Tuesday, December 15, 2009

Exxon Mobil makes $29B bet on Natural Gas - Buys XTO Energy

The Company that provides the product to fill your car’s fuel tank now wants to provide the fuel to power the electrical production for your home.

ExxonMobil, The world’s largest publicly traded oil company, agreed to buy XTO Energy in an all-stock deal at a 25 percent premium, a $29 Billion move showing how convinced they are that pressure to curb climate change will mean natural gas, abundant in the US, cleaner than coal and suddenly much easier to reach with new technologies — will become a crucial source of U.S. power.

ExxonMobil, a company that is among the most conservative and profitable in a conservative industry is going headfirst into the market for natural gas, this deal suggests Exxon sees change coming for an energy source best known now for heating homes. The drilling and extraction technology to unlock natural gas from tight rock formations has advanced so rapidly that energy experts have raised their estimates of how much fuel is available by 35 percent in just two years. The emergence of the discovery of massive supplies of natural gas in the U.S. coincides with the nation's focus on cutting greenhouse gas emissions.

Largest Energy Deal in over Four Years

The deal announced late Monday was also the largest for the U.S. energy sector in at least four years and Exxon's biggest acquisition since it bought Mobil Corp. for $75 billion in 1999. The natural gas supply increase and coming climate legislation have been cited by utilities this year as reasons as to why they have shuttered old coal-fired power plants and scrapped plans to build new ones. Already in the news with the controversy at the Copenhagen Climate Change Conference this week, climate legislation would put utilities in the crosshairs, and many are seeking new fuels like natural gas to produce electricity to minimize the economic hit. Just this month, Progress Energy became the latest utility to announce it would close its coal-fired power plants in favor of producing electricity using natural gas.

Exxon Mobil expects global demand for gas to grow 50 percent by 2030. "Natural gas is really well-suited to meet that growing power generation demand, both from the standpoint of its lower environmental impact, but also its capital efficiency and its flexibility," Exxon Mobil chairman and CEO Rex Tillerson told analysts on a conference call.

Other Oil Companies look to get into Natural Gas Market

Through August, utilities used gas to generate 23 percent of the nation's electricity. That figure is up nearly three percentage points from last year. Coal's share was down about 13 percent. Takeover target XTO claims about 45 trillion cubic feet of gas, much of it trapped in tight shale formations. Technology developed over the past decade has made it much cheaper to pull natural gas from those formations.
Monday many energy experts were laying odds as to which natural gas companies would be sold next, and which major oil companies might follow Exxon's lead by snapping them up. European oil firm are already cutting deals with Chesapeake Energy, one of the biggest independent U.S. natural gas companies. Companies like Royal Dutch Shell and Statoil want more exposure to supply in the natural gas fields in the U.S. and the technology to extract gas. Potential takeover targets include big natural gas companies like Chesapeake Energy, Devon Energy and Anadarko.

Exxon is also moving beyond the U.S. to increase their natural gas production. Last week, ExxonMobil gave the go-ahead for a $15 billion natural gas project in Papua New Guinea, a nation just north of Australia. That deal positions ExxonMobil to provide energy to a fuel-hungry China.

Once the XTO deal closes, Exxon said it will be establishing a new organization to manage global development and production of so-called “unconventional resources”. XTO's chairman and founder, Bob Simpson, said his company has the capability of developing the unconventional resources that have given North America more than 100 years' worth of natural gas supplies. This is what Exxon is purchasing in the deal.

The deal was valued at about $31 billion based on Exxon's closing stock price Friday Dec 11th. Exxon shares fell nearly 5 percent on Monday, placing the deal's value closer to $29 billion.

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