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Exxon seeks new life Bets heavily on unconventional gas as fuel of choice by 2030 in takeover of XTO Gary Park For Petroleum News
The tipoff was there for anyone caring to pay attention when ExxonMobil declared on Dec. 8 that natural gas would be the fuel of choice in the United States by 2030, shunting aside coal and oil.
Less than a week later the energy giant took a page out of Star Trek by going where no company has gone before.
It offered $41 billion ($10 billion in assumed debt) to take out XTO Energy and create the world’s largest unconventional gas producer.
Caught off guard by the move, which surfaced at a time of sluggish commodity prices and persistent doubts over the economics of shale gas development, analysts were left scrambling to figure out whether other majors might also be on the prowl for other independents with strong positions in shale plays but not the financial means to bring their assets to the next level.
XTO Chairman Bob Simpson, who launched his company 23 years ago, succinctly captured the realities in a conference call Dec. 14.
“We could reach our potential if we could join an organization to bring scale and financial capacity to what we were doing,” he said.
And that, coming from a company with 45 trillion cubic feet of resources and expected production this year of 2.87 billion cubic feet per day, was a clear an expression of the challenges confronting shale independents.
Risks even for Exxon ExxonMobil Chief Executive Officer Rex Tillerson made no attempt to hide the risks even his company faces in absorbing XTO, its biggest transaction since the $81 billion merger of Exxon and Mobil 10 years ago.
“We’ll probably suffer in the near-term as we put it together,” he said. “This is really about value creation over the next many years. This is not a near-term decision. This is about the next 10, 20, 30 years.”
That strengthens ExxonMobil’s own view that fossil fuels will remain a critical part of North America’s energy supply for many years. The company estimates that by 2030, worldwide, wind, solar and biofuels will grow sharply, but still only account for some 2.5 percent of total energy, no matter what measures are taken to lower greenhouse gas emissions.
What the company believes is that gas consumption, which emits half as much carbon dioxide as coal when burned, will grow faster than oil or coal over the next two decades and that investment is needed in such energy sources as wind, solar and biofuels.
“There will be an expansion of natural gas supply, particularly in the U.S. where unconventional gas supplies are expected to satisfy more than 50 percent of gas demand by 2030,” said ExxonMobil’s “Outlook for Energy: A View to 2030.”
Tillerson said the report sees many hopeful trends — “economic recovery and growth, improved living standards and a reduction in poverty and promising new energy technology.”
Major shale investments Larry Nicols, chairman of Devon Energy and chairman of the American Petroleum Institute, endorses Tillerson’s gas forecast by insisting that the U.S., no matter what legislation the U.S. Congress passes to regulate carbon, will “need a growing amount of electricity and natural gas is in an excellent position to capture a significant amount of that market.”
It’s technology that has brought shale gas from the shadows over the past decade, and now needs the control levers to be passed from a handful of smaller companies that staked their claims almost unnoticed in Texas, Louisiana, Arkansas, Oklahoma, Pennsylvania, New York, Quebec and British Columbia to those who have a pile of unused cash to commercialize the resource.
The moves in that direction have been under way over the past year as European-based companies BP, Royal Dutch Shell, StatoilHydro and Eni along with Chevron have invested billions in shale assets and answer the call by their shareholders to increase reserves and production.
They also represent an indirect boost for the future of stranded Arctic gas deposits in Alaska and Canada’s Northwest Territories — where development is effectively in the hands of ExxonMobil and its controlling share of Imperial Oil.
Analysts at Tudor, Pickering, Holt & Co. in Houston said in a report the ExxonMobil-XTO deal could signal a major consolidation trend by majors who “tend to be lemmings around trends like JVs-consolidation.”
UBS Securities said the “major’s limited access to resources, coupled with the plethora of low-cost U.S. shale plays, has prompted several to recently invest in U.S. unconventional resources,” but not anywhere near the scale of the XTO deal.
Oppenheimer & Co. analyst Fadel Gheit was emphatic there will be more deals, making the industry “more resilient to volatility in natural gas prices.”
Analyst: Time to buy Wells Fargo Securities analyst Dave Tameron said in a report that if “ever there was a time to buy U.S. natural gas, it would be now, while fundamentals are weak and reflected as such in share prices.”
That was despite the implied per-share price offered by ExxonMobil of $51.69, a premium of 25 percent on XTO’s closing price on the previous day’s trading, which Calgary-based investment dealer Peters & Co. estimates at a staggering $88,611 per flowing barrel of oil equivalent or $2.88 per thousand cubic feet of reserves, excluding the development cost.
FirstEnergy Capital analyst Martin Molyneaux told the Calgary Herald that ExxonMobil’s record of pursuing targets that offer “pretty robust rates of return” is evidence that the supermajor thinks “gas prices are going to go higher and there’s a lot of running room in bookable reserves.”
He suggested XTO’s skills in unlocking shale resources will likely be deployed in northern British Columbia, where ExxonMobil and Imperial are joint-venture partners in the Horn River basin.
The initial skirmishes for shale assets started in 2008 when BP acquired 25 percent of Chesapeake Energy acreage in Arkansas’ Fayetteville shale for $1.9 billion and Statoil paid $3.375 billion for 32.5 percent of Chesapeake’s acreage in the Marcellus shale of Pennsylvania.
Other potential targets Tillerson is not ruling out more moves by ExxonMobil, noting “we still have a lot of financial capacity and wherewithal to look at and consider other things we would find attractive.”
Those considered ripe for the picking include Chesapeake, Devon, Anadarko Petroleum, EOG Resources, Petrohawk Energy, Southwestern Energy and, in the eyes of some, Canada’s EnCana, which has become a possible prime target having split off its unconventional gas holdings from its oil operations, plus ARC Energy Trust and Progress EnergyTrust.
Chesapeake Chief Executive Officer Aubrey McClendon, who is keeping tightlipped about whether his company has ever been courted by ExxonMobil, said the pending XTO transaction is “the latest and highest-profile validation of the future potential of deep shale plays to provide enormous new reserves of clean fuel” for the U.S.
What that might mean for the new EnCana, which has scarcely had a chance to draw breath since its rebirth as a pure-play unconventional gas producer, is the hottest talking point in Canada.
Genuity Capital Markets analyst Phil Skolnick estimated that what ExxonMobil is prepared to pay for XTO raises EnCana’s worth to between $49 and $38 per share, compared with its current trading range of about $30. At $49, the market value of EnCana would soar from about $23 billion to $38 billion, a prospect that has investors salivating and probably has lawmakers quaking at the fallout should a foreign-owned entity make a run at one of Canada’s corporate jewels.
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