Since the beginning of the year, analysts have been asking "WWEMB?" -- What Would ExxonMobil (NYSE: XOM ) Buy? Some, like Oppenheimer's Fadel Gheit, expected Exxon to go for one of its major peers. Others saw the firm gobbling up one of the independents, such as Chesapeake Energy (NYSE: CHK ) or Anadarko Petroleum (NYSE: APC ) . We finally got our answer today. The supermajor and XTO Energy (NYSE: XTO ) agreed to an all-stock deal valuing the latter firm at $41 billion, or about seven times cash flow.
For most other companies, $41 billion is a lot of money. ExxonMobil is not most other companies. With 3.27 billion shares held in treasury as of Sept. 30, the company is using just a fraction of its buying power here.
That's not to say this won't be a transformative acquisition for ExxonMobil. Beyond the 10% boost to the firm's resource base, Exxon is truly taking the plunge into unconventional resource plays. XTO has a strong foothold in each of the most promising shale plays in America, including the Marcellus, the Haynesville, and the Bakken.
Prior to the late 2008 commodity bust, XTO, Chesapeake, and other independents were leveraging up to make big shale play acquisitions. Chairman Bob Simpson described this period as "a time to grab hold or sit and miss." Some majors got in on the act by either joint venturing with an independent, or swallowing someone whole, as in the case of Royal Dutch Shell and Duvernay Oil.
Exxon was notably absent from the domestic frenzy, though it did grab a large position in Canada's Horn River Basin, and stake out prospective shale gas acreage over in Europe. As recently as this summer, my colleague David Lee Smith thought Exxon might go it alone. EOG Resources (NYSE: EOG ) has taken this organic approach, and Exxon probably could have made that work as well. It would have taken years, however, to create a world-class unconventional resource organization in-house.
Now that the amazing shale race has gone global, time is of the essence. Exxon has ConocoPhillips (NYSE: COP ) and Marathon Oil (NYSE: MRO ) to compete with in Poland. Statoil and Chesapeake are busily scouring the globe together. After being late to the party in the U.S., Exxon certainly doesn't want to "sit and miss" as the shale gas boom goes global. I believe that's the primary motivation to bring XTO and its unconventional expertise into the fold at this time.