For a major oil and gas producer, organic growth over time is very good. But if you want next-level scale, and the economies that come with it, there’s nothing like cannonballing yourself into the deep end of the pool with a huge, game-changing acquisition. ExxonMobil has already done this 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. It is now said to be poised for another big drop and is eyeing the largest exploration and production in the Permian, Pioneer Natural Resources. In today’s RBN blog, we look at a potential deal that would make Exxon the dominant producer in America’s premier shale play.
A little history about Exxon and the Permian may be helpful here. In the early 2000s, Exxon focused primarily on overseas operations, but the onset of the shale revolution in the late 2000s convinced the company of the potentially strong growth of the production offered by US unconventional assets. Their options for entering the shale space were to build a business organically over a decade or acquire an established company to fuel their 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 at various U.S. plays , such as Barnett Shale, Haynesville and Marcellus. Seeing the investment as a springboard for shale development in the United States and perhaps elsewhere, Exxon bought XTO for $41 billion, $30 billion in stock and the assumption of more than $10 billion in debt, its biggest deal since the merger with Mobil Inc. in 1999. . (We will explore the latest developments in US crude oil and petroleum products, including the Permian, in our next conference call, xPortCon-Oil 2023to be held in Houston on June 8, 2023.)
The XTO Energy transaction was the first mega-deal in the US shale space, but the timing was unfortunate as rapid growth in shale production led to an oversupply of gas that drove the Henry Hub price from about $5/MMBtu at the deal announcement to less than $2. /MMBtu in April 2012. The XTO results were a drag on Exxon’s upstream financial performance and required years of share buybacks to offset the dilution of shares issued to XTO holders. In June 2019, Exxon CEO Rex Tillerson said, “We probably overpaid. The general consensus was that natural gas would stay around $5, maybe $6, but of course we didn’t come back check out those numbers The XTO purchase gave Exxon experience in unconventional development, but low prices held back significant development of the significant gas-weighted portion of the acquired portfolio.
