By now, much ink has been spilled analyzing ExxonMobil’s pending acquisition of XTO Energy Inc. for $41 billion. The transaction will make this major the No. 1 producer of natural gas in the U.S. More important, it grafts XTO’s considerable shale know-how and plentiful acreage onto ExxonMobil’s formidable technical savvy and deep pockets.
This deal caps a string of transactions where big companies — now ending with the biggest of them all — have bought or joint-ventured into North American shale plays.
I count at least $53 billion of acquisitions and joint ventures in the shales — so far — as I believe more deals are coming.
It now seems that the biggest independents with shale savvy are becoming farm teams for the majors and the national oil companies. Last year Oil and Gas Investor magazine honored XTO for making an $11.6-billion series of acquisitions of unconventional gas resources to beef up its shale potential. CEO Bob Simpson has known Exxon chief executive Rex Tillerson for years.
There are several important lessons here. One is that relationships in the oil and gas industry matter greatly, and for the long term. You never know who will be working for you, or whom you’ll be working for, as the industry follows its twists and turns.
The biggest lesson here, however, is that the value of gas shales has been validated, putting to rest the doubters and naysayers. Last fall there was public debate about the shales. Was all this an overhyped frenzy to woo investors? Were estimated ultimate well recoveries far too optimistic?
Devon Energy Corp. defended the shale plays in an op ed in The Daily Oklahoman this past October. But actions speak louder than words. And capital spending speaks even louder. Devon’s bold new strategy is to sell its plum offshore and international assets and focus on natural gas in North America. Independents, from St. Mary Land & Exploration Co. to Forest Oil Corp., have been restructuring their portfolios to add shale acreage. Do we need further proof?
Sure, there are some legitimate near-term concerns on gas prices, infrastructure and markets. But if any particular shale is not economic right now, it will be one day. We also know that ExxonMobil doesn’t do anything this big lightly — this being its first merger in a decade. The company has always taken the long view.
The coming “wave” of natural gas production will be needed as the U.S. energy picture transitions in the next couple of decades, even if there seems to be too much gas supply now. We tend to focus and fret on this quarter or the next one, when good managers also have to keep in mind the long-term picture, ultimate outcomes, and which strategy fits best in that picture.
Even if estimated ultimate recoveries are questioned by some at the moment, time will tell. And now, ExxonMobil will help tell the story.
It helps to keep in perspective, too, that ExxonMobil has a lot on its plate around the world, more than most, from Qatar to research on algae to paying up to $1 billion for a new purpose-built rig for drilling in the Arctic. That the board thinks it necessary to add U.S. shale gas to the menu says a lot.
What does this mean to the industry? Several analysts think it puts other companies in play. ExxonMobil is acquiring 45 trillion cubic feet equivalent of resource potential for an all-in resource cost of about 70 cents per thousand cubic feet equivalent, according to Morgan Keegan E&P analyst Chris Pikul’s research note.
Pikul calculates that applying this same metric to Petrohawk Energy Corp. and Range Resources Corp.’s unrisked resources would suggest a price tag of $15- to $16 billion for each of them — much higher than their roughly $8- to $9 billion of enterprise value.
What’s more interesting is what this merger means for the U.S. natural gas picture. The last time a major acquired an independent, ConocoPhillips bought Burlington Resources, and the purpose was, as now, to get more natural gas resources.
No doubt, this deal changes the industry permanently. Policymakers need to catch up with what technology has enabled, and we all need to promote more use of natural gas.
Don’t forget to attend the 5th annual DUG, Developing Unconventional Gas, conference in Fort Worth, March 30 and 31. We have an outstanding lineup of chief executives and other experts speaking this year. Go to dugconference.com to learn more.
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