Dew --from another board. Question --Does the US currently tax profits from foreign operations? Your post wasn't clear.
John
Exxon/XTO gas valuations
The Commodity Investor Q&A
With Matt Badiali
ExxonMobil recently offered to pay $32 billion for natural gas producer XTO Energy, a 25% overnight payout for XTO shareholders.
XTO Energy is one of the premier "unconventional" natural gas companies in the U.S. (We discussed unconventional gas here and here.)
Unconventional gas is trapped in shale. Shale is a sedimentary rock made of fine particles of clay and mud deposited at the bottom of ocean basins or giant lakes. The shale that oil and gas companies like has a lot of old plants and algae mixed in. Over time, that kind of shale makes natural gas and sometimes oil.
There are several premier shale plays in the U.S., like the Barnett in Texas, the Marcellus in Pennsylvania, and Haynesville in Arkansas. XTO holds leases in all of them.
Exxon's Big Oil peers began buying into shale plays years ago. Both Chevron and ConocoPhillips bought in 2005. Gas price forecasts were rising and the prices they paid reflected it. But Exxon really hasn't jumped in... until now.
Exxon is notoriously tight with its cash. So did Exxon get a good deal? I think so...
Acquirer
Acquired
Price per MCFE*
ExxonMobil
XTO Energy
$2.31
ConocoPhillips
Burlington
$4.50
Chevron
Unocal
$3.02
*Thousand cubic feet of natural gas equivalent
The overall outlook on natural gas is pessimistic. Basically, there's more gas in storage than we can realistically use up this winter and even more production in our future. If we don't figure out a way to use it, the glut will continue to depress prices. (You can read more on this topic here.)
So why would Exxon buy XTO now? Let's take a closer look...
Exxon's offer is $32 billion in stock. That doesn't take into consideration XTO's $10 billion in net debt. So we'll use $42 billion as the buy price.
On paper, Exxon is buying 13.8 trillion cubic feet of natural gas reserves. But XTO actually has another 14 trillion cubic feet of natural gas that it can't call reserves. The SEC defines oil and gas reserves as "economic" today. Unconventional gas is not economic until it's drilled. You have to fracture the rock to get it out. But shale wells are remarkably consistent, so we know the gas is there.
All-in, Exxon paid $42 billion for 27.8 trillion cubic feet of gas. That works out to $1.50 per MCF... about 50% lower than the recent bottom and 72% below today's prices at $5.50.
When you look at it that way, you can see how brilliant Exxon is at this stuff. Even if gas prices fall all the way down to their record lows, Exxon got a good deal... and so did XTO shareholders.
There are plenty of cheap natural gas producers out there. I put together a table of a few I think might make good buyout targets if Exxon's deal kicks off a trend...
Company
Enterprise Value
Price Per MCFE
Ultra Petroleum
$8 billion
$2.29
Chesapeake Energy
$28 billion
$2.35
EOG Resources
$25 billion
$2.88
Enterprise value is the market cap plus debt, minus cash. It's how Exxon valued XTO. As you can see, these giant gas companies are similar to XTO by that measure. This is where I'd start looking for my next natural gas investment.
Good investing,
Matt
Market Data 
Markets 
AI
