UPDATE: "XTO Energy and Exxon Mobil: The Natural Gas Price Question (XOM; XTO; XNG)"
Some additional insight, from DealBook:
Exxon Mobil’s acquisition of XTO Energy amounts to a $31 billion wager on natural gas becoming the fossil fuel of choice for power generation in the United States. The huge deal brings the world’s largest energy company back home to focus on what could be an expensive and time-consuming effort — something it wouldn’t have considered just a few years ago.From the WSJ's DealJournal:
Exxon is not a company known for making rash moves. In fact, it is viewed largely as the most conservative company in what is arguably a very conservative industry. So some analysts were surprised by its decision to acquire a company that gets a large portion of its production from somewhat unconventional sources with limited export abilities.
XTO is mostly an onshore domestic natural gas company specializing in squeezing gas out of very tight and expensive reservoirs. The boom in natural gas prices in the past decade allowed it to grow and expand in areas once thought to be uneconomical to drill. At the same time, advances in technology helped lower costs and increase production.
Rampant speculation from financial players sent prices skyrocketing, allowing even the most unconventional of natural gas fields to be economical. But when the speculators rushed to the exits last summer, many drillers were left unable to sell their gas for market prices. Meanwhile, demand dropped as the financial crisis curbed energy use across the board.
The envisioned demand for natural gas just has not kept up with the amount of supply that was flooding the market. So even with the number of drilling rigs down to half the number operating just a year ago, there is currently a record 3.7 trillion cubic feet of natural gas in storage at the moment (equivalent to the nation’s average natural gas demand for eight weeks).
All that extra supply will eventually work its way through the system, but the days of $10 gas per thousand cubic feet seems to be over for the foreseeable future.But Exxon is making a bet that demand for natural gas will rebound and continue its steady march upward, especially in the United States....MORE
Did Exxon Overpay for XTO?
Exxon Mobil’s $31 billion acquisition of XTO Energy is one of the largest deals of the year. But the early reaction to the deal is mixed.
The all stock deal represents a 25% premium over XTO’s closing share price on Friday, but investors seem to think Exxon overpaid for XTO. Exxon’s shares are down nearly 4%, or $2.86.
Can you blame them? The deal values XTO greater than the value of its underlying natural gas resources. The deal implies a value of $17.5 of barrel of oil equivalent, or boe, for XTO’s proven gas reserves compared with how XTO currently values those reserves at $14.9 boe....MORE