Exxon Mobil's (XOM) recent decision to increase its holdings in the Bakken formation, by purchasing Denbury Resource's (DNR) assets on the play, could herald a new M&A spree by the largest natural gas producer in the U.S. CEO Rex Tillerson famously -- or infamously, depending on your point of view -- said over the summer that Exxon Mobil executives were "losing [their] shirts" over the company's natural gas exposure from the 2010 acquisition of XTO Energy. I think that the heartburn from this ill-timed shale gas deal prevented Exxon Mobil from taking any new market-moving action on shale oil before. So why is the picture different now?
Changing Views on the Bakken
It's certain that Exxon Mobil wanted to avoid taking on any significant additional exposure to natural gas. Depending on the asset, even liquids-rich shale oil produces a fair amount of natural gas, and with the criticism from its shareholders mounting over natural-gas-related losses, Exxon Mobil was wise to wait until recent market trends indicated at least some stability in natural gas prices. Although the focus on the Bakken is in regard to oil, a significant amount of natural gas is produced as a byproduct, which most companies flaring (i.e., burning off) the gas rather than attempting to bring to market. Last year, it's estimated that almost half of natural gas brought to the surface was flared.
Northern Plains Nitrogen is proposing a solution for Bakken producers' unwanted natural gas production. Northern Plains wants to build a fertilizer plant that would put the natural gas currently being flared to use, as the surging boom in the Bakken leads to more natural gas production even as demand for the commodity remains low. The possibility of finding an outlet for this surplus production must be attractive to Exxon Mobil.
Exxon Mobil is also working to replace volume in the face of declining output as its oldest assets start to run dry. Although its downstream refining can help it live on slimmer production, it is clear that Exxon Mobil does not intend to follow this track. If nothing else, its recent acquisition history shows that it wants to keep the balance sheet of a supermajor while making moves like an independent, and I for one like the approach.
The Bakken fits in with this approach, and it shows no signs of slowing down. Even small independents are seeing outsize results on the play. Slawson Exploration is putting its resources into Richland County, recently receiving nine permits to drill between roughly 14,000 feet and 15,495 feet at locations across the county. Brigham Exploration, now part of Statoil (STO), recently completed a well in Richmond County with a bottom hole extending to 20,144 feet and initial IP rates of 1,448 barrels of oil and 921 mcf of natural gas per day. Newfield Exploration (NFX) is putting out some of the best 30-day IP rates on the Bakken, at a gross average of 2,009 boe per day. Despite these impressive results, however, these companies -- tiny compared to Exxon Mobil and its ilk -- could be in for upheaval when the supermajors take note.
Exxon Mobil's Peers Following Suit
Royal Dutch Shell (RDS.A) and BP (BP) are moving to ensure downstream profits from the Bakken surge, as both companies recently applied for permits to export crude oil from this and other plays from the U.S. to Canada. BP's project has already been green-lit. The companies are looking at this market shrewdly because they could potentially make a profit on both sides of the transaction; most of the lighter crude extracted from shale and exported to Canada is likely to be turned around and imported back into the U.S. as different products.
Speculation is high that now that Exxon Mobil is moving in on the Bakken, Chevron (CVX) will follow. Chevron is noticeably absent from major U.S. shale oil plays including the Bakken, which could be attributable to its focus on international shale gas or due to an incredibly bearish stance on the resource. However, if Chevron does move in, I think that the ensuing wave of M&A activity will wash most of the small independents out of these plays.
Exxon Mobil is trading around $92 per share, giving it a price/book of 2.6 and a forward price/earnings of 10.6. Statoil is trading around $25 per share, with a price/book of 1.5 and a forward price/earnings of 3.9. Chevron is trading around $111 per share, with a price/book of 1.7 and a forward price/earnings of 8.3. BP is trading around $43 per share, with a price/book of 1.2 and a forward price/earnings of 18.5. Shell is trading around $70, with a price/book of 1.3 and a forward price/earnings of 11.1.
Exxon Mobil is lower than its peer group with its dividend yield, currently around 2.5%; its growth potential justifies the value. For comparison, Chevron's dividend stands at 3.04%, one of the reasons it is at the top of the list as far as year-over-year investor returns. Shell is paying a higher dividend at about 4%, slightly lower than BP's yield around 4.5%, although neither of these stocks can currently claim the stock price growth that Chevron can. Finally, though it is not a direct peer to these supermajors, Statoil's dividend is around 3.6%
Exxon Mobil's value ratios edge on overpriced compared to Chevron and BP, but in the current market Exxon Mobil has more room for growth, which helps explains the price investors are willing to assign to the stock even in light of its recently reported lower production. I think that Exxon Mobil is making the right moves for this market and setting itself up for a strong 2013 and beyond.