Purchase of XTO gives Exxon access reserves of nearly 45 trillion cubic feet of gas
In an effort to enhance its position in the development of unconventional natural gas and oil resources, the world's largest publicly traded oil company, Exxon Mobil Corp. has agreed to buy XTO Energy Inc. in an all stock transaction valued at $41 billion, including $10 billion of existing XTO debt.
ExxonMobil has agreed to issue 0.7098 common shares for each common share of XTO, representing a 25% premium to XTO stockholders.
| XTO chairman and founder Bob Simpson. Photo courtesy of XTO. |
XTO's resource base is the equivalent of 45 trillion cubic feet of gas and includes shale gas, tight gas, coal bed methane and shale oil. The 45 tcfe includes 13.9 in proved reserves, 14.2 in low risk upside and 17.0 tcfe of additional potential. XTO puts its resource potential at growth above 30% since 2007 and 20% CAGR growth since 1993. Most of the growth has been through acquisitions as the company made over $11 billion of acquisitions in 2008.
The November issue of Oil & Gas Financial Journal showed both ExxonMobil and XTO as top performers in the OGJ150 Quarterly Report.
ExxonMobil was the leader in four of the five categories highlighted – assets, revenue, income, and stockholder equity. XTO Energy, which showed a 9.3% revenue gain ($200 million), was the biggest gainer of the group and moved from 11th place to 8th place in the revenue rankings.
Timing
The announcement has the industry excited, as ExxonMobil is known to be slow and deliberate in its actions—the most notable being its $74 billion purchase of Mobil that closed in 1999. At the time, the merger was the biggest in US history.
With advances in technology and the current administration's push for cleaner energy, excitement surrounding North America's natural gas sector has grown wildly and ExxonMobil is the first super major to make such a commitment to the movement.
ExxonMobil is making the push while gas prices are low. Before press time, natural gas prices for January delivery closed at $5.33 per million British thermal units, up 16.9 cents, in trading on the New York Mercantile Exchange. Not long ago, in the summer of 2008, natural gas prices passed $13.
Future of XTO
Rex W. Tillerson, chairman and CEO of Exxon Mobil Corp. noted, "XTO is a leading US unconventional natural gas producer, with an outstanding resource base, strong technical expertise and highly skilled employees." He continued, saying the deal was good news for the US as it will "enhance opportunities for job creation and investment in the production of America's own clean-burning natural gas resources."
After closing, ExxonMobil plans to turn XTO, and its current headquarters in Fort Worth, into a new upstream organization to manage global development and production of unconventional resources.
The transaction is also expected to create jobs, a departure from other oil giants like BP, ConocoPhillips, and Shell—which has publicly announced a cut of 10% of its global workforce by year end and, is reportedly migrating finance and other office jobs to India and the Philippines. The thought its that Exxon has the capital to develop the shale plays at a faster pace than is possible for XTO, thus creating jobs for engineers, managers, and on down to field-level employees.
Bob R. Simpson, chairman and founder of XTO commented, "As the world's leading energy company, ExxonMobil will build on our success and open new opportunities for the development of natural gas and oil resources on a global basis."
Standard & Poor's echoed Simpson's statement saying "XTO's assets will compliment ExxonMobil's growth plans in unconventional gas, and ExxonMobil's technical expertise will unlock additional XTO resource potential."
Analysis
Based on Madison Williams' (formerly SMH Capital) year-end proved reserve estimate of 15.3 Tcfe and 4Q09 production estimate of 2.9 bcfepd, basic metrics are $2.69 per proved Mcfe and $14,099 per flowing Mcfe.
Dahlman Rose & Co. points out that XTO has "significant exposure to all major unconventional plays," with shale gas comprising 30% of XTO daily gas production, and tight gas is 45% of daily gas production.
The firm sees the transaction as a positive. XTO provides ExxonMobil with both the unconventional resource expertise and a long term inventory of unconventional potential. ExxonMobil can leverage XTO's unconventional expertise in the US and apply its techniques to ExxonMobil's global assets.
Dahlman Rose notes the take out multiples have positive implications for XTO peers and other independents that have the experience and technology to operate unconventional assets. The acquisition is occurring at just under $3/Mcfe, $13,265/mcfepd, and 7.2x EV/2010 EBITDAX, while Dahlman's group is at $3.26/Mcfe, $17,611/mcfepd, and 8.7x EV/EBITDA.
While industry insiders are looking at the proposed transaction as a positive, Rep. Edward Markey, chairman of the House Energy and Commerce Committee's electricity subcommittee has voiced his intent to hold hearings next year—before the transaction's anticipated close in 2Q10—to take a closer look at the transaction, including industry practices and the role of natural gas and unconventional extraction techniques.
JP Morgan Securities Inc. is acting as financial advisor to ExxonMobil and Barclays Capital Inc. and Jefferies & Co. Inc. are acting as financial advisors to XTO.
