Replies to post #1171 on 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.

Comments?

[DewDiligence]

Collins Stewart Says XOM Is a Screaming Buy

http://online.barrons.com/article/SB50001424052970203296004575343131531751688.html

›JULY 6, 2010
By Collins Stewart (analyst: Katherine Lucas Minyard)

We are reiterating our Buy rating and updating our estimates for ExxonMobil (ticker: XOM) following the closure of the company's acquisition of XTO Energy.

We believe the 22% share-price slide since the mid-December acquisition announcement is far overdone, having wiped out not only the value of XTO in the combined entity, but also the XTO acquisition premium. ExxonMobil is currently offering more than 40% upside to our year-end 2010 $80-per-share target price, a level supported by discounted-cash-flow analysis as well as historical dividend yield and price-to-earnings ratios.

We would take advantage of current share-price levels to build large positions in ExxonMobil. Over the last six months, we have highlighted how the slide in ExxonMobil's share price gradually eroded the value of XTO in the combined entity. Based on the current ExxonMobil share price, the $296 billion enterprise value of the combined entity [now about $307B, $11B higher than when this report was written a few days ago] is $47 billion less than enterprise value of ExxonMobil prior to the merger announcement.

Moreover, ExxonMobil's share-price slide has eroded nearly the entire acquisition premium implied by the original offer, as the final transaction value of $41.95 per share of XTO represents only a 1% premium over the market price immediately prior to the merger announcement.

..We see strong upside support from current ExxonMobil share-price levels, with an implied share-price value of $75 to $83. Our DCF analysis implies a per-share value of $75 on our long-term $80-per-barrel oil price, and historical P/E multiples suggest a value of $82 per share. Moreover, ExxonMobil's dividend yield is currently 3.1%, with a return to the 10-year average 2.2% implying a share price of $82.‹