Big Oilfield Service Cos May Benefit from Exxon's XTO Buyout

HOUSTON (Dow Jones), Dec. 18, 2009

Exxon Mobil Corp.'s move to buy one of the leading U.S. natural gas producers could provide a boost to big oilfield service companies that have been hit hard by a downturn in the North American drilling market.

Exxon's $31 billion all-stock bid for XTO Energy Inc. has been widely viewed as the biggest endorsement yet for shale gas production both in the U.S. and abroad because Exxon, the largest U.S. oil company by market value, has more wherewithal to develop unconventional natural gas resources, such as shale. Shales are dense rock formations that require complicated horizontal drilling techniques to tap the rock and break it apart, releasing the gas trapped within.

While scores of service companies can help develop these fields, Exxon is likely to turn to the most experienced and biggest providers of oilfield services that can provide bundled development packages, said Bill Herbert, an analyst with Simmons & Co.

Herbert said that XTO's stable of 15 contract drillers would likely be cut in half by Exxon.

"They are not going to deal with as many contractors and will have more exacting standards," Herbert said.

The ramifications of an Exxon-XTO merger underscore the challenges of oil patch consolidation for oilservice firms.

As larger oil companies begin to dominate shale drilling, small service providers could find themselves displaced by their bigger brethren. The XTO buyout "is going to push the industry to a more sophisticated way of doing business and increase its focus on equipment that provides greater efficiency," said Doug Sheridan, managing director of EnergyPoint Research, which tracks customer satisfaction in the oilfield services sector.

Herbert said that "premium service providers" like Schlumberger Ltd. and Halliburton Co. would likely benefit from the transaction. Baker Hughes Inc., with its pending acquisition of BJ Services Co., would also likely benefit, as BJ Services' pressure-pumping business is considered key to unconventional gas development.

Schlumberger, Baker Hughes and Halliburton declined to comment on the potential impact.

Land driller Helmerich & Payne Inc., which owns high-efficiency drilling rigs that primarily operate on long-term contracts, is also likely to be a beneficiary, Simmons & Co.'s Herbert said. Those rigs have been widely used to exploit unconventional sources of natural gas and about 80% of its fleet is contracted by major oil companies or large independent energy producers.

The Exxon-XTO deal could be a welcome change for big service providers, which have reported drastically lower earnings this year as the recession-stricken producers that have until now ruled unconventional gas exploitation pulled back on drilling in the face of low demand for natural gas. The number of rigs drilling for natural gas in North America is down more than 40% from last year, according to Baker Hughes data.

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

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