Exxon to Buy XTO for $31 Billion in Bet on U.S. Gas

Exxon to Buy XTO for $31 Billion in Bet on U.S. Gas

Dec. 14 (Bloomberg) -- Exxon Mobil Corp., the biggest U.S. oil company, agreed to buy XTO Energy Inc. for $31 billion in a bet that U.S. emissions restrictions will spur increased demand for natural gas.

Owners of Fort Worth, Texas-based XTO will get 0.7098 share of Exxon for each of their shares, the companies said today in a statement. The transaction, the largest energy acquisition since 2006 and Irving, Texas-based Exxon’s biggest takeover since the purchase of Mobil Corp. in 1999, values XTO at $51.69 a share, 25 percent higher than its last closing price.

“This says that corporate M&A is alive and well in the exploration and production sector,” said Curtis Trimble, an analyst at Natixis Bleichroeder Inc. in Houston. “It also says that Exxon isn’t shy about stepping up their exposure to the natural-gas market. Almost certainly, we will see some more follow-the-leader type transactions.”

Exxon, which also will assume $10 billion in debt, will get the largest producer of U.S. natural gas. Demand for the fuel will grow as U.S. carbon legislation prompts power producers to switch from coal, Kenneth Cohen, Exxon’s vice president for government affairs, said in a Dec. 7 interview.

XTO rose $6.39, or 15 percent, to $47.88 at 12:05 p.m. in New York Stock Exchange composite trading. The stock had climbed 18 percent this year before today. Exxon fell $2.94 to $69.89.

Acquisition Outlook

The purchase is scheduled to close in the second quarter, the companies said. JPMorgan Chase & Co. and Davis Polk & Wardwell are advising Exxon. Barclays Plc, Jefferies & Co. and Skadden Arps Slate Meagher & Flom LLP are advising XTO.

“In terms of which deal gets triggered next, it’s kind of a race to the altar,” said Ted Harper, who helps manage $6.1 billion, including 137,550 XTO shares and 932,268 Exxon shares, at Frost Investment Advisors in Houston.

Acquirers will probably be major oil companies that are having a tough time increasing production, such as Europe’s Royal Dutch Shell Plc and Total SA, Harper said. Potential takeover targets would include independent exploration and production companies like Ultra Petroleum Corp., EnCana Corp., and Range Resources Corp., he said.

Other potential targets could be Anadarko Petroleum Corp., EOG Resources Inc. and Devon Energy Corp., said Philip Weiss, an analyst at Argus Research Corp. in New York.

Reserves Needed

An index of independent oil and gas producers in the Standard & Poor’s 500 climbed 6.9 percent, the biggest gain since May 6. Other than XTO, the biggest advancers were Cabot Oil & Gas Corp. and Fort Worth-based Range Resources.

XTO’s output jumped 23 percent to the equivalent of 2.95 billion cubic feet of gas a day after a $4.2 billion acquisition spree last year that included Hunt Petroleum Corp. The company reported proved reserves equivalent to almost 13.9 trillion cubic feet of gas at the end of last year. Including reserves not yet proved, XTO has an estimated 45 trillion cubic feet of gas equivalent, according to today’s statement.

“There very little in the way of really good reserves out there,” said Stephen Leeb, who manages $175 million as president of Leeb Capital Management in New York. “If you want reserves you can count on, you really have to buy domestic reserves, or reserves in countries that are, you know, trustworthy, and XTO has a lot of wonderful domestic reserves, especially, I think, in the gas area.”

Including all reserves, not just proved, Exxon is paying $5.47 per barrel of oil equivalent, Chief Executive Officer Rex Tillerson told reporters today on a conference call.

‘Elevated’ Price

Exxon is paying $13.42 per barrel of oil equivalent in proved reserves. When Oklahoma City-based SandRidge Energy Inc. agreed last month to buy $800 million in assets from Forest Oil Corp., the price was about $10 per barrel.

XTO’s price may be “elevated” by the quality of the company’s assets, according to a research note by analysts Ben Dell and Neil McMahon of Sanford C. Bernstein & Co. in New York.

XTO extracts gas from the Barnett Shale region of Texas, the largest so-called unconventional gas field in the U.S., and has started output in the Bakken Shale in North Dakota, where oil is trapped between shale beds in rock resembling concrete.

The company is doubling its drilling in the Marcellus Shale, a gas-bearing formation that stretches through parts of Pennsylvania, New York and West Virginia. Shale developments, where rock formations are fractured and injected with water, sand and chemicals to release trapped gas, drove a jump in U.S. gas production last year.

Exxon’s War Chest

XTO’s headquarters will be the center of Exxon’s unconventional oil and gas unit, which will be based in Fort Worth, Tillerson, 57, said on the conference call. The company will exploit shale formations globally, he said.

Additional scale is needed to develop shale formations, XTO Chairman Bob Simpson, 61, said on the call.

Exxon amassed more than $31 billion in cash as of the end of last year and almost $200 billion of its own shares purchased through buybacks. Prior to today’s announcement, the company had used its cash stockpile on its own capital projects and asset purchases. The Mobil deal was the company’s last major takeover.

“They’ve been sitting on a huge amount of cash for the last several years, with speculation mounting as to what they will do,” said Gianna Bern, president of Brookshire Advisory & Research Inc. in Flossmoor, Illinois. “Acquisitions that increase their production capabilities will be viewed fairly positively.”

Gas Drops

The Exxon-XTO deal is the largest U.S. energy takeover since Houston-based ConocoPhillips acquired Burlington Resources Inc., also primarily a gas producer, for $36 billion in 2006. ConocoPhillips recorded $34 billion in fourth-quarter 2008 costs to reflect a drop in the value of acquired assets, including the Burlington gas properties.

U.S. gas futures tumbled to a seven-year low in September as the recession eroded demand for the heating and power-plant fuel.

Global energy demand will rise 30 percent by 2030, led by gains in use of gas, Exxon Senior Vice President Andrew P. Swiger said last month in a presentation in New York. Gas use will increase twice as fast as demand for crude oil and will surpass coal as the second-largest energy source, he said.

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