Exxon-XTO Deal: Majors to Grow Reserves Through Natural Gas Acquisitions

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 |  Includes: FCG, GAZ, XOM, XTO
by: Gregor Macdonald

Exxon (NYSE:XOM) is like the government. It’s constitutionally unable to face reality. This has been the case for some years now, and has been reflected in their refusal to accept that spending billions annually would not result in any appreciable growth in their oil reserves. I’ve been snickering for years at XOM’s stuck-in-time approach. Here’s a snippet of a post of mine from a year ago, Advice to Major XOM.

Like sands through the hourglass, so are the days of ExxonMobil. Each year brings a new promise to grow production and build reserves “the old fashioned way.” They spend 20 billion. They spend 40 billion. The CEO is interviewed, and gives his patient outlook on the price of oil. (has no idea). Cash builds up on the balance sheet. The company is praised, for not being aggressive. The company is criticized, for not being aggressive. More cash builds up on the balance sheet. Investor groups become alarmed, at an apparent lack of strategy. Production stays flat, year after year. Reserve replacement flattens.

When Rex Tillerson was made CEO of ExxonMobil a few years ago he was asked for his outlook on the price of oil. Rex stated that was not his job, and that frankly he didn’t care. Now, that’s probably the kind of attitude that caused the Rockefeller heirs to probe the board, for a new strategy. While misunderstood as a push for investment in Alternative Energy, the Rockefeller group was correctly identifying the fact that Exxon was led by an intellectually incurious CEO, and that the company was sleepwalking its way into a paradigm shift in energy supply. Spending 20 billion a year just to keep production and reserves flat does, indeed, indicate a state of denial.

Whether Exxon’s corporate culture of denial has changed or not is unclear. However, Exxon today has purchased for itself one of the best run Natural Gas producers in the United States, with its all stock deal for XTO. (they should have paid cash and de-hoarded some of their dollars). XTO Energy (XTO), Run by Bob Simpson, has assembled a fine collection of shale NG properties and conventional oil production in the continental U.S. over the past five years, and is quite the prize. One wonders if XOM will have to compete a bit further, however, before the deal is actually closed.

A more poignant and broader question however is as follows: does Exxon see a shift coming, finally, to energy policy in the U.S. that would favor natural gas? Given XOM’s devotion to doing things the old-fashioned way, I say maybe- but unlikely. I doubt very much Exxon would make a deal that would depend on the whims of future policy decisions, out of Washington. No, Exxon makes deals based on the hard-bitten truths and laws that oilmen of old would live by. So while I can’t give them credit for having any vision, they do know history. And that’s what you get with Exxon, visionless management–but safe, disciplined management.

Perhaps this is an apt moment to post the most recently updated chart of Non-OPEC crude oil production. Because that’s the real reason for Mpnday’s deal. Developing new oil production here in the West, except on a small scale, is tough. Exxon is too big to add reserves therefore on the oil side through development. Indeed, in recent years, Exxon has not been able to boost its annual reserve replacement ratio above 100% via oil. So instead, it obtains reserves of BTU’s another way, via natural gas. Needless to say, but this puts a finer point on how all the global majors will add to reserves in the years ahead: Through more acquisitions of North American NG.

Non-OPEC Supply 2001-2009