How to Play Oil's Switch to Gas

For Big Oil leader ExxonMobil (NYSE: XOM  ) , 2010 nearly turned into the year of Big Gas.

After all, the price of crude oil has recently moved to about $94 a barrel, a level that not long ago appeared "way down the road." But crude's reaching higher prices sooner than expected these days, so I'm treating a recently published notion that gasoline prices will hit $3.50 a gallon by summer as excessively conservative.

But you've likely noted that 2010 was the year of big natural gas buys, especially by Exxon, which spent much of the year shopping for solid deals. For instance, a whopping $41 billion purchase (including debt) of gas producer XTO instantly turned Exxon from simply ranking as the world's biggest company to an added status as the largest U.S. gas producer.

Then, after closing its XTO deal, Exxon added Denver-based Ellora Energy to its gas collection at a cost of $695 million.

However, that wasn't the end for the big company. As most of us were heading for our holiday respite, Exxon agreed to pay $575 million for Petrohawk (NYSE: HK  ) wells and reserves in the Arkansas' Fayetteville shale. Another $75 million bought Petrohawk's Fayetteville pipeline assets. Already, Exxon's 3.726 billion cubic feet of natural gas produced daily during the third quarter amounted to 16% of total U.S. output.

Of course, Exxon doesn't limit its natural gas activities to the domestic front. Along with Chevron (NYSE: CVX  ) and Royal Dutch Shell (NYSE: RDS-A  ) , it's involved in laying out $37 billion for the development of Western Australia's huge Gorgon LNG project. And beyond that, Exxon's working to add new production from such countries as Indonesia, Canada, Germany, and Poland.

But other majors also are in the U.S. gas-shopping game. Chevron paid about $3.2 billion for Atlas Energy in the giant East Coast Marcellus Shale. It also gained 49% of the Laurel Mountain Midstream, a system of more than 1,000 miles of gas gathering lines that it'll share with the Williams Companies (NYSE: WMB  ) . And finally, Royal Dutch Shell made a $4.7 billion cash payment to East Resources for 650,000 net acres in the Marcellus.

How then should Foolish energy investors play the major companies' transition to a mixture of oil and gas producers? My best answer is that, as commodities prices work their way northward, there are likely profits to be made from all of the Big Oil (and now Big Gas) companies. Nevertheless, given its technological superiority, the relative size of its gas assets, and its geographic diversity, I'd continue to head first to the tent occupied by ExxonMobil.   

Chevron is a Motley Fool Income Investor pick. The Fool owns shares of Exxon Mobil. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the companies named above.  The Motley Fool has a disclosure policy.


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