Tuesday, December 15, 2009

Exxon Buys XTO for Natural Gas Holdings

HOUSTON (Dow Jones)--Exxon Mobil Corp.'s (XOM) planned buyout of independent natural gas producer XTO Energy Inc. (XTO) provided a ringing endorsement for the commodity on Monday--and could signal a modest uptick in merger activity.

The deal is valued at $41 billion, including the assumption by Exxon of about $10 billion of XTO's debt, and is the largest energy transaction since Chevron Corp. (CVX) acquired Texaco in 2001. It underscores the increasing attention major oil companies have been paying to unconventional resources--and is likely to stoke some of the mergers and acquisitions that until recently have been frozen by uncertainty about the future of natural gas prices.

"We should see a slow and steady increase in M&A activity," said Stephen Davis, an associate portfolio manager for Alpine Mutual Funds.

While other major oil and gas companies have struck deals to develop expertise in shale fields, Monday's deal is the first full-blown buyout of a large independent oil and gas company, which explores for and produces natural gas but doesn't have refining or retail operations.

Shales are dense rich rock formations, rich in natural gas, that dot the U.S. Such independent energy companies as XTO Energy Inc., Devon Energy Corp. (DVN) and Chesapeake Energy Corp. (CHK) have pioneered the exploitation of shales, which are credited with creating a boom in domestic gas output. Stocks of those companies and other independents with shale gas operations surged on the news of the Exxon acquisition.

Last year, Chesapeake entered into a joint venture with BP Plc. (BP) to develop shale resources in the U.S. and inked a deal with Statoil ASA (STO) to develop resources both here and abroad. Italian oil giant Eni SPA (E) struck a deal with Quicksilver Resources (KWK) last May.

"Short-term, what is good for XTO is good for all independents," said Dan McSpirit, an analyst with BMO Capital Markets.

Analysts said that the next major targets could include EOG Resources Inc. (EOG), Southwestern Energy Co. (SWN), Petrohawk Energy Corp. (HK), Chesapeake and Anadarko Petroleum Corp. (APC). Devon was also listed as a possible target, with Credit Suisse boosting its rating to neutral from underperform and calling it next in line for a buyer.

"The industry has been expecting this kind of consolidation for some time," said Joan Dunlap, PetroHawk vice president of investor relations. "It is a signal in the right direction for resource-style assets."

Motley Fool senior analyst Joe Magyer said that such cash-rich majors as Chevron Corp (CVX), Royal Dutch Shell PLC (RDSA) and BP PLC (BP) could be interested in takeovers.

Natural gas prices were also lifted by news of the deal, which some analysts said implied natural gas prices in 2010 at more than $1 above their current level.

Natural gas futures for January delivery on the New York Mercantile Exchange settled 16.9 cents higher, or 3.3%, at $5.332 per million British thermal units. Prices, which are still down about 60% from their 2008 summer highs above $13/MMBtu, have faced pressure from soaring domestic production and tepid demand resulting from the economic downturn. Natural gas traded below $2.50 in early September, its lowest in more than seven years.

Davis, with Alpine Mutual Funds, said that the deal was also bullish for oil prices, as a big company like Exxon finds it hard to replenish its reserves with crude and resorts to natural gas. Exxon has agreed to buy a stake in a rich oilfield in offshore Ghana for $4 billion from private-equity backed company Kosmos Energy, but it faces competition from other big western and Asian oil companies.

"It highlights that it is hard to find oil these days," Davis said.

-By Jason Womack, Dow Jones Newswires; 713-547-9201; jason.womack@dowjones.com

(Shara Tibken in New York contributed to this story.)

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