Investors appear concerned that ExxonMobil Corp. (XOM, NYSE) might have paid too much for XTO, while some have expressed concerns that the new assets increase the profile of natural gas in Super Oil’s production mix. The market has vastly overreacted to both concerns, furnishing savvy investors with an excellent opportunity to buy ExxonMobil’s shares. And there’s plenty to like about XTO Energy’s business model. The acquired firm is a U.S.-focused natural gas producer with a long history of operating in the Barnett and Haynesville Shale, among other unconventional natural gas plays. Moreover, XTO and ExxonMobil share similar strategies; both firms built a reputation for driving down costs in new fields through efficiency gains. XTO also brings a lot of know-how to the table, a valuable asset as ExxonMobil seeks to exploit the significant unconventional acreage its amassed both in the US and internationally. At present, shale-gas production is primarily a North American phenomenon, though ExxonMobil and other producers are eyeing similar deposits overseas.
Granted, the deal increases the ExxonMobil’s exposure to natural gas, but as my rundown of upstream projects suggests, the company was already headed in that direction before the tie-up with XTO. This strategic shift reflects the company’s long-term outlook for energy markets; management expects demand for natural gas to accelerate at a much faster rate than the market for any other energy commodity between now and 2030. ... This view isn’t that far-fetched when you consider the impressive demand growth in China and India. The market is paying too much attention to the near-term outlook for gas in North America; I expect gas prices to return to $6 per million British thermal units over the next one to two years. In addition, I don’t agree that Exxon overpaid. Although Exxon issued new shares for XTO holders, the deal doesn’t represent much of a financial burden for a company of Exxon’s size. And with gas prices depressed in late 2009 and sentiment weak, ExxonMobil wasn’t exactly buying into the industry at the height of euphoria—the deal is a value play on a business that will be of increasing strategic performance down the line.
This shortsightedness affords investors an opportunity to pick up a long-term value creator at a cheap price. Readers who received shares of ExxonMobil as part of the XTO transaction should hold onto the stock. Yielding 3 percent, ExxonMobil is a buy up to 65 in the Proven Reserves Portfolio.
Elliott H. Gue, The Energy Strategist
