Exxon Deal For XTO Energy May Set Off Wave of Energy Mergers and Acquisitions

In a deal that may set off a wave of mergers and acquisition (M&A) activity in the energy sector, Exxon Mobil Corp. (NYSE: XOM), the biggest U.S. oil company, agreed to buy XTO Energy Inc. (NYSE: XTO), the largest U.S. natural gas producer, in an all-stock deal valued at $31 billion.

Exxon, which hasn't made a major acquisition since it bought Mobil ten years ago, is taking advantage of the low gas prices pressuring smaller, debt-laden gas exploration companies. The economic downturn and discoveries of vast pools of North American natural gas have kept a lid on gas prices, leaving companies in the industry strapped for operating cash.

The deal announced yesterday (Monday) values XTO at $51.69 a share, 25% higher than Friday's closing price. XTO holders will get 0.7098 share of Exxon for each share of XTO. The Texas-based oil giant will also assume $10 billion in debt.

The takeover is seen as a bet by Exxon that while government energy policies will eventually gravitate towards renewable alternatives, they will still rely heavily on cleaner burning fossil fuels in the interim. Natural gas burns much cleaner than coal, generating about half the carbon dioxide emissions, and is considered as a potential bridge to a carbon-free economy.

"This says that corporate M&A is alive and well in the exploration and production sector," Curtis Trimble, an analyst at Natixis Bleichroeder Inc. in Houston told Bloomberg News. "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."

According Money Morning Contributing Writer Dr. Kent Moors, the deal sets the stage for Exxon's gradual exit from oil and towards dominance in natural gas and other energy alternatives.

"Exxon has been telegraphing this move for some time," Moors said in an interview. "They're putting themselves in position to be the largest natural gas producer in the world. This won't be the last deal they do, and it's likely to set off a string of acquisitions by the big players."

Monday's deal could fuel further efforts by major energy companies to snap up natural-gas assets. Wall Street analysts were buzzing with speculation as to what companies might be M&A targets in the energy arena.

Analysts at Tudor Pickering & Holt Co. LLC told The Wall Street Journal potential acquisition targets could include EOG Resources Inc. (NYSE: EOG), Southwestern Energy Co. (NYSE: SWN), PetroHawk Energy Corp. (NYSE: HK), Encana Corp. (TSE: ECA), Chesapeake Energy Corp. (NYSE: CHK), Devon Energy Corp. (NYSE: DVN) and Anadarko Petroleum Corp. (NYSE: APC).

Moors thinks Chesapeake and Devon are particularly attractive right now, but there are "literally hundreds of smaller natural gas drillers who are ripe for the picking right now."

"In terms of which deal gets triggered next, it's kind of a race to the altar," Ted Harper, who helps manage $6.1 billion, including XTO and Exxon shares, at Frost Investment Advisors in Houston told Bloomberg.

The purchase will give Exxon the equivalent of about 45 trillion cubic feet of natural gas throughout the United States and puts the world's largest publicly traded oil company in prime position to expand in shale gas, the fastest growing area in the natural gas sector.

As outlined in a recent Money Morning article by Dr. Moors , the natural gas industry is likely to undergo dramatic changes in the next six months, primarily due to a shift from conventional to shale gas.

Until about 10 years ago, shale gas was too expensive to extract. But a technology that moves large volumes of water under high pressure - called a "frac" - and horizontal drilling have made shale the up-and-coming domestic gas source.

Attention is already fixed on The Marcellus Shale Formation in the northeastern United Statesas many exploration and operating companies have focused on the area. XTO has about 280,000 acres under lease in the formation, making it the third largest leaseholder in the region.

Although fewer than 350 wells have been drilled, Moors explained, the pay zones in the Marcellus tend to be larger, pressures are higher and recoverable volume greater than projected. Moors projects total volumes there could meet all U.S. demand for almost five years.

XTO has been a major player in extracting natural gas from unconventional sources including shale. Tapping gas trapped in hard rocks has boosted the industry, helping to increase U.S. supplies and contributing to plummeting prices.

XTO has set itself apart from other natural-gas companies by staying focused on its specialty, generally steering clear of other types of exploration, such as deep-water drilling.

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