Exxon Mobil to buy natural gas specialist
Purchase would boost reserves of a fuel with a growing market

By Steven Mufson
Washington Post Staff Writer
Tuesday, December 15, 2009

Exxon Mobil moved to bolster its U.S. natural gas reserves by announcing a $41 billion agreement Monday to acquire XTO Energy, a 23-year-old independent oil and gas company.

Analysts called the acquisition a bet on future demand for natural gas as the nation looks for energy sources with lower greenhouse-gas emission levels than coal and oil. It also reflects growing confidence among utilities and industry that recent advances in exploiting natural gas from widespread deposits of shale rock have unlocked vast supplies of gas for wider use at reasonable prices.

The deal reflects the "long-term energy view, which would be that natural gas would be the fastest-growing fuel over the next 30 to 40 years," said Deutsche Bank oil analyst Paul Sankey. "We're moving from a 20th century driven by gasoline to a 21st century driven by electricity, and the way you're going to generate it is through natural gas as much as anything."

"Natural gas . . . is the transition fossil fuel," said Larry Goldstein, a trustee with the Energy Policy Research Foundation.

The deal, which is subject to XTO shareholder approval and regulatory review, would be the fifth-largest acquisition of a U.S. energy company since 1995. It comes as global leaders meet at this week's Copenhagen summit focused on ways to slow climate change. Under its co-founder and chairman, Bob Simpson, a former accountant, XTO has specialized in buying up natural gas properties, including unconventional shale gas prospects and gas fields beyond their prime but with years of steady output ahead. And XTO has used financial devices to hedge against the risk of fluctuating prices.

To date, XTO has accumulated about 14 trillion cubic feet of proven gas reserves. The company produces more than 4 percent of total U.S. natural gas. The acquisition would double Exxon Mobil's U.S. natural gas reserves and boost Exxon's worldwide natural gas reserves by 10 percent, a hefty chunk for a giant that has dominated the industry for more than a century.

"Bob Simpson is a very clever guy," said Fadel Gheit, oil analyst at Oppenheimer & Sons. "He's like a guy betting on real estate in the run-down part of town. Eventually this place turns into a good place to live." The result, Gheit said, is that "Bob Simpson has created more value than any living person. The company's value is up 29-fold in 10 years."

Exxon Mobil agreed to pay $31 billion in stock and to assume $10 billion in XTO debt, even though gas prices have been sharply down for much of the year. The price represents a 25 percent premium over XTO's recent stock price, and the stocks of other big and medium-size independent domestic oil and gas companies jumped after the news. Exxon Mobil would issue 0.7 shares of stock in exchange for every share of XTO stock. XTO's stock jumped 15 percent Monday, to $47.86 a share.

Simpson, 61, would benefit handsomely from the deal. The XTO chairman, who relinquished the chief executive post last year, earned $65.5 million for the year in salary, bonus, stock awards and options. He owns 6.8 million shares of XTO Energy stock, now worth $325 million. (Only 14 months ago, Simpson was forced to sell 30 percent of his holdings when he faced a margin call.) His nephew is also a senior executive at the company.

Gheit said XTO Energy's expertise in exploiting shale gas resources in the United States would also help Exxon Mobil develop similar resources in areas it owns in Poland, Hungary and Germany.

XTO produces substantial amounts of gas from the Barnett shale region of Texas and has started producing in the Bakken formation in North Dakota. It is also stepping up drilling in the Marcellus region, which stretches through much of Pennsylvania, New York and West Virginia.

But some analysts worried about Exxon Mobil's ability to hang on to XTO's skilled employees. "Exxon Mobil is buying one of the highest-regarded management teams in U.S. [exploration and production], and a major challenge could be retaining talent in a big and process-driven organization," said Paul Sankey, research analyst at Deutsche Bank Securities.

Analysts also attributed Exxon Mobil's decision to buy XTO Energy to the challenges of operating overseas. Exxon Mobil has exited Venezuela after a dispute with President Hugo Chávez and has been pressed by other governments eager to make sure their state-owned oil companies control their domestic resources.

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