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ExxonMobil's $40 Billion Mistake

ExxonMobil (NYSE: XOM  ) was recently downgraded by Morgan Stanley. But with a company like Exxon that has a long history of a rock-solid balance sheet, excellent reserve replacement, and the ability to return enormous amounts of money to shareholders, what is holding back the world's largest oil company? In this video, Motley Fool energy analysts Joel South and Taylor Muckerman discuss Exxon's 2009 acquisition of XTO Energy, and tell investors how overpaying in an acquisition continues to hurt investors.

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Comments from our Foolish Readers

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  • Report this Comment On April 13, 2013, at 10:29 AM, rsinj wrote:

    You folks really are fools, and with short-term memories at that.

    1. Did XOM overpay for XTO - sure, probably a bit. Let's say it is 25% as you have - so they overpaid by $10 billion - big deal - that's one quarter of profits.

    2. Let me jar your memory a little about all the mud slinging going on with XOM at the time of the XTO acquisition. You had Sierra Club along with every other barefoot hippy shouting at XOM because they had nothing in the renewable energy space and most everything in oil. XTO was part of a move to further diversify the asset base. As a result, nobody can compete head to head with XOM. Regardless of where demand is, XOM is there, and will continue to show tremendous profits.

    3. In purchasing XTO, XOM went from being a non-player in natural gas, to the 800 pound gorilla in the industry. At the time, if XOM did not pay the $40 billion, maybe your darling Chevron or other major would have paid the $30 billion or $35 billion to lock up those assets. Regardless, it is a given fact that natural gas will play an important part in the future - XOM will be there.

    I believe XOM may be a bit overvalued right now, and the market would tend to agree seeing as it's not participating in the current runup. However, that doesn't mean that XTO was a $40 billion mistake by a longshot.

  • Report this Comment On April 13, 2013, at 10:46 AM, TMFrunAMuck wrote:

    @rsinj - Thank you for getting the discussion started. With regards to your comment, if you watch the video, you will clearly see that we are only discussing the current impact that the acquisition is having due to low NG prices throughout 2012. To close the video we address that the company is in great position with its NG reserves due to the XTO purchase to capitalize once prices DO rise. It is also mentioned that investors who have HELD shares through this period will likely be rewarded.

  • Report this Comment On April 13, 2013, at 11:35 AM, Seanickson wrote:

    So you call it a $40 billion mistake and then conclude that it wasn't a mistake?

  • Report this Comment On April 13, 2013, at 11:36 AM, freakyguy666 wrote:

    It may be a good idea to change the Title of your article to something like "Did XOM overpay $10Billion for XTO?" Currently the title implies that XOM should not have done the deal as the deal in its entirety was a "mistake", which is different from what you are actually saying. Unless I'm mistaken, you believe is was not really a mistake because you believe that it will payoff when NatGas prices go up. If anything I believe you're saying they may have overplayed. In any case, the title is misleading.

  • Report this Comment On April 13, 2013, at 4:24 PM, lazyal wrote:

    Whoa, there's a big difference between paying a premium price for an acquisition and making a "mistake." True, XOM paid top dolllar for XTO but I think time will bear them out as having made a fair deal.

    If you want to revist a "mistake", take a look at ConocoPhillips'$37 billion' buyout of Burlington Resources in 2005, at exactly the same time nat gas prices were peaking

  • Report this Comment On April 18, 2013, at 12:05 PM, keva1 wrote:

    ConocoPhillips' purchase of Burlington Resources was only a mistake in that they didn't develop the assets they bought properly. Simply buying another company or another company's assets is no guarantee for success or profits. You still have the responsibility to have smart and efficient continued development plans...which CoP simply did not. Burlington Resources was very attractive to be bought at the time because they had efficient development, no debt, a lot of cash, great people, and great assets.

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