Exxon’s Acquisition of XTO Sends Bullish Signal on Natural GasPublished on December 14, 2009 at 10:37 am
Exxon Mobil has agreed to acquire XTO Energy in a $31 billion all stock deal which values XTO at a 25% premium to Friday’s closing price. According to a Wall Street Journal article, Exxon’s move may send a bullish signal on natural gas particularly given that the company has not made a major acquisition in over a decade.
The deal ends speculation about when Exxon, which hasn’t had a major acquisition since the merger a decade ago with Mobil, would exploit the lower gas prices pressuring smaller, debt-laden companies in the oil patch. The weak economy and vast discoveries of North American natural gas have kept a lid on gas prices, leaving companies in the industry strapped over how to pay for operations and finance growth.
XTO has been a major player in extracting natural gas from so-called unconventional places such as shale rock and says it controls an estimated 45 trillion cubic feet of gas. Tapping gas trapped in these hard rocks has been a boon for the industry, helping to increase U.S. supply and contributing to a plunge in natural-gas prices.
Unconventional sources of natural gas such as shale deposits promise plentiful domestic supplies of the fuel although the cost of production is higher than conventional sources. While natural gas is a fossil fuel that emits carbon, it is regarded as a cleaner burning fuel compared to crude oil and coal.
With the Copenhagen climate talks set to end this week, any agreement will require significant carbon emission reductions in the United States. To the extent that such reductions are required, it makes sense to pursue the lowest cost means of reducing emissions. Greater supplies of natural gas could shift electricity generation away from coal. In addition, unconventional power such as wind farms and solar cannot generate steady supplies of electricity and must be combined with “peaker” plants which could be fueled by natural gas.
The author owns shares of a company engaged in the exploration and production of natural gas.