What the Exxon-XTO Deal Means for Everyone Else

Exxon Mobil agreed to buy XTO Energy this morning for $31 billion in stock. Exxon, the world’s biggest oil company, paid a 25% premium for XTO, a big player in domestic energy, especially the shale oil and shale gas that has garnered so much attention lately. Exxon certainly isn’t hiding what it’s going after… in a report last week, the company forecast energy demand to rise 35% by 2030, with over half of that new demand met by natural gas.

“If there is one prediction I feel confident about for 2010,” writes Chris Mayer, “it’s that the M&A market is going to get going again. Companies have lots of cash — more, as a percentage of assets, than at any time since 1960. There are fewer opportunities to invest that cash and fewer opportunities to grow, so you buy competitors. Also, the M&A market has been dead since the Lehman bankruptcy, and it’s not a market that stays dull for long.

“I’ve also specifically pointed out that the energy sector was ripe for such deal making because the cost of buying proven oil and gas reserves in the stock market is cheaper than creating them from scratch by drilling and exploring for oil and gas.

“Today, we got a big signal that the feeding frenzy is on. Exxon Mobil is taking out XTO, America’s largest natural gas producer, for a 25% premium. It’s a stock deal, but it illustrates the ideas above.

“For investors, it means we could see more of these deals, which could provide nice payoffs. (I have a bunch in MSS — we got one already last week where MSS readers could’ve made as much as 350% on ROY, which rose 50% in one day.) Second, I think it’s also bullish for natural gas. Exxon is no dummy. They see the carbon emission stuff coming down the pike, and cheap clean-burning natural gas is going to be good asset to own.”

The Daily Reckoning