Jeremy Glaser: I'm Jeremy Glaser with Morningstar.com. After ExxonMobil's historic deal to buy XTO, the question is what's next for ExxonMobil shareholders and next in the oil and gas space. Here to discuss with me is Associate Director of Research Eric Chenoweth and Senior Equity Analyst Justin Perucki. Gentlemen, thanks for joining me.
Eric Chenoweth: Thanks for having us.
Justin Perucki: Thanks, Jeremy.
Glaser: What are the implications for ExxonMobil shareholders?
Chenoweth: Like you mentioned, it's an historic deal. It marks a big strategy shift on Exxon's part to move full force into on-shore natural gas in the United States, and to eventually take that and use that model overseas as well in European shales. The deal itself is a big deal; it's a $41 billion deal. But for Exxon it really means about a 10% to 15% increase in their production and reserves. Really, the significance to us is that it's a platform for them. This really kicks off this new strategy to attack on-shore gas. It creates the largest US gas producer and it creates a platform.
XTO knows how to acquire and exploit and produce gas properties in the US, and now they have a big bankroll behind them in Exxon Mobile to go after this. So it's a big, big deal and it creates a new giant.Read Full Transcript
Perucki: Eric, do you think it's safe to say that ExxonMobil is still going to be out there acquiring businesses? And what about the other majors?
Chenoweth: We think Exxon still is the most likely to make additional acquisitions. They're very methodical, so it may not be a big rush to do deals. They'll probably think it through. They showed that kind of discipline with the XTO deal. And like we said, they are head and shoulders the most likely to do more deals. We do think Chevron has some firepower to do a big deal, and maybe BP will be kind of a distant third.
Perucki: So what about the targets, the people they're going to acquire? For my list, I think Anadarko seems like a likely candidate. They have a large off-shore presence, very lucrative assets in West Africa, and then also a big large natural gas presence on-shore in the US. Some others that come to mind are Chesapeake, although it might be a little bit more difficult given the size of their balance sheet and the deals that they've already put in place with Statoil and BP.
Devon and EnCana also come to mind, but they're in the process of restructuring, so once those kind of restructurings get finished, I think they'll have the kind of portfolio that Chevron or even Exxon Mobile might want to gobble up.
Is there any maybe smaller targets out there that might be of interest?
Chenoweth: There are a few that we look at. Like you mentioned, I don't think there's a perfect analog to XTO in the large, kind of big, broad portfolio of properties across the US. I think that the smaller ones look interesting to us. Number one would be Range Resources. They have the largest position in the Marcellus of any of the smaller E&Ps that we cover, mid-size E&Ps that we cover. They would be very attractive, even for an Exxon/XTO combination. That's one of the gaps you could say is in XTO's portfolio, is in Appalachia. So Range would be a great addition to that mix.
Petrohawk is another one that comes to mind and would probably be the number two that we think about. Great emerging position in the Hainsville and the Eagleford, a little bit of Fayetteville. So a great target there for these guys.
Southwestern is a dominant Fayetteville player. It would be a great opportunity for someone to acquire. And then Ultra has a great Rockies position in the Pinedale, and also has an emerging Marcellus position.
All of these would be smaller deals, more bolt-on deals for a major, but also very large deals in and of themselves and very focused in on-shore gas and unconventional gas development.
Glaser: You go back to that Exxon was being extremely patient. What do you think about the price that they paid for this deal?
Chenoweth: We thought it was a pretty fair price. Our fair value estimate was $53, and the deal was announced just a hair under $52. So I think their patience really paid off. This has been a company, XTO has always had a premium valuation, and rightfully so in our opinion. A top-notch operator, a top-notch balance sheet and assets. So we think their patience paid off. They were able to acquire a premium set of assets, a premium team, at a pretty fair price. And I think for Exxon's shareholders and for XTO's shareholders, the upside is in Exxon's share price now.
And we do think Exxon is undervalued, so if I was an XTO shareholder, you might say, well, based on where the stock's trading now, it looks fair, but there's upside in Exxon shares, especially if this strategy works and takes off. That's where the upside would be.
Glaser: So if you're an Exxon shareholder now, or potentially going to become an Exxon shareholder next year, you would say to hold on now. What about people with new money? Is now the time to buy into Exxon?
Chenoweth: We think it's very close. It's not a five-star stock right this instant, it's very close, though. So it's one we pay a lot of attention to.
Glaser: Thanks so much for talking with me today.
Glaser: For Morningstar.com, I'm Jeremy Glaser.