Exxon Should Buy Chesapeake

Americans might be addicted to oil, but the world's largest integrated oil company is addicted to natural gas. ExxonMobil (NYSE: XOM  ) has gone on a natural gas shopping spree, with no end in sight -- and Chesapeake Energy (NYSE: CHK  ) should top its list. 

NGLs
Exxon execs recently revealed the company is looking for some "liquid plays." Chesapeake would be a good place to start that search.   

Chesapeake is heavily committed to the natural gas liquids market. The company plans to allocate 75% of its 2012 capital expenditures to NGLs, up from 30% in 2010. The extreme shift to natural gas liquids could seriously boost revenue, considering that NGLs historically follow the price of crude.

Nat gas transportation
Chesapeake is taking the lead in the natural gas transportation movement by tackling the CNG infrastructure problem. It recently revealed plans to fund Clean Energy Fuels (Nasdaq: CLNE  ) , the nation's leading natural gas station operator.

In addition, Chesapeake is seeking partnerships with gas station chains in more than 17 states to increase the availability of natural gas infrastructure.

Essentially, Chesapeake plans to compete with big oil for a place in your fuel tank. Exxon could eliminate this nuisance by acquiring Chesapeake and steering funds away from natural gas transportation projects. Then Exxon could proceed with its plan to sell oil as a transportation fuel and natural gas for power generation.    

Or Exxon could simply export gas to the highest bidder in the international marketplace; a move that would greatly benefit Cheniere Energy (AMEX: LNG  ) .  

Free natural gas
Chesapeake CEO Aubrey McClendon, believes the company's unproved reserves are valued at "absolutely zero," or a $40 billion discount. McClendon goes on to say that Chesapeake shares should sell for twice as much.

If the math adds up, Exxon or any other energy company with the financial resources should certainly seize the opportunity to acquire Chesapeake at a severe discount. 

The bottom line
Chesapeake is a perfect fit for Exxon. However, a deal is far from a sure thing. Chesapeake appears significantly undervalued, and it may ask more than Exxon is willing to pay.

Fool contributor Adam J. Crawford does not own shares of any company mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. 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. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (15)

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  • Report this Comment On July 26, 2011, at 1:04 PM, TheDumbMoney wrote:

    As a holder of Exxon shares for well over a decade, though a completely insignificant little bacterial shareholder to be sure, I have to say I would only support a purchase of Chesapeake if Exxon could get rid of a lot of Chesapeake's top folks, including Aubrey McClendon. But doing that would make integration harder. I think it would be horrifying if that man got a seat on Exxon's board, for example. More broadly, Exxon is an exceedingly shareholder-friendly, long-term-oriented, bonus-claw-backing benevolent giant. I am not sure that it could integrate Chesapeake into that culture.

  • Report this Comment On July 26, 2011, at 3:23 PM, michjksn wrote:

    How much exactly were you paid to write this ridiculous pump? Man, Aubrey sure spreads a lot of cash around the internet rag-o-sphere. Between Motley and Seeking Alpha in particular, he must pay out thousands for the CHK friendly propaganda spewed forth almost on a daily basis....

  • Report this Comment On July 28, 2011, at 5:01 AM, kmacattack wrote:

    I'm a Chesapeake shareholder, and an acquisition by Exxon could certainly pad my IRA. However, I'm not sure this merger would clear government regalators concerned about a monoopoly. Exxon is number 1 in natural gas production, Chesapeake is number 2. Americans have been the victims of manipulation and price fixing in the crude oil and retail gasoline markets forever, yet congress was never interested in looking under the covers to see what was going on when gasoline prices moved from $0.79 in the spring of 2000, nearly doubled just before the presidential Gore/Bush election. After Bush won, gas started moving steadily higher, up to the point where it was 700 percent higher, reaching $5.50 per gallon in late 2007 into 2008, until the Goose that laid the golden egg was eaten by the big oil boys, which cooked the goose called the American economy. Energy prices and health care sucked every last dime of disposable income from 90 percent of Americans. Gas prices destroyed the auto industry-period. True, the automakers were building cars that no one wanted to buy, but 3 years earlier Americans were buying trucks and SUV's in record numbers, due to stupid tax policy contained in the Bush tax cuts of 2001. You could buy an $80,000 Hummer on December 31st of a calender year, and write off the entire purchase off in one day. When President Bush assumed office, one of his first major speeches declared that we needed to "conserve energy" and "import less foreign oil" which were noble ideas, but what the administration SAID and what they DID were completely unrelated. After nearly $1 billion in campaign "contributions" from big oil, overwhelmingly to republican candidates, the republicans were not about to rock the boat and ask questions when gas prices skyrocketed. I guess it's still true that you" don't bit the hand that feeds you".

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