XTO Energy deal seen as bold response to shifts in environmental regulations
By JENNIFER LATSON
Dec. 15, 2009, 12:30AM
With its deal to buy a Fort Worth-based energy independent, oil giant Exxon Mobil Corp. set the pace for what analysts predict could be a rush of new investment in North American natural gas — a surge pushed by low prices, new extraction methods and demand for cleaner-burning fuel.
Irving-based Exxon Mobil said Monday it will acquire XTO Energy for $31 billion and assume $10 billion in debt,banking on the future of natural gas as an accessible fuel source that may be more valuable in light of tightening environmental regulations, since natural gas emits less greenhouse gas than other fossil fuels.
The deal, subject to approval of both companies' shareholders, would be a massive acquisition for Exxon Mobil, theworld's largest publicly traded oil company, which hasn't had a merger since it acquired Mobil for $74 billion a decade ago. And it confounded expectations of analysts who consider Exxon Mobil the most cautious and conservative of the major energy companies.
“It's somewhat a surprise that they're first out of the bag,” said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University's Cox School of Business. “They've traditionally had the reputation of being the best-managed, so maybe there's something to read there in terms of why they moved first. Clearly they see upsides here that they'll be able to leverage elsewhere.”
Natural gas for January delivery closed at $5.33 per million British thermal units, up 16.9 cents, in trading Monday on the New York Mercantile Exchange. Less than two years ago, in the summer of 2008, the price surpassed $13.
Taking the plunge
With prices low, and the possibility of carbon emission caps looming, analysts expected it would be just a matter of time before one of the major energy companies took a plunge into the natural gas market. Now they expect others to follow suit.
“I think this is the first domino to fall,” said Curtis Trimble, a Houston-based analyst for Natixis Bleichroeder. “In future weeks, months or quarters we can expect to see other deals as well.”
That means American independent oil and gas producers such as Chesapeake Energy, Devon Energy and The Woodlands-based Anadarko, may get a look from other energy companies seeking an entrée into the gas market.
“I think it's definitely a validation of the value of natural gas,” said Anadarko spokesman John Christiansen. He deflected questions of whether Anadarko anticipates a merger of its own. “We're not looking to sell the company,” he said.
New technology helped pave the way for the XTO deal, in addition to a shifting regulatory climate, analysts said.
New methods of producing natural gas trapped in shale have made it vastly more accessible in recent years, greatly boosting estimates of the country's gas reserves.
“Just 10 years ago, that technology didn't exist,” said Exxon Mobil spokesman Alan Jeffers. “They've gone from thinking we had about a decade's worth of gas in the U.S. to thinking we've got anywhere from 80 to 100 years' worth.” Jeffers said Monday's announcement affirmed Exxon Mobil's commitment to natural gas.
“We think gas is going to grow more than any other major energy source. We think it's going to really become the fuel of choice for power generation and increase and replace coal,” Jeffers said. “Depending on whatever carbon management scheme comes into play, that's going to change the economic scheme and push more people toward natural gas.”
45 trillion cubic feet
While Exxon Mobil already holds natural gas resources in the U.S. and in areas as far-flung as Argentina, Canada, Poland, Hungary and Germany, its deeper investment in American gas bodes well for the domestic economy, analysts say.With Monday's agreement, Exxon Mobil stands to gain XTO's estimated 45 trillion cubic feet of gas equivalent.
“Those of us who watch the gas markets have been wondering about Exxon and others investing in the Middle Eastern gas market,” said Bullock. “Once the demand picked up in the U.S., there was a concern that the demand would be filled with Middle Eastern gas, which would dampen domestic production. That still may occur, but obviously that's a long way off if this transaction is any indication.”
Increased natural gas production will be a boon to the American market in terms of jobs, the overall economy and energy security, SMU's Bullock said. “Whether it's better for Exxon I can't say, but it's certainly better for the U.S. economy,” he said.
The new focus on gas doesn't diminish the importance of oil in Houston's economy — at least not anytime soon. “Clearly until petroleum is replaced as a transportation fuel,” Bullock said, “oil will continue to be an important pat of the mix.”
jennifer.latson@chron.com
Source: http://www.chron.com/disp/story.mpl/business/energy/6770279.html
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