Exxon to acquire us gas company for $31 bn

The transaction values XTO at $51.69 a share, 25 per cent higher than its last closing price

Exxon Mobil Corp, the biggest US oil company, agreed to buy XTO Energy Inc for $31 billion in a bet that US emissions restrictions will spur increased demand for natural gas.

Owners of Fort Worth, Texas-based XTO will get 0.7098 share of Exxon for each of their shares, the companies said on Monday in a statement. The transaction, the largest energy acquisition since 2006 and Irving, Texas-based Exxon’s biggest takeover since the purchase of Mobil Corp in 1999, values XTO at $51.69 a share, 25 per cent higher than its last closing price.

“This says that corporate M&A is alive and well in the exploration and production sector,” said Curtis Trimble, an analyst at Natixis Bleichroeder Inc in Houston. “It also says that Exxon isn’t shy about stepping up their exposure to the natural-gas market. Almost certainly, we will see some more follow-the-leader type transactions.”

Exxon, which also will assume $10 billion in debt, will get the largest producer of US natural gas. Demand for the fuel will grow as US carbon legislation prompts power producers to switch from coal, Kenneth Cohen, Exxon’s vice president for government affairs, said in a December 7 interview.

XTO rose $6.52, or 16 per cent, to $48.01 at 10.20 AM in New York Stock Exchange composite trading. The stock had climbed 18 per cent this year before. Exxon fell $2.90 to $69.93.

The purchase is scheduled to close in the second quarter, the companies said. JPMorgan Chase & Co and Davis Polk & Wardwell are advising Exxon. Barclays Plc, Jefferies & Co and Skadden Arps Slate Meagher & Flom LLP are advising XTO.

“In terms of which deal gets triggered next, it’s kind of a race to the altar,” said Ted Harper, who helps manage $6.1 billion, including 137,550 XTO shares and 932,268 Exxon shares, at Frost Investment Advisors in Houston.

Acquirers will probably be major oil companies that are having a tough time increasing production, such as Europe’s Royal Dutch Shell Plc and Total SA, Harper said. Potential takeover targets would include independent exploration and production companies like Ultra Petroleum Corp, EnCana Corp, and Range Resources Corp, he said.

XTO’s output jumped 23 per cent to the equivalent of 2.95 billion cubic feet of gas a day after a $4.2 billion acquisition spree last year that included Hunt Petroleum Corp. The company reported proved reserves equivalent to almost 13.9 trillion cubic feet of gas at the end of last year. Including reserves not yet proved, XTO has an estimated 45 trillion cubic feet of gas equivalent, according to Monday’s statement.

“There very little in the way of really good reserves out there,” said Stephen Leeb, who manages $175 million as president of Leeb Capital Management in New York. “If you want reserves you can count on, you really have to buy domestic reserves, or reserves in countries that are, you know, trustworthy, and XTO has a lot of wonderful domestic reserves, especially, I think, in the gas area.”

Including all reserves, not just proved, Exxon is paying $5.47 per barrel of oil equivalent in reserves, Chief Executive Officer Rex Tillerson told reporters on a conference call.

XTO extracts gas from the Barnett Shale region of Texas, the largest so-called unconventional gas field in the US, and is drilling in the Bakken Shale in North Dakota, where oil is trapped between shale beds in rock resembling concrete.

The company is doubling its drilling in the Marcellus Shale, a gas-bearing formation that stretches through parts of Pennsylvania, New York and West Virginia. Shale developments, where rock formations are fractured and injected with water, sand and chemicals to release trapped gas, drove a jump in US gas production last year.