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.

Carbon Emissions Credits Are Designed to Dampen Fuel Demand

Source Article
Oil Refiners Predict Higher Gas Prices | online.wsj.com (view article)


Implications:
1) Refiners paying for transports share of Carbon output is "De Facto" Emissions tax

2) Higher Carbon Emissions share on Refining, an efficient part of energy supply chain, seems counterproductive

3) Refiners paying price for auto makers lack of progress on efficiency and emissions?

Analysis:

If refiners have to pay for the Carbon output of Transportation, it acts as a "De Facto" emissions tax on prior choices made by the consumer and auto business.

Transportation manufacturers should have to include the projected emissions amount each vehicle will emit over it's lifetime in the initial purchase price; that will give consumers a really clear choice as to why more efficient and cleaner cars are the way to go.

Charging refiners for emissions is like charging farmers for the sewage fees that the people eating the food they produce will eventually use.

The higher carbon emissions share on refining, an efficient part of the energy supply chain, seems like it's more a choice of the best place to "close the barn door after the horses have left" than anything else. The automakers and transport manufacturers should be paying the Carbon Output up front in the sale of the vehicle.

The multiplication of increased fuel prices across all sectors of the economy was clearly seen last year in the fuel price spike. The linkages cause a "ripple effect" of price increases throughout the economy. We saw there is very little elasticity of demand on transport fuels; whether the increase is market driven or government mandated, it still affects all sectors of the economy with higher prices.

There needs to be a direct correlation between the choice of vehicle and the Carbon Output tax, not on usage for a fleet that was built before this was a rule, which is what hitting the refiners does. Capping and eventually reducing carbon emissions is a worthy and necessary goal, the mechanism for getting there needs to be fair.

Green Energy Investment is Risky without Government Backup

Source Article
Green energy plans in disarray as wind farm giant slashes investment | business.timesonline.co.uk (article)

Implications:
1) Alternative Energy is not able to compete with "Cheap" oil at this time.

2) Wind and Solar may be able to compete before Biofuels for Transport

3) There is no way to Project Competing Energy (Hydrocarbon) Costs reliably for the length of investment needed for Alternative Energy Infrastructure.

4) Government programs guaranteeing "Floor" pricing for alternatives and renewables only way to attract investment capital

Analysis:
The "Green Energy" movement - Renewables, Biofuels and oil substitutes like ethanol, are subject to energy market price volatility as a whole, and compete for capital with other energy projects.

The rapid spike and decline in oil prices over the last 18 months has shown that there is very little elasticity of demand for hydrocarbon-based energy. The infrastructure the world has invested in for the past 100+ years is based on the availability of hydrocarbon fuels (Coal, Natural gas, and Crude Oil derived refined products) as the primary energy source.

As long as the emerging "Green" energy sources cannot be guaranteed a "floor" price where government will make up the difference between production and market costs while the industry matures and is able to become competitive in the global energy free market, there will be very little incentive for private(NYSE:BBY) investment in these technologies and the infrastructures needed to support them.

The financial collapse of corn-based ethanol producers in the US is a prime example of why alternative and Bio energy will be a hazardous proposition for investors until a way to protect them from the bottom of oil's price swings can be initiated.

Relatively inexpensive oil will always be a threat to Green Energy business plans; they are building against a competitor that has years of investment and operating experience, in addition to loads of capital, with which to compete.

State oil firms pump based on how much cash they need to bring in to support the government that owns them, market lows are of little consequence to their plans. While the State-owned Oilcos love the high prices, the odds of a group of state-owned firms volume discipline being maintained at the expense of a bankrupt government is virtually nil.

The Super Major Multinational privately owned firms have been very selective about competing wit their core hydrocarbons businesses, they understand the economics better than anyone else.

Until some large governments embrace distributed-generation electrical production and the smart grid needed to make that model work, as a national security priority, the odds of significant amounts of electricity being produced by "Green" means is very slim indeed.

Biofuels for transport face an even tougher uphill fight without help to get the industry off the ground

Consolidation of Mid-Size Oil Firms is Sign of Current Market Conditions

Source Article: Suncor's Petro-Canada bid may spur more deals | www.reuters.com (article)

Implications:
1) Suncor(TSX:SU)/Petro-Canada(TSX:PCA) combination makes for stronger single entity

2) Merger will make access to capital easier- Oil sands are expensive development prospect through to production.

3) Creates a firm with broad interests and verticle integration

4) Other mergers are going to occur in "Mid-Major" firms, and not be limited by national borders

5) State Oil firms may look to reach out to create "hybrid" firms across borders like PDVSA-Citgo

Analysis:
Suncor's(TSX:SU) purchase/merger with Petro-Canada(TSX:PCA) makes sense for both the players, and advances Canada's overall energy interests by creating a player with deep pockets and a breadth of resources.

Firms of this size, while large by conventional standards, are dwarfed the Super Major Multinationals like Chevron(NYSE:CVX), ExxonMobil(NYSE:XOM), BP, Royal Dutch Petroleum (Shell(NYSE:RDS/A)(NYSE:RDS/A)) and Total. They compete with these firms for exploration and development properties, in distribution and retail in R & M operations, and for capital on the global lending market.

Bigger, in this business, means real and realized efficiencies of scale, and make economic sense. The combined entity will find access to capital an easier proposition, and be able to expand those savings over the entire range of both firms operations as they combine.

Look for other mergers to occur in Major or Mid-Major Oil firms. The time is right for strong firms to make moves before energy prices head precipitously back up, making the book values of known reserves prohibitively expensive.

The prospect of State-owned oil firms purchasing privately held firms in other markets shouldn't be discounted as a potential play, either.

Had Venezuela's current political posture not come to complicate the situation, the PDVSA-Citgo combination could be a blueprint as how to leverage a nation's natural resources into commercial interests that are far more than trading extracted natural resources for cash.

Super Major Multinational Oil Firms Can Continue to Invest for the Future

Source Article: Shell Plans Major Investments in 2009, Tags Dividend Growth at $10 billion | www.rigzone.com (article)

Implications:
1) Recent big profits give them strong balance sheets
2) Can Source Capital inexpensively right now
3) World Still Hungry for Hydrocarbons at any Price
4) OilCo's can control bio and alternative fuel assets at discount now.

Analysis:
Shell's announcement of capital expenditures remaining at high levels should come as no surprise. All the Supermajor Multinational Oil firms have plenty of cash and strong balance sheets, access to capital at very low rates, and an inelastic demand vs price in hydrocarbon based energy. ExxonMobil(NYSE:XOM) and Total are doing the same.

While prices are down right now, the historic run-up last year showed just how inelastic the core demand for oil, natural gas and refined products really is. While alternative fuels and conservation measures like hybrid and electric cars will reduce demand in the long run, those developments are still way out on the investment horizon.

The oil companies can also exert influence and a degree of control on the future of biofuels right now, and Valero's(NYSE:VLO) announced purchase of bankrupt VeraSun's ethanol production assets this week shows. BP, Chevron(NYSE:CVX) and ExxonMobil are all featuring alternative technologies in their advertising right now.

The collapse of oil prices created an opportunity to purchase overleveraged bio and alternative fuel assets at a discount, as the market price the VeraSun's and the like used to justify investment fell apart.

So the future for the Oil companies isn't just about crude, but the alternatives and substitutes being developed to supplant the world demand for crude. The Supermajors are expert and efficient conduits for product and capital, as they diversify into the other types of energy alternatives, that isn't going to change.