The Rising Influence of Rising Affluence

[DewDiligence]

Thanks, CT. Goldman’s analysis of the XTO deal is unduly bearish, IMO. This is the key passage from your post:

…we estimate XTO will earn a minimal 3%-8% ROCE in 2012 using $5-$8/MMBtu gas prices, well below Exxon’s more robust average ROCE of 28% over the last decade. As such, we think the deal is unlikely to live up to what investors have come to expect from Exxon in terms of project returns… Exxon has now raised questions as to whether the deal signals a less attractive legacy resource base than previously assumed.

This analysis treats XTO as merely an asset play and gives no credit whatsoever to the technology XOM acquired from XTO that can be applied to XOM’s own assets. XOM cited this technology as a key component of the deal, although they did not publicly quantify its value.

Although the 9% expansion of XOM’s share count from the newly issued shares to XTO holders causes some near-term EPS dilution, the acquired technology ought to persuade investors to assign XOM a somewhat higher P/E ratio, which would offset the effect of the reduced near-term EPS.

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