ExxonMobil Takes the Plunge

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.

Chesapeake is an Inside Value recommendation. Statoil is an Income Investor pick. You can explore any of our Foolish newsletters free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool owns shares of Chesapeake and XTO, and has a disclosure policy.


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  • Report this Comment On December 14, 2009, at 4:18 PM, karlwmiller wrote:

    Energy Icon Re-Affirms December 10, 2009 Recommendation: CHK Attractive Acquisition Candidate at Discount

    _______________________________

    Chesapeake Energy (NYSE: CHK) Attractive Acquisition Candidate at a Discount

    Leverage and producing natural gas assets and undeveloped reserves profile is the rationale to own Chesapeake Energy (NYSE:CHK) for a levered equity return. CHK is a pure play on U.S. Natural Gas, essentially a futures contract, albeit with less risk of price deterioration than a true financial futures contract as its stock price is backed by real producing assets. On a pure asset basis, CHK common equity is significantly undervalued.

    The probability that CHK asset portfolio is acquired has risen dramatically and recent large investor movements indicate positioning to influence and benefit from either an outright sale of the company or significant asset dispositions once controlled properties come to full production. CHK already controls the proven reserves and has achieved significant leverage; therefore the company is positioned for a sale or unsolicited third party bid.

    As mentioned, CHK is significantly levered. CHK leverage, strong production profile, and discount to its peer group on a price to earnings basis make it an attractive discounted asset candidate.

    There will again be energy shortages in the U.S., increased fuel price volatility, and a marked need for new clean power generation, primarily natural gas derived due to its moderate construction time, proven efficiency and security of fuel supply.

    To view Mr. Miller's Full report: U.S. Renewable Energy: A Self Inflicted Crisis in the Making go to:http://news.prnewswire.com/ViewContent.aspx?ACCT=109&......

    --

    About Mr. Miller:

    Mr. Miller is a globally recognized energy executive and institutional investor with a balance of both financial and energy sector expertise. Mr. Miller began his career on Wall Street during the 1980s and has an extensive background in banking, commodities trading and risk management.

    Mr. Miller has a long history in the global energy business and has held a variety of executive management positions both within the United States, Europe and Asia. Mr. Miller has bid on over $25 billion in energy related assets during his career.

    Mr. Miller has built, restructured and managed energy businesses for major public energy companies on several continents, including PG&E Corporation, Electricite de France, El Paso Energy, Enron Corporation and JPMorgan Chase.

    Mr. Miller holds an MBA in Finance from the Kenan-Flagler Business School at The University of North Carolina, Chapel Hill. Mr. Miller also holds a B.A. in Accounting from Catholic University located in Washington DC.

    Mr. Miller is currently on medical leave until 2010.

  • Report this Comment On December 14, 2009, at 7:40 PM, OPTIONNUT wrote:

    XOM bought the best in XTO and will reap their reward once things pick up!

    My belief is that this is a sign of a bargain purchase that will further spur our economy to recovery.

    I continue to maintain my position that the market was way over sold and we are back to about even especially when you consider those issues that are still beat up.

  • Report this Comment On December 14, 2009, at 8:02 PM, plange01 wrote:

    41 billion for a company that produces the cheapest most plentiful fuel is a lot of money and will weigh down exxons stock price for years to com.a better buy now would be conoco phillips who already has a large gas exposure at a far beter price...

  • Report this Comment On December 15, 2009, at 9:17 AM, viologen wrote:

    XOM is getting into the natural gas business in a big way. Prior to this XTO deal, XOM has been building the infrastructure for one of the largest natural gas fields in the world:

    http://www.forbes.com/forbes/2009/0824/energy-oil-exxonmobil...

    With the emphasis on green energy, natural gas is a plentiful, cheap, and relatively easily exploited stepping stone to renewables. I think XOM is taking the lead in this trend to position itself for big profits prior to the coming carbon restrictions (whether taxes or tradable credits). I know this is a controversial topic, especially in light of the news stemming from information pointing to falsification and/or suppression of global warming data from the East Anglia Climate Research Unit:

    http://online.wsj.com/article/SB125986208035474981.html

    http://online.wsj.com/article/SB1000142405274870434240457457...

    However, absent clear, undeniable evidence exonerating anthropogenic carbon dioxide from causing global warming, the question of carbon restrictions is one not of if but of when. It will be a disruptive change that will redefine the business landscape and those that are in a leading position to exploit that change will reap disproportionate benefits. Of course, there is some danger of taking a position too soon but in the case of XOM, they have a balance sheet that will allow them to wait comfortably for the incoming tide.

    Disclosure: I do not own any shares of XOM--yet.

    CAVU,

    Viologen

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