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ExxonMobil buys U.S. natural gas for $31 billion–I told you this was a big trend

posted on December 14, 2009 at 1:53 pm
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ExxonMobil (XOM) will buy XTO Energy (XTO) for $31 billion in stock. (ExxonMobil will also assume $10 billion in XTO Energy debt.)

This acquisition is just the latest example of a shift among the international energy majors from exploration and development for oil in risky new geologies and tough climates to a concentration on predictable, low-production cost assets such as onshore U.S. reserves of natural gas locked up in shale formations such as the Barnett shale formation of Texas.

I flagged that trend for you in two posts earlier this month. You’ll find links to those columns later in this post.

XTO Energy is one of the largest producers of unconventional natural gas from the Barnett shale region. Through a series of recent acquisitions of its own (Headington Oil, Hunt Petroleum, and Linn Energy), XTO Energy has built positions in new unconventioanl natural gas and oil formations such as the Bakken shale of Montana and North Dakota, and the Marcellus shale that stretches through the Appalachians from New York to West Virginia.

The company has proved reserves of almost 13.9 trillion cubic feet of natural gas and another estimated 31 trillion cubic feet of unproved reserves. XTO produces about 5% of all U.S. natural gas.

ExxonMobil’s cost in the deal is roughly $13.42 per barrel of oil equivalent for the proved reserves and $5.47 a barrel of oil equivalent for total proved and unproved reserves.

That compares to a finding and development cost of $13.19 per barrel of oil equivalent for ExxonMobil at the end of 2008, according to calculations by Deutsche Bank.

That comparison–$13.19 per barrel in finding and development costs in 2008 versus a cost ranging from a low of $5.47 a barrel to a high of $13.42 a barrel to acquire XTO Energ–tells you why ExxonMobil is doing this deal even through natural gas prices are stuck in a slump of $4 to $5.50 per million BTUs. As I explained in my December 1 column http://jubakpicks.com/2009/12/01/its-not-the-price-of-oil-but-the-cost-of-oil-that-divides-the-good-oil-stocks-from-the-bad/ investing in predictable reserves of unconventional natural gas, such as those in the Barnett shale formation, instead of exploring for oil in risky geologies and climates makes sense because the finding and development costs are so low.

Predictably ExxonMobil’s acquisition of XTO Energy has put boosters on the price of all the other U.S. unconventional natural gas plays such as Ultra Petroleum (UPL) up 4.9% today as of 1:30 ET, Denbury Resources (DNR) up 5.2%, and Chesapeake Energy (CHK) up 6.1%.

Even EOG (EOG), which I wrote about as a long-term bet on a shortage of oil five years or so down the road because of the shift of capital budgets from exploring for tough to find oil to buying and developing easily predicted unconventional natural gas reserves, is up 6.1% today. For more on that future oil shortage and two stocks that stand to profit from it read my post http://jubakpicks.com/2009/12/08/the-return-of-the-oil-shortage-around-2015-and-why-the-industrys-logical-decisions-now-will-make-it-worse/.

Full disclosure: I own shares of Ultra Petroleum.

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  • bobmregina on 14 December 2009

    So, would you buy XOM now?

  • cjxland on 14 December 2009

    Another great call JIm- that’s why we trust you.

    But I think I will now hang on to [most of] my EEP, just to see which way the dust settles the next few days.

    Question tho: if this trend continues- what does it portend for SLB and NOV and TS and RIG and the rest of the service sector?

  • KBLS on 14 December 2009

    Hi Jubak, I bought into a norwegian company called Norse Energy about 3 months ago with an average px of Kr4.5 which is probably too high but I felt natural gas has potential to become quite big but it has been performing quite poorly. Can you let me have your thoughts and more info on this company? Thx KBLS

  • sevenacorns on 14 December 2009

    Hi Jim,
    Any thoughts on Fuel Systems (FSYS), as a play on natural gas, transportation efficiency?

  • illinidj on 14 December 2009

    Have to laugh a bit at this one, Jim. You have pretty consistently not been enamored with XOM. One always has to remember that XOM thinks long term. The big dog just got bigger, cut their cost their structure and is heavily involved in a trend I have been saying for a year now. Not a bad PR move as well. There is no better to fuel to generate jobs and keep the money in the US than natural gas.

  • Milestone on 15 December 2009

    Valero (VLO) bought 3 ethanol making plants from VeraSun (VSUNQ) yesterday, which drove the profit up today 40%.
    If you want to know about things before they happen, I can help you for an intra-day profit.

  • Milestone on 15 December 2009

    Mr. Jubak,
    Yes, this is a big trend, but what good does it do us now? XTO already jumped in price two days ago. I suppose over time you can make money off of XOM, but the real ability to make money, as you outlined in your book, is to find the macro trend, which would be XOM buying into natural gas, and to widdle that macro trend down to a specific stock that profits off of the the trend or, in this case, the acquisition of XTO. Its great talking about these things, but its almost frivolous if you cant preempt the decision and act on it. Since you have yet to reply to single comment of mine I’ll assume your silence is…

  • cyfairslam on 18 December 2009

    I have to wonder if this was a great deal for XOM. XTO is a great company with low development and production costs. The XTO salary and initiative program is completely different than XOM. Working for XOM is considered by many as like working for the government. It may be difficult for XOM to retain the XTO personnel for a long period of time. The XOM HSE program as well as general overhead could significantly increase development and production costs.

    On the plus side, XTO personnel should be able to help Exxon develop their international shale prospects. Exxon’s big bucks may be able to assist the Natural Gas lobby.

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