Dr. Exxon Gives Gas a Clean Bill of Health

by: Sam Subramanian

In an article titled ‘Natural Gas Trading: Opportunities for Both Shorts and Longs’, I had expressed my optimism on the long-term outlook for natural gas based on the premise that the U. S. economy will recover and resume growth sometime in the future.

My optimism on the future of natural gas has now strengthened. Exxon Mobil (NYSE:XOM) has moved to buy a major natural gas producer XTO Energy (XTO) for $41 billion – a 25% premium to XTO shareholders.

Exxon, the energy juggernaut, does not move often but when it does, it creates a cascade. The one mega purchase Exxon pursued earlier was Mobil in 1999 and that has worked well for Exxon’s shareholders.

So why is Exxon pursuing this deal?

Following the Copenhagen summit on climate change, political support in Washington and elsewhere has shifted more favorably towards reduction of carbon emission. Natural gas, a cleaner burning fuel than coal, stands to benefit from this trend.

Exxon’s Kenneth Cohen has commented that U. S. carbon legislation will prompt power producers to switch from coal to natural gas increasing demand for the latter. Andrew Swiger, also of Exxon, has predicted,

The use of natural gas will increase twice as fast as the demand for crude oil and that natural gas will surpass coal as the second-largest energy source as global energy demand increases 30% by 2030.

Exxon’s purchase of XTO Energy is a strategic bet on natural gas becoming the fuel of choice. The XTO purchase should enable Exxon to increase its resource base to meet the expected increase in demand for natural gas. Exxon's technical expertise in producing natural gas from shale formations should help create value.

The future for gas

If Exxon’s bet proves right, the $2.51 per MMBTU bottom in the price of natural gas set on September 3 could well turn out to be an enduring one.

Also, the Exxon–XTO deal could trigger a cascade of transactions by other major integrated oil companies. Just yesterday, French oil major Total (NYSE:TOT) struck a $2.25 billion deal with Chesapeake Energy (NYSE:CHK) to enter the U. S. shale-gas market. More deals could be in the offing with players like Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) vying to acquire natural gas producers like Oklahoma-based Devon Energy (NYSE:DVN) and Texas-based EOG Resources (NYSE:EOG).

Investors looking to join Exxon in betting on the future of gas can consider the following investment vehicles:

  • Commodity: iPath DJ UBS Natural Gas (NYSEARCA:GAZ)
  • ETF: First Trust ISE-Revere Natural Gas (NYSEARCA:FCG)
  • Mutual Fund: Fidelity Select Natural Gas (FSNGX)

Disclosure: I own shares in FSNGX. I have no positions in the other securities discussed.