Small Energy Firms Yielding to International Giants

(THE WALL STREET JOURNAL via Dow Jones), Dec. 15, 2009

Exxon Mobil Corp.'s acquisition of XTO Energy Inc. is the latest sign of a changing of the guard in the U.S. oil patch, as the small companies that led an exploration boom in the past decade start to give way to the international giants.

XTO, based in Fort Worth, Texas, was one of dozens of independent producers that pioneered a revolution in the U.S. natural-gas industry in recent years. While global companies like Exxon and Chevron Corp. largely stayed on the sidelines, independents like XTO, Chesapeake Energy Corp. and Devon Energy Corp. leased millions of acres of land across the U.S. in search of new sources of gas and, to a lesser extent, oil.

But pumping the gas is proving to be a lot more expensive than finding it, which has led to an increasing number of joint ventures between the independent companies and the major multinational oil players -- and with the acquisition announced Monday, an outright company sale.

More deals are likely, analysts say, though they suggest that it may be hard to find buyers large enough to absorb the biggest independent companies.

Moreover, acquisitions of independent producers -- those without refining and marketing operations -- haven't always worked out well in the past, in part because the cultures of major oil companies and independents tend not to mix well. One example is ConocoPhillips's 2006 deal for U.S. gas producer Burlington Resources Inc., which at $35 billion is now widely seen as too expensive.

Driven by a combination of easy credit, rising gas prices and new drilling technologies that can pull out gas locked in dense rocks, the independents found huge new fields in Texas, Louisiana, Pennsylvania and elsewhere in the past few years.

The discoveries led to rapid growth for the companies and a surge in U.S. natural-gas production.

But the new output glutted the gas market just as the weak economy was cutting into energy demand and restricting access to credit. That forced companies to seek new sources of capital, often from the same major producers that missed out on the early years of the boom.

Although XTO is the first big independent to sell to a major producer, several others have found ways to get cash from bigger companies. Chesapeake last year sold all or part of three of its fields to European giants BP PLC and Statoil ASA for a combined $7 billion, and smaller Quicksilver Resources Inc. this year sold a stake in one of its fields to Italy's Eni SpA for $280 million.

XTO went on an $11 billion spending spree last year, just before prices fell. Most analysts now consider those deals a success, but they nearly doubled the company's debt, to $12 billion at the end of 2008, leaving XTO with less money to drill.

At the same time, XTO and other big independent producers are having difficulty maintaining the growth rates that made them Wall Street favorites.

"The size of these companies has gotten so large that just continuing on a growth pattern has got to look pretty challenging to them," said Keith Fullenweider, an attorney specializing in energy mergers for Vinson & Elkins in Houston.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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