Exxon Mobil Corporation (XOM) recently increased its holdings in the Bakken by nearly half, expanding its total holdings to 600,000 net acres through the acquisition of shale assets formerly held by Denbury Onshore LLC, a subsidiary of Denbury Resources (DNR). Exxon Mobil is paying $1.6 billion in cash and exchanging interests in the Hartzog Draw in Wyoming and the Webster field in Texas to acquire the Bakken assets. Exxon Mobil's subsidiary XTO Energy will operate the Bakken assets, due to its experience in shale exploration and development.
Exxon Mobil Senior Vice President Andrew Swiger noted that "this agreement provides a strategic addition to Exxon Mobil's North American unconventional resource base." This is somewhat of an understatement as the Bakken will now be Exxon Mobil's largest unconventional oil play after its Canadian oil sands assets - assets that it sorely needed to prop up with further oil production, given its natural gas exposure after the 2010 acquisition of XTO. This is the second major domestic shale deal between a super major and an independent in recent weeks, as Royal Dutch Shell (RDS.A) recently announced it was acquiring $1.94 billion in assets from Chesapeake Energy (CHK).
More M&A On the Horizon
I believe that these moves herald a further wave of consolidation as the smaller early movers make way for the deep pocketed majors and super majors. While I think it would be wise for Exxon Mobil to maintain a strong cash balance in the near term pending the resolution of several international disputes, Exxon Mobil does have cash to spare for more deals on the order of the Denbury announcement; its most recent balance sheet indicated the world's largest oil company had $18 billion cash on hand.
The Bakken is the one of the most attractive plays for Exxon Mobil to use to build further unconventional domestic oil resources. The Denbury assets being transferred cover proved reserves of 96 mboe, which is only 26% developed. That gives Exxon Mobil a drilling inventory and opportunity to use its own technology to develop the majority of the leasehold it's acquiring under the deal. Additionally, the infrastructure in the Bakken, while stressed, is beginning to approach scale, which reduces the cost of further infrastructure builds for Exxon Mobil. Though bottlenecks are leading to deep discounts on Bakken production, it will be at least six months before Exxon Mobil significantly scales production from its recent acquisition, which Denbury estimates will produce 15,000 boe per day - a drop in a very large bucket, estimated at 730,000 boe per day total from all operators on the Bakken.
Exxon Mobil can also now claim to be answering shareholder calls for further oil development, especially as the giant continues to suffer from XTO Energy, which was a short-term mistake, but I believe a long-term value add. Finally, the Bakken is also a potential long term play, as recent engineering analyses by the State of North Dakota's Oil and Gas Research Program indicates that the average lifespan of recently drilled wells should be around 30 years, perhaps longer with enhanced recovery methods.
With the acquisition, Exxon Mobil is now catching up to unconventional oil players with several years' experience on the Bakken. ConocoPhillips (COP) and Hess (HES) are the number one and two players on the Bakken, respectively, with Exxon Mobil tied for fifth with EOG Resources (EOG). Despite Exxon Mobil's leap onto the top five, it is still a tight play, with recoverable oil estimated anywhere between 4.3 billion and 20 billion barrels of oil plus associated gas.
This gives Exxon Mobil plenty more room to acquire Bakken resources, and good reason to do so. With its XTO acquisition Exxon Mobil became the largest US natural gas producer practically overnight, and despite the burn from the timing of that particular acquisition, I don't think Exxon Mobil would be averse to claiming the same title in domestic oil - and its shareholders would view that as a net positive.
Exxon Mobil is currently trading around $92 per share, which gives it a price to book of 2.6 and a forward price to earnings of 10.3. For comparison, close competitor Shell is currently trading around $69, with a price to book of 1.2 and a forward price to earnings of 11.2. Chesapeake is trading around $19 per share, with a price to book of 0.9 and a forward price to earnings of 11.1. ConocoPhillips is trading around $57, with a price to book of 1.5 and a forward price to earnings of 9.3. EOG is trading around $114 at a price to book of 2.4 and a forward price to earnings of 18.4. Finally, Continental Resources is trading around $77, with a price to book of 5.0 and a forward price to earnings of 16.1; this hefty price to book value makes it one of the least attractive E&Ps for investment right now.
Although Exxon Mobil is still reporting earnings increases quarter to quarter, recently these increases could be called more of a coast than a surge, as Exxon Mobil attributes the increases primarily to asset sales and improved margins, not increased production. Simply put, Exxon Mobil needs to replace its reserves and focus on growth through the drill bit and in the near term, especially as US natural gas prices are not forecast to increase substantially until after this coming winter. Overall, Exxon Mobil's second quarter production volumes were down nearly 9%, an unsustainable trend.
Despite a steady climb since the summer months, Exxon Mobil is still a good value at $92 per share. Its healthy dividend, at a projected yield of 2.48%, does much to help overcome its lower-than-average revenue growth. However, if Exxon Mobil continues to make moves into U.S. conventional oil even as it explores for oil in other areas, that revenue growth should jump quickly - which is why value investors should be moving in now.