— Mikaila Adams
Rex Energy completes Marcellus well
Rex Energy Corp. has completed the Alder Run #1H well, the company's first Marcellus Shale horizontal well in Clearfield County, Pennsylvania. The well was drilled to a depth of approximately 8,200 feet with an approximate lateral extension of 2,700 feet. The well tested an average rate of approximately 4.1 MMcf per day over the first 13 days and is currently shut in awaiting the completion of a pipeline which the company expects to have completed in early February 2010.
The company is currently drilling the Alder Run #3H, a direct offset to the Alder Run #1H, and plans to begin fracture stimulation before the end of the year.
Although still in the early stages, Rex Energy's CEO, Benjamin Hulburt, views the results as "very encouraging."
Sumitomo becomes first Japanese company to enter shale business with Carrizo Barnett JV
Houston-based Carrizo Oil & Gas has sold an interest in a portion of its core Barnett Shale acreage to a subsidiary of Sumitomo Corp. for $15.7 million. Sumitomo has purchased on a promoted basis, a one-eighth (12.5%) interest in 16 Carrizo Barnett drilling units, including six recently completed wells with a current production rate net to Sumitomo of 1.25 million cubic feet per day.
As part of this agreement, Sumitomo will participate on a promoted basis in the completion of 18 drilled wells and the drilling and completion of 12 more wells under similar terms. In addition, Sumitomo has the right to participate, on a promoted basis and at the same working interest, in up to 56 future wells within these units.
S.P. "Chip" Johnson IV, Carrizo's president and CEO, commented, "We view Sumitomo as a strong partner that will permit us to opportunistically accelerate drilling in our core Barnett Shale development area." He said there is potential for the relationship to expand into other resource plays as well.
A day earlier, the banking syndicate of Carrizo, led by Wells Fargo as administrative agent, agreed to increase the company's borrowing base from $284 million to $350 million. Currently, Carrizo has an outstanding balance of roughly $202 million, representing about 58% of a $350 million conforming borrowing base. The increase in borrowing base increased the company's available liquidity to $148 million.
Available liquidity is expected to increase once net proceeds from the transaction are applied to outstanding borrowings. The outstanding balance will be reduced to $187 million.
Sumitomo Corp. will be the first Japanese company to participate in the shale gas business. The company is looking to expand its E&P business and, according to its website, will actively seek opportunities for investment in the near future.
Pacific Summit Energy LLC, a fully-owned subsidiary of Sumitomo, engages in the trade of natural gas in the US.
— Mikaila Adams
Energy XXI acquires additional GoM assets
Energy XXI has executed a conditional purchase/sale agreement to acquire certain Gulf of Mexico shelf oil and natural gas interests from MitEnergy Upstream LLC, a subsidiary of Mitsui & Co. Ltd., for a cash consideration of $283 million, or $12.30/boe on a proved basis.
The transaction involves mirror-image non-operated interests in the same group of properties Energy XXI purchased from Pogo Producing Co. in June 2007. The properties include 30 fields currently producing 8,000 net barrels of oil equivalent (boe) per day, about 77% of which is oil and 80% of which is already operated by Energy XXI.
Upon restoration of volumes pending repair of third party pipelines damaged by hurricanes in 2008, net production is expected to reach 10,000 boe/d. Offshore leases included in the purchase total nearly 33,000 net acres.
"The original Pogo property acquisition turned out to be an excellent transaction for Energy XXI, and the purchase announced today will double our interests in the same properties," Energy XXI chairman and CEO John Schiller said. "The synergies are obvious, as no incremental personnel, systems or other overhead will be required. Administrative and operating cash costs are expected to be reduced by about $1 per boe overall. This transaction will boost our recent production run rate by 43% to about 27,000 boe/d, with near-term upside anticipated," Schiller continued.
Pro forma for the transaction, oil represents 67% of current production, up from 59% in the company's 2009 fiscal year ended June 30; proved plus probable reserves increase to 93 million boe from 66 million boe, 61% of which is oil, up from 56%. In addition, accounting for recent development activity, Energy XXI expects its pro forma reserves to be 76% proved developed, up from the 64% reported at June 30. The company will operate 79% of its properties on a reserves basis, compared with 78% currently.
Concurrent with the signing, Energy XXI has purchased puts and put spreads that provide downside price protection averaging $73.46 per barrel on 6,500 b/d of oil production for 18 months, from January 2010 through June 2011.
The transaction is likely to be funded through a combination of new equity, cash on hand and bank debt. Energy XXI has placed a 5% cash deposit into escrow under the terms of the agreement.
EV Energy Partners, EnerVest farm-out Marcellus acreage
EV Energy Partners LP and EnerVest Ltd. have entered into a farm-out agreement with PetroEdge Energy LLC on approximately 9,500 net acres in Harrison, Marion, Doddridge, Barbour, Upshur, and Randolph Counties in North Central West Virginia. EVEP is contributing roughly 7,760 net acres (81% of the total), with EnerVest contributing the remainder.
PetroEdge will earn a 75% working interest in the acreage related to each well it drills and completes, and will earn a 75% working interest in the total acreage if it spends $33 million on drilling and related expenditures within a four year period.
EVEP and EnerVest will retain their proportionate share of the remaining 25% working interest. EVEP and EnerVest will each separately retain all net revenue interest in excess of 82% on their respective contributed acreage.
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