Stepping on the gas

Exxon/XTO: Exxon Mobil has picked its spot. The oil giant is paying $31 billion to buy XTO Energy, its biggest deal in a decade. The transaction ticks many boxes for Exxon. It gains a foothold in U.S. gas and secures a needed boost to energy reserves. The long-term bet is timed to strike just as gas recovers from historical lows. Plus, to fund the XTO takeover, Exxon isn’t diluting holders much. All told, the deal looks smart.

XTO operates in unconventional markets including shale. While promising, these resources have tested the fortitude of companies exploring for them of late. An oversupply of gas accompanied by a recession-led drop in industrial demand pushed prices to a new bottom. Storage filled to record levels, and natural gas contracts tanked. XTO’s shares followed, declining 40 percent from their high in June 2008.

Exxon is more hopeful about tomorrow than it is worried about today. Its recent energy outlook estimated that unconventional gas could meet more than half of U.S. demand by 2030. Environmentalists tout natural gas as a bridge to a low-carbon economy – with CO2 emissions roughly half those of coal. But any spike in demand will need a nudge from lawmakers. Exxon is taking a punt that opposition from Democrats in coal states will eventually be overcome. Gas-friendly regulation would help prices overcome powerful headwinds from vast increases in the potential supply of shale gas over the past year.