For a major oil and gas producer, organic growth over time is all well and good. But if you want next-level scale — and the economies that come with it — there’s nothing like cannon-balling into the deep end of the pool with a huge, game-changing acquisition. ExxonMobil has already done that twice — first in 2010 with the $41 billion purchase of XTO Energy, then in 2017 when it bought the Bass family’s oil and gas assets for $6.6 billion. Now it’s said to be poised for another big plunge, and to be eyeing the Permian’s largest E&P, Pioneer Natural Resources. In today’s RBN blog, we analyze a potential deal that would make Exxon the dominant producer in the premier U.S. shale play.
A little history about Exxon and the Permian may be helpful here. In the early 2000s, Exxon was focused primarily on overseas operations, but the onset of the Shale Revolution in the late 2000s convinced the company of the potentially strong production growth offered by U.S. unconventional assets. Its options for entering the shale space were building a business organically over a decade or acquiring an established company to jump-start its expansion. An obvious target was XTO Energy, which since its formation in 1986 as Cross Timbers Oil — a name that later morphed into XTO — had built an impressive portfolio of unconventional natural gas assets across several U.S. plays, including the Barnett Shale, the Haynesville and the Marcellus. Seeing the investment as a springboard to shale development across the U.S. and maybe elsewhere, Exxon bought XTO for $41 billion — $30 billion in stock and the assumption of more than $10 billion in debt — its largest deal since the merger with Mobil Inc. in 1999. (We’ll be exploring the latest developments in U.S. crude oil and petroleum products, including the Permian, at our upcoming conference, xPortCon-Oil 2023, to be held in Houston on June 8, 2023.)
The XTO Energy transaction was the first mega-deal in the U.S. shale space, but the timing was unfortunate as rapid shale production growth resulted in an oversupply of gas that drove the Henry Hub price from about $5/MMBtu at the deal’s announcement to under $2/MMBtu in April 2012. XTO’s results were a drag on Exxon’s upstream financial performance and it took years of stock buybacks to offset the dilution of the shares issued to XTO holders. In June 2019, Exxon CEO Rex Tillerson said, “We probably paid too much. The general consensus was that natural gas would stay around $5, maybe $6, but of course we never saw those numbers again.” The XTO purchase did provide Exxon with expertise in unconventional development, but low prices put a halt to major development of the significant gas-weighted portion of the acquired portfolio.
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