ExxonMobil Announces US$41-bil. Deal to Buy XTO Energy

Biggest Gets Bigger

In ExxonMobil's largest acquisition in a decade—indeed, since ExxonMobil was formed in November 1999 via the merger of Exxon and Mobil—the U.S. supermajor announced yesterday it has reached a deal to buy Houston (Texas)-based independent XTO Energy. Under the terms of the deal, which has already been approved by the boards of directors of both companies, ExxonMobil will issue 0.7098 of a common share for each common share of XTO, representing a 25% premium to XTO's closing share price on Friday (11 December), the last day of trading prior to the announcement of the transaction. The all-stock transaction is valued at US$41 billion, including US$10 billion of existing XTO debt.

The deal, provided it is approved by XTO shareholders and secures the requisite regulatory clearances, will bolster ExxonMobil's position in the development of unconventional gas and oil resources. ExxonMobil is already the biggest of the supermajors, and the fact that this transaction will make it even bigger could generate problems with federal regulators, particularly with the Obama administration taking aim at "Big Business". However, in touting the deal as beneficial for U.S. gas consumers and global energy security, ExxonMobil appears to be counting on regulators to stand down and allow the deal to go forward.

Indeed, coming in the midst of stalled negotiations in Copenhagen towards a post-Kyoto global climate change treaty, the ExxonMobil-XTO deal is an eye-opening bet by the top U.S. oil company on the future of cleaner-burning natural gas. Long castigated by environmental groups for its stance on climate change and global warming, ExxonMobil appears to be subtly changing its tune with the acquisition of XTO, which controls a resource base with the equivalent of 45 tcf of gas, including substantial "unconventional" gas reserves in the form of shale gas, tight gas, and coalbed methane. ExxonMobil said that XTO's unconventional gas reserves would complement its own holdings in the United States, Canada, Germany, Poland, Hungary, and Argentina, with the company planning to establish a new upstream organisation based at XTO's current offices that will manage global development and production of ExxonMobil's unconventional resources.

ExxonMobil's bet on unconventional gas reflects the rapidly changing dynamics in the U.S. gas industry, which is undergoing a "revolution" as new technology and drilling techniques have led to a sharp rise in unconventional gas production (see United States: 6 August 2009: U.S. Unconventional Gas Briefing: From Imminent Supply Crunch to Unexpected Resource Bonanza). XTO has been in the vanguard of the shale gas revolution, vying with other independents such as Chesapeake Corp. and Southwestern Energy Co. for the title of industry leader. In a press release to announce the transaction, ExxonMobil noted the synergies to be realised with XTO in the all-stock deal, stating, "XTO's strengths, together with ExxonMobil's advanced R&D [research and development] and operational capabilities, global scale and financial capacity, should enable development of additional supplies of unconventional oil and gas resources, benefiting consumers both here in the United States and around the world."

Outlook and Implications

Provided the deal secures regulatory clearance, ExxonMobil said that the transaction is expected to close in the second quarter of 2010. Considering the size of the deal and the impact on the industry, U.S. federal regulators may take a long, hard look at the merger before signing off, but with few obvious anti-trust ramifications on first glance, the ExxonMobil-XTO deal could move towards completion rather painlessly. Indeed, if the administration of President Barack Obama buys into ExxonMobil's arguments that the agreement is good for the U.S. economy and energy security—since it will "enhance opportunities for job creation and investment in the production of America's own clean-burning natural gas resources", according to company CEO Rex Tillerson—federal regulators could even speed the deal along towards closing.

Regardless, the announcement of the deal, together with the fact that it is industry heavyweight ExxonMobil that is undertaking it, is likely to generate a new round of industry consolidation—or at least speculation about it. The competition among the big publicly traded energy companies is such that an acquisition move by one of the big boys typically triggers a similar move by the other players as the herd mentality kicks in. Already, speculation is rampant about which of the supermajors will be first to follow ExxonMobil's lead. Similarly, with XTO now snapped up, the race is on to identify other potential acquisition targets, particularly in the small- to mid-cap range. Mid-majors such as Devon Energy, Anadarko, and EnCana, as well as Chesapeake, Southwestern Energy, and EOG Resources, among others, could all be in the cross-hairs if the ExxonMobil-XTO deal does indeed herald a new era of industry consolidation.