Exxon Puts Big Money on Natural Gas

When executives from Exxon Mobil Corp (XOM) came to speak at my business school in 2008, I had the wherewithal to ask if they were thinking about investing in any renewable energy sources. The execs confidently responded that the world would be reliant on oil for the next 50 years, without any hope of a cost-effective replacement, and suggested that I take a gander at their 10-K, which showed profits higher than any other company in the world. Touche. Over the last decade, however, analysts have speculated that Exxon’s conservatism was hindering its long-term growth prospects. When the price of oil rose to record highs, Exxon spent more on share buybacks and dividends than investments. Now, Exxon is proving that the company is truly in it to win it, as it takes advantage of lower oil and gas prices to replenish and diversify its reserves.

Exxon Mobil is taking unconventional steps that will transform the future of the company and the energy industry for the long haul. The most profitable oil conglomerate in the world showed this week that it is not shy about investing in natural gas when the price is right. Exxon’s purchase of XTO Energy Inc. for $31 billion is the largest energy acquisition since 2006 and Exxon’s biggest M&A power play since it bought Mobil Corp. in 1999. If completed, the deal will increase Exxon’s reserves by the equivalent of 2.3 billion barrels of oil, almost 20%, with exploration rights to expand far beyond that amount. The move is a bet that tougher U.S. emissions restrictions will increase demand for natural gas, especially since Exxon will assume $10 billion of XTO’s debt. While XTO and other independent producers have been hit by declining prices and an inability to borrow the funds necessary to support capital intensive production (due to illiquid credit markets), Exxon will have no trouble servicing debts or funding exploration.

XTO is a leader in the extraction of gas from shale, a hard subterranean rock that lays far beneath the earth in deposits throughout the U.S. To access it, drillers blast a pressurized mix of water, chemicals, and sand into the rock to create cracks so the gas can be brought to the surface. This technique, promoted as a clean, abundant source of fuel, has boosted the output of gas in the U.S. Yet the move may still cause backlash from environmentalists who are unconvinced that the shale production process, known as hydraulic fracturing, doesn’t pollute ground water. 

Although the harmful effects still lack definitive scientific evidence, investors are aware of the power behind green lobbying and Exxon is no stranger to protecting itself from risk. If Congress outlaws hydraulic fracturing or makes it “commercially impracticable” the XTO deal is invalidated.   XTO is a member of American’s Natural Gas Alliance, which was launched in March to lobby Congress.  The group claims that the environmentalist attacks are “unsubstantiated and alarmist” and that any environmental impact is minute compared with damage other energy sources.

While XTO’s stock price rose 19% to $49.18 upon purchase, Exxon fell $1.53 to 71.30, indicating Wall Street’s uncertainty about the impact on Exxon’s balance sheets. Although doubts remain about the long-term environmental impacts of hydraulic fracturing, other energy companies are due to shore up their gas reserves and follow Exxon’s lead into new cleaner energy sources.