Exxon Gaining Huge Gas Reserves in XTO Buyout

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When supermajor Exxon Mobil unveiled a $41 billion deal to buy XTO Energy last week. it was clear that with the acquisition Exxon gains not only the reserve base and production of one of the largest independent exploration and production companies in the US, but more importantly, access to XTO's expertise in unconventional natural gas extraction technologies, which can be applied to Exxon's growing unconventional resource base worldwide (NGW Dec.21,p1). XTO has expertise in tight gas, shale gas, coalbed methane and shale oil and exposure to nearly every key unconventional resource play in the US. This includes positions in the Haynesville, Fayetteville, Barnett, Marcellus and Woodford gas shales and the Bakken oil shale. As of late February, XTO held 1.7 million acres in US shale gas plays, accounting 30% of the firm's total daily gas production. It also holds coalbed methane positions in the Uinta, San Juan, Raton and Powder River basins in the western US, which account for another 11% of gas production. The Fort Worth, Texas-based company had built a large drilling inventory through a mix of acquisitions and organic growth projects in recent years. XTO led the US exploration and production sector in capital outlays last year, significantly expanding its resource base and closing several big deals that brought it large swaths of unconventional acreage in several US plays. During 2008, the company invested $11 billion in proved and unproved property acquisitions, including $4.2 billion on the purchase of Hunt Petroleum, which boosted its Haynesville Shale acreage, and another $1.86 billion on properties in the oil-laden Bakken Shale from privately held Headington Oil (NGW Jun.22,p5). In April of that year, XTO also entered the emerging Marcellus Shale, paying $600 million for 152,000 net acres from Linn Energy. It now holds 280,000 net acres in the Appalachian play. "Since 2004, XTO has aggressively pursued the best shale basins -- in terms of geology, productivity and economics -- to stake a claim for long-term growth," XTO Chairman Bob Simpson said in May 2008. XTO held estimated proved reserves of 11.8 trillion cubic feet of natural gas, 76 million barrels of natural gas liquids and 268 million barrels of oil at year-end 2008. Daily production stood at 2.42 billion cubic feet of gas and 88,000 barrels of oil in the third quarter. Despite the significant capital outlays of 2008, the firm was not financially distressed and market consensus held it had sufficient capital to fund its development program in the near future. Fifty-five percent of anticipated 2010 production was hedged at $9.62/Mcfe and full-year production was on track to grow 23%. Part of XTO's appeal lies in the strength of its management team, which has historically generated strong financial returns. The company was founded in 1986 as Cross Timbers Oil by Simpson, current Encore Acquisition Chairman Jon Brumley and others, went public in 1993, and changed its name to XTO Energy in 2001. "[Exxon] is buying one of the highest regarded management teams in US E&P," wrote Deutsche Bank analyst Paul Sankey. The Exxon deal appears to be one bred of opportunity, sustained low gas prices and a bearish price outlook for natural gas as substantial shale production integrates into the US supply mix in the next few years. Chairman Bob Simpson noted last week that developing unconventional plays in the decades to come will require a "huge" amount of capital, and while his firm has the skills and manpower to grow faster, "Exxon has the capital and the global scale to unlock more value than we could unlock ourselves." Simply put, Exxon brings "additional scale, technology and financial capacity," Simpson said. That XTO was willing to sell out indicates management may see limited upside potential for natural gas in the next few years. "Mr. Bob Simpson and his team have been very proficient in calling the longer term price cycles," noted Wells Fargo analyst David Tameron. "We believe anytime a company sells it is making a commodity price call." But while the near-term price outlook may be bearish, Exxon clearly sees long-term potential. Exxon Chief Rex Tillerson said last week he sees natural gas demand growing faster than coal demand over the next several decades, driven by increasing use in power generation, the fuel's lower environmental impact and its capital efficiency and flexibility. Rachael Seeley, Houston

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