If you like energy stocks, you probably are aware of the next big trend in the business -- natural gas. The stuff has become an epicenter of attention recently as big players capitalize on attractive valuations and expansive opportunities.
Naturally, any company that joins this competition should be prepared to battle against entrenched giants such as Chesapeake Energy
After the acquisition of XTO for $34.9 billion, Exxon recently purchased natural gas firm Phillips Resources and related company TWP for $1.69 billion in a deal that will give Exxon access to 317,000 acres in the gas-rich Marcellus shale. The two firms, which will be added to existing XTO reserves, will produce combined year-end reserves of 228 billion cubic feet of gas.
The clash of the titans
Not one to be outdone, Shell is working on its own $10 billion liquefied natural gas project, which involves building a 600,000 metric ton floating structure for offshore drilling. This ground-breaking facility will be game-changing.
In response to all of this, the dominant Exxon is now going for smaller and smarter deals. This seems like a good strategy, especially considering its already massive scale.
Why is everyone going for natural gas?
Owing to the growing need for natural gas imports, the worldwide liquefied natural gas market is expected to approximately triple in volume from 2005 to 2030. Fool colleague Jim Royal believes that natural gas is all set to steal the show since the International Energy Agency expects consumption of natural gas to increase by 50% over the next 25 years. This is due to the shift of energy use to gas by large economies including China, Germany, and the United States. I couldn't agree more.
From an investment standpoint
In its first quarter this year, Exxon reported earnings of $10.65 billion -- a whopping 69% year-on-year leap and the highest since the third quarter of 2008. Its production in oil-equivalent volumes grew by 10.5%, thanks to the XTO deal.
But more importantly, Exxon's unlevered free cash flow stands at $19.6 billion. This was the fifth straight quarter that witnessed an increase in FCF. It implies that Exxon has ample cash to continue with its consolidation spree and still pay a healthy dividend to its investors. It has a payout ratio of 25% and a healthy yield of 2.4%. Chesapeake, with a payout ratio of 25.3%, offers a yield of 1.1%.
The Foolish bottom line
By acquiring these gas assets, the energy behemoth is just solidifying its dominance in the natural gas market. I suspect we'll see Exxon and its competitors going for more such consolidations in the not-so-distant future. These Big Oil components are betting huge on natural gas. Are you ready to bet on them?
Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy and Chevron. 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.
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