The rumors were true. ExxonMobil (XOM -2.66%) is indeed buying fellow oil producer Denbury Resources (DEN). The Thursday announcement ends months of rumors and speculation that Exxon would acquire Denbury.

However, Denbury's relatively small-scale oil business isn't the main draw. Exxon wants its carbon dioxide expertise and infrastructure. Here's a look at the deal and how Denbury fits Exxon's lower-carbon strategy.

Finally sealing a deal

ExxonMobil has agreed to acquire Denbury in an all-stock transaction. It's exchanging 0.84 shares of its stock for each share of Denbury. This exchange ratio values Denbury at $4.9 billion. That's a meager 2% premium to Denbury's trading price before the deal's announcement.

Denbury has been the subject of mergers and acquisitions (M&A) speculation for nearly a year. Last August, Bloomberg reported that the company was exploring its strategic options, which could include a sale. In October, it reported that Exxon had expressed preliminary interest in buying the company. Meanwhile, CNBC reported in January that Exxon had some interest in Denbury, though the issue might be pricing. Initial speculation about a potential tie-up with Exxon sent Denbury's valuation soaring to around $5 billion.

In the end, Exxon secured a deal to acquire Denbury. While it could have paid cash -- Exxon ended the first quarter with $32.7 billion of cash -- Exxon opted for an all-stock deal. That will preserve its financial flexibility to help further hedge against oil price volatility.

It's all about carbon dioxide

While Denbury Resources is an oil producer, that's not why Exxon is acquiring the company. Denbury's first-quarter production of 47,655 barrels of oil equivalent per day (BOE/D) is a drop in the bucket for Exxon, which produced 3.8 million BOE/D in that same period. 

Instead, the main draw is Denbury's carbon dioxide expertise and infrastructure. Denbury is a leader in using carbon dioxide for enhanced oil recovery (EOR). This process injects the greenhouse gas into legacy oilfields to increase pressure in the reservoir and boost oil production. In addition to using naturally occurring carbon dioxide, Denbury uses carbon dioxide captured from industrial sources. The company currently injects 4 million tons of industrial-sourced carbon dioxide each year. 

Denbury has extensive infrastructure to support carbon capture, utilization, and storage (CCUS). By acquiring Denbury, Exxon will gain the largest owned and operated carbon dioxide pipeline network in the country. Denbury has 1,300 miles of pipelines, including 925 miles in the Gulf Coast region, one of the largest U.S. markets for carbon dioxide emissions. Denbury also has 10 strategically located onshore sequestration sites. 

A slide showing a map of the combined CCUS infrastructure of Exxon and Denbury.

A map of the combined CCUS infrastructure of Exxon and Denbury. Image source: ExxonMobil.

The acquisition of Denbury -- expected to close in the fourth quarter -- will help accelerate Exxon's lower-carbon energy strategy by providing it with a cost-effective transportation and storage system that it can integrate with its existing assets for an optimized CCUS solution. The combined system will have the potential to profitably reduce emissions in the region by more than 100 million metric tons per year.

Exxon believes that CCUS can become a meaningful business for it. The company estimates that CCUS will be a $4 trillion global market by 2050. That represents a multibillion-dollar annual revenue opportunity for the company and a revenue source that would be more stable than its base oil and gas business. It's building it on the foundation of long-term contracts that would provide it with a more predictable cash flow stream. Exxon has already secured commercial contracts to capture and sequester carbon from several industrial emitters to underpin sequestration hubs it's developing around the Gulf Coast. Adding Denbury's infrastructure will enhance Exxon's ability to capture future CCUS opportunities.

A potentially significant strategic move

ExxonMobil's acquisition of Denbury Resources might seem small at first glance, given the company's meager oil production and relatively small acquisition price. However, it has the potential to be significant over the longer term. It will provide Exxon with substantial complementary infrastructure in the Gulf Coast region, positioning it to accelerate its CCUS ambitions. That could be a massive market opportunity for Exxon, which is why this deal looks like a smart move by the oil giant.