ExxonMobil Bets That Natural Gas Prices Will Rise – Placing A Similar Bet Is Like Betting With The House
There have been many analytical reports issued in the 8 days since ExxonMobil announced that it was purchasing XTO Energy, one of the largest independent natural gas producers in the United States, for a total of approximately $41 billion. ($31 billion in ExxonMobil stock plus assumption of $10 billion in XTO debt.)
Some analysts have cheered the announcement as a validation of the new paradigm that US domestic natural gas is an abundant fuel that should be more widely used to propel vehicles and generate electricity while producing a somewhat lower quantity of polluting emissions than burning coal, diesel fuel or gasoline. Here is a quote from a Washington Post article titled Exxon Mobil to buy natural gas specialist
Analysts called the acquisition a bet on future demand for natural gas as the nation looks for energy sources with lower greenhouse-gas emission levels than coal and oil. It also reflects growing confidence among utilities and industry that recent advances in exploiting natural gas from widespread deposits of shale rock have unlocked vast supplies of gas for wider use at reasonable prices.
Others have questioned the timing of the deal, indicating that they think it is not smart to be paying a 25% premium over the market price for a gas producer at a time when natural gas prices are lower than they have been in recent history and storage volumes look high enough to keep them low for the foreseeable future. Here are some samples of those kind of comments from a Wall Street Journal blog entry titled
Collins Stewart: “Given the size of the XTO acquisition, the relative weakness in the North American natural gas market, and the fact that it appears XOM is paying a more generous price for XTO’s resources than the value of its own underlying resource base, we expect [Exxon Mobil] to underperform the other integrated oils.”
Goldman Sachs: “The question investors will ask is whether an acquisition of a large-cap E&P is consistent with its returns focus. In our view, Exxon will need to demonstrate that it can develop XTO’s resources at an even lower all-in cost than XTO or other E&Ps; we would be surprised if Exxon management were basing the acquisition on materially higher US natural gas prices.”
I think those analysts are wrong. ExxonMobil has a history of being able to buy low and sell high. Its internal analysts have a deep understanding of the cyclical nature of the fuels market and access to some of the world’s most experienced explorers and extractors of fossil fuels. The last time the company decided to make a major purchase – when it decided to purchase Mobil for $82 billion in December 1998 – the fuels market was also at a relatively low point.
When they announced the deal, Exxon and Mobil insisted it was necessary to help them find greater efficiencies amid low crude oil prices last year. Low oil prices put the squeeze on a company’s margins in its “upstream” activities, or their exploration and production operations.
Since then, oil prices have rebounded and are hovering near a nine-year high. Prices of many top oil producers have rebounded as a result.
Prices in the fuel market continued to “improve” for several years after the merger with Mobil closed and Exxon increased its net income per share by a factor of 7.5 between 1998 and 2008. That is a pretty respectable performance for a company that was already one of the world’s largest companies in one of the world’s most established industries. XOM also increased its net cash position by a factor of 4, increased the value of its common stock held in treasury from less than $20 billion (2001) to nearly $150 billion (2008) and paid some amazingly generous bonuses. One thing it did not manage to do with that purchase, however, was to increase its daily production of its primary product – barrels of oil equivalent. During the period from 1998-2008, that measure of the company’s production actually fell by about 10%. (The incredible financial success on a lower production base means that the company’s customers were providing a heck of a lot more revenue for every unit that the company produced.)
It is certainly possible to assume that Exxon’s purchase of Mobil was a well timed, lucky bet. My analysis tells me that betting against Exxon’s choice would be like betting against the house on a blackjack table. In fact, I have just placed an order for some ExxonMobil shares.
I’d recommend anyone interested in the history of ExxonMobil to read Ida Tarbell’s “The History of The Standard Oil Company”. It’s a bit dated (written in 1904) but the lessons are eternal, and as old as Standard Oil itself is (or whatever the Standard is calling itself now – “ExxonMobil”.)
Old habits die hard, let’s just say.
Merry Christmas to you and your family
A simple google search for “global warming” today results in dozens of headlines such as “gas could be cavalry in global warming fight” and “is natural gas a key to our energy future?”. Nuclear has been successfully suppressed once again. All throughout the Copenhagen madness there was nearly zero mention of nuclear but lots of natural gas. Interestingly there is even more talk about gas now than about wind/solar/”renewables”. The new strategy seems to be to acknowledge silently that renewables have failed, and to move on to natural gas. This means oil companies get increasing control over electricity production, so once plugin hybrids appear (Chevy Volt due end of 2010) most of the kWh the cars consume will come from the same oil fields that the gasoline comes from.
