Tuesday, December 15, 2009

Rex Tillerson's Carry Trade (XOM; XTO; XNG)

The enthusiasm is waning for some of the peripheral players, five of the fifteen components of the XNG are down today.
From ZeroHedge:
You have to hand it to the boys at Exxon. When they go shopping they bring a debit card with no limit. The XTO Energy deal is worth $31b. That represents nearly 10% of the market cap for XON. They paid a premium of 25% to get it done. That is a measure of how much this deal meant to them.

You can be sure that this deal was looked at every which way before CEO Tillerson said yes. There was a lot of that ‘deep thinking’ going on. At the end of the day I think it was as easy as looking at the futures market.

The closing futures prices for Nat Gas yesterday were as follows:

January 2010 = 5.332
January 2011 = 6.900

The year over year price differential is $1.568. That is a premium over the near month of 29%. That is a very big number. There are a number of contributing factors to this premium. The most significant of which is the lack of storage capacity and a big enough balance sheet to finance it. No doubt but that the good folks at Exxon will be earning a significant portion of that premium in the years to come....MORE
That's one way to buy storge, in situ.