example of a goose-chase with the author chasing his own tail. And your point is....?
If it is the fact that XTO insiders are selling, insiders selling their own stock (and companies) is the norm, not unusual. They tend to be as stupid as the rest of the market with one exception, when they buy their own stock.
Had to laugh at your charge of Berman's analysis "feel's like peeing in the wind." What an incredible example of the pot calling the kettle black!
on Tue, 12/15/2009 - 14:48
#164858
I appreciate your critique, and will of course keep your thoughts in mind going forward. If you are looking for a recommendation--here goes: sell natural gas-levered equities. The smartest guy in the room (XTO) just sold his shares with a flight to quality into XOM shares. Have a nice day.
on Tue, 12/15/2009 - 16:01
#164969
If you had provided a brief summary of Bob Simpson's background and how much money he has made over the years it would help make the case that he's the smartest guy in the room. Simpson selling out reminds me of Wallace Malone of Southtrust and the Sandlers of Golden West selling the financial institutions they had founded 30-35 years prior to Wachovia near the height of the real estate bubble. But as you pointed, Exxon Mobil has a great investment track record, unlike Wachovia. I'd guess the low beta and liquidity of XOM stock probably made it the preferred buyer from Simpson's point of view.
on Tue, 12/15/2009 - 15:37
#164938
Ok professor Annie. Please call someone to bring over the extra large step-ladder.
on Tue, 12/15/2009 - 14:22
#164827
Maybe Exxons play has less to do with XTO
specifically and more to do with long term
projections for oil prices and profitability
vs. natural gas prices and profitability.
on Tue, 12/15/2009 - 14:43
#164854
In Asia and other parts of the world i'm sure, natural gas is used in taxis and cars as well as gas. The U.S. should implement this. Many advantages to using natural gas.
on Tue, 12/15/2009 - 19:00
#165204
In SoCAl, buses and trash hauler trucks run on natural gas. These 2 types of rigs used to be awful to get behind on the road when they were starting from a dead stop. Now they are as clean as the regular smog.
I think the distribution network for refueling NG is the roadblock due to low/nonexistent demand. Don't discount Big Oil's retail network......although mostly franchised.....they could be on line in no time. It's the mass manufacturing of NG autos that slows a dual retail conversion. But I'll bet it happens in 20 years.
on Tue, 12/15/2009 - 20:38
#165351
current autos can be converted, for under $5,000 to be dual fuel
on Tue, 12/15/2009 - 14:51
#164867
I started at Exxon when I got out of college. Exxon culture is the head-down, grind-it-out mentality and, if that's not sexy, well they don't care. Sex appeal is not their thing. It's a house full of really smart people who know how to squeeze a turnip dry. That said, it is running out of turnips. Therefore, when market prices fall, it sees an opportunity to add to reserves fairly cheaply. I'd say an all-stock deal benefits Exxon very well here. It was not a bullish sign for either the nat gas market or the American economy. It's also a further signal that Chinese solar stocks are but a passing fancy. The future of energy is still in hydrocarbons.
on Tue, 12/15/2009 - 15:03
#164886
Can somebody explain why UNG spiked on a 11 million share block trade on Dec 11 a few days before this NG deal with XOM?
Is it insider trading?
George Orwell
on Tue, 12/15/2009 - 15:13
#164901
I really doubt insiders use UNG as their vehicle of choice but this is pure speculation.
I don't know about the rest of the world, but Dec. 11 was freakin' cold in California.
on Tue, 12/15/2009 - 15:20
#164911
I believe the spike was on Dec. 10th and it was because inventories were down for the first time this season. I don't believe it had anything at all to do with this deal.
http://www.eia.doe.gov/oil_gas/natural_gas/ngs/ngs.html
on Tue, 12/15/2009 - 15:23
#164914
It was put down to this, but it was more than a third of the normal daily trading volume in just 1 minute so there may be more to it.
http://www.marketwatch.com/story/crude-rises-first-day-in-seven-after-jo...
NEW YORK (MarketWatch) - Natural gas futures surged more than 8% Thursday to their highest level in 11 months after government data showed U.S. inventories fell more than expected, signaling a recovery in demand as cold weather hit major gas-consuming regions.
on Tue, 12/15/2009 - 15:12
#164899
Any chance they know something about that T Boone bill?
on Tue, 12/15/2009 - 15:39
#164942
The XOM purchase has to do with one thing and one thing only: expand Exxon's reserves of natural gas (which outside of the joint venture it has in the UAE) are almost zero.
Of course when the UAE project comes on line (I think next year), XOM will become one of the largest NG producers in the world.
But they don't really control this resource.
The future is in NG, there is no doubt about it.
on Tue, 12/15/2009 - 18:42
#165171
Your post was inaccurate.
At y/e 2008 Exxon had 22.986 Billion Barrels of Oil Equivalent of Proved Reserves (BBOE), of which 52% were liquids (OIl, NGLs, and Condensate) and 48% was natural gas. Of the 10.98 BBOE of natural gas (65.9 Tcf), 47% were attributable to its AsiaPac & Middle East region (which includes a number of other resources in addition to its Qatar LNG projects). The rest of the natural gas reserves are in North America, Europe, etc.
XTO had 13.9 Tcfe of Proved Reserves at y/e 2008, or 2.3 BBOE of Oil-Equivalent Reserves, 85% of which was natural gas and 15% of which were liquids.
Pro Forma, this transaction only moves the needle in terms of mix slightly (49% liquids, 51% natural gas), with Total Pro Forma Proved Reserves increasing from 22.6 BBOE to 25.3 BBOE, up 10% from Exxon's year-end 2008 Proved Reserves.
on Tue, 12/15/2009 - 17:30
#165062
Regarding the article tags. ExxonMobil is an oil company. Mobile is a type of phone, or a city in Alabama.
on Tue, 12/15/2009 - 20:06
#165300
What if Big Oil knew coal usage was about to get pummeled in upcoming EPA regulations ? What if more electric utilities were planning to go 100% natural gas as opposed to coal to appease the EPA ?
Taking it a step further, can you capture /contain CO2 under ground after you've extracted all the nat gas that is economically feasible ? Would this help your other businesses based on carbon-trading credits ?
It will be interesting to see if the EPA goes along with the "expensive use of water" and risk to ground water supplies, given that one method of extracting natural gas from shale formations, relies on injected millions of gallons of water mixed with chemicals... and water is getting more expensive everyday.
on Wed, 12/16/2009 - 02:34
#165621
Good point. When oil rises above 100 a barrel we will see some changes.
on Tue, 12/15/2009 - 20:34
#165343
now that's good ish right there. and Occam's razor.
on Tue, 12/15/2009 - 22:08
#165421
Geopolitical angle: XTO is a US-based hedge against a Persian Gulf disruption.
The Tehran-Caracas Nuclear Axis -WSJ
http://online.wsj.com/article/SB1000142405274870486930457459565281580272...
If they hit Iran-Venezuela, those US-based natural gas assets from XTO look very valuable.
http://www.xtoenergy.com/en/Properties_Overview.html
on Tue, 12/15/2009 - 23:10
#165490
Repealing G-L-B and reinstalling Glass Steagall. The ultimate example of closing the barn doors after the horse has galloped out and far away.
Gramm is laughing his ass off where he works now...UBS.
on Tue, 12/15/2009 - 23:16
#165491
.
on Wed, 12/16/2009 - 01:49
#165597
Easiest way to make Hydrogen for fuel cells: reforming natural gas.
Post new comment