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Exxon Adds to Gas Toolbox With XTO Buy

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Supermajor Exxon Mobil flexed its financial muscle Monday by snapping up independent gas producer XTO Energy in an all-stock deal worth $31 billion. The acquisition will make Exxon the top natural gas producer in the US and give a major impetus to its efforts to export the recent boom in US unconventional gas production to the rest of the world. The deal -- the largest of the current industry downturn and Exxon's most significant move since its 1999 merger with Mobil -- caught industry observers by surprise. Exxon was seen as the most likely of the major Western integrated oil firms to make an upstream acquisition during the current market trough. But while names such as Devon and Chesapeake had been mentioned as possible candidates, XTO was not on most people's radar screen. By buying XTO, Exxon will acquire an additional 13.9 trillion cubic feet of natural gas equivalent of proved reserves and over 45 Tcfe of total resources -- all of it located in the US. The deal will greatly expand Exxon's position in the leading US shale gas plays and the Bakken Shale oil play. Exxon will roughly triple its US gas output and become the top domestic producer with a daily volume of almost 3.7 billion cubic feet per day. Nevertheless, the deal is less about XTO's reserves and production than its technical expertise in developing unconventional gas resources. The US has experienced a dramatic revival in domestic gas production in recent years, based on the methodical and systematic exploitation of previously uneconomic unconventional gas resources trapped in coal seams, tight sands and -- most notably -- shales. Industry giants such as Exxon, BP and Royal Dutch Shell have been relative late-comers to the US unconventional gas boom, with companies such as Devon, XTO, Chesapeake, EnCana and even smaller firms taking the lead. However, larger more internationally-oriented companies like Exxon -- now backed by XTO's know-how -- appear better placed to put the same technology to work around the world. Exxon Chief Executive Rex Tillerson told reporters Monday that his firm has "no particular strategy" of tipping its production balance toward natural gas, although a shift toward gas may result from the company's expected growth trajectory over the next two decades. Exxon was attracted to XTO by its proven track record in developing unconventional resources "effectively and efficiently," he said. Exxon's growing unconventional resource base includes shale, tight gas and coalbed methane holdings in the US, Canada, Germany, Poland, Hungary and Argentina. Following the addition of XTO's prolific US unconventional assets, Exxon will expedite the development of a combined unconventional gas portfolio covering nearly eight million acres -- the largest in the industry, according to Exxon -- of which about 60% is located outside the US. To oversee this effort, the supermajor will establish a new upstream organization specializing in unconventional resources that will be located at XTO's offices in Fort Worth, Texas, which lies at the heart of the Barnett Shale gas play. The move to maintain a base in Fort Worth is expected to help retain highly skilled XTO employees and avoid some of the problems experienced after previous acquisitions of Fort Worth companies in which many key employees refused to relocate and were lost to the acquiring firms. For its part, XTO's management said that it found the combination of XTO's operational expertise and Exxon's financial strength compelling. XTO is slated to grow its production 23% this year and was seen as having sufficient capital to fund its development program in the near future. But XTO founder and chairman Bob Simpson alluded to the "huge" amount of capital needed to develop unconventional plays in the decades to come. "Exxon has the capital and the global scale to unlock more value than we could unlock ourselves," Simpson told reporters. Under the agreement between the two companies, Exxon will offer 0.7098 of its shares for each share of XTO. That represents a 25% premium over XTO's Friday close of $41.49 per share and a total purchase value of $31 billion. Exxon will also assume XTO's $10 billion in outstanding debt. Exxon's acquisition of XTO is the first buyout of a large US independent by a major since ConocoPhillips paid $35.6 billion for Burlington Resources four years ago (OD Dec.14 '05,p1). Conoco's deal was heavily scrutinized at the time given its announcement just days after US natural gas prices hit highs above $15/Mcf. Conoco had to write down the entire $25.4 billion in goodwill associated with the deal earlier this year because of the subsequent slump in gas prices. In fact, the price of $2.96/Mcfe that Exxon is paying for XTO's proved reserves matches Conoco's price for Burlington. Unlike Conoco, however, Exxon is able to fund this deal from a $225 billion hoard off treasury shares rather than piling up debt like Conoco. The Exxon-XTO deal is subject to approval by regulators and XTO shareholders but is expected to be completed in the second quarter of next year. Casey Sattler, Houston

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