I would agree with Rod that odds favor Exon Mobile is somewhere close on timing its acquisition of XTO. Natural Gas prices are genuinely low and are unlikely to stay at these levels if energy planners around the country opt for natural gas as the expedient least risk approach to keeping the lights on. It might take 10 years of careful planning and investment to bring new nuclear plants online (the actual figure could actually be more like 15 years). A natural gas power generation plant can be constructed and put online in 2 years. The future of natural gas looks bright and the guys with the money will probably continue to be on the right side of the investment.
For what its worth I would also suggest consideration of Southwestern Energy Co (SWN) which is a pure natural gas play that has traditionally outperformed other natural gas suppliers and is currently short term overbought. I would wait for the next pull back from recent high levels and then buy into “modern clean natural gas”.
The planning timelines that you mention are valid for only a certain set of entering arguments. I fully expect that nuclear projects will be developed more quickly after there are fully certified designs available and operating. Another consideration is that there are several projects that are already well into the planning, design, licensing and construction schedule. It is likely that Vogtle, for example, will be in operation within 8 years from today.
The two year timeline for a natural gas project is only valid if the project is being developed in a place where there is already a gas supply. All bets are off for the project schedule if there is a substantial amount of fuel delivery infrastructure development required. Siting and developing a pipeline is not something that can be done in a 2 year window in most locations in the US.
I remain convinced that the “guys with the money” are helping to establish the rules on the playing field and tilting it as much as possible in their own favor; putting nuclear energy at as much disadvantage as they can without overtly revealing their manipulation efforts.
@Rod I think I might have left a misimpression. I am an advocate of nuclear and on a level playing field I feel nuclear would provide the most low cost energy for the dollar invested.
Unfortunately, I think the current Administration and Congress believe in a tilted playing field where they choose the energy sector winners up front based upon their own predilections and not a study of benefits relative to real costs or letting individual purchasers and the market decide. I regret that my impression is decision makers would like to raise the funding and regulatory obstacles for nuclear just high enough so that the nuclear industry does not totally disappear but arrange that only a small trickle, roughly at a rate designed to keep nuclear at approximately the same percentage in the energy mix, make it through the funding obstacles and the regulatory hurdles to become operational.
It looks to me like natural gas is the fossil energy that American decision makers are willing to live with. I wish investment in new nuclear was really directed toward revitalizing a nuclear renaissance embracing US built reactors of all sizes that could become an export product which could be sold to an energy starved world. It looks more to me like no one currently in power really wants this. They are happy to have the nuclear base load capacity that currently exists and do not mind if a modest number of additional plants are built to replace plants that must be retired and maybe add a few just to keep the same fraction for nuclear as currently exists in the future energy mix but a revitalization or nuclear renaissance is not in their plans.
Natural Gas is the sector that has the fewest obstacles placed in front of it by current leadership and natural gas fired power plants are the generation source that requires the least capital investment per MW generated to bring online given you have a nearby source of gas. Everything is in place to permit natural gas to play a larger role in America
Robert – no apologies necessary. I am well aware of your pro nuclear sympathies.
However, I am more optimistic and perhaps a bit too vain about our ability to influence decision makers by the simple act of continuing to press for a fact informed discussion. Each day, more and more thinking people are questioning their leaders about why nuclear is not more thoroughly discussed, developed and deployed.
It is not hard to understand why natural gas is well accepted. The people who sell it are working hard and spending real money. The American Natural Gas Alliance started off with a budget of more than $80 million for advertising, but I am certain they are willing to keep on spending. That spending, however, is simply putting their message out in front of people. We can question that message and help force supporters to explain why they think that cutting emissions in half is such a great step or why we should be buying into another fuel where the likely swing sources will come from the same countries that now control our petroleum fueled destiny.
Do people really LIKE paying tribute to ExxonMobil; a company whose 2008 revenues exceeded $440 BILLION dollars! That is not terribly far from the baseline budget for the entire US Department of Defense and it is for a company that only employs 80,000 people!
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