Exxon Holds Its Ground

(Dow Jones Newswires), Nov. 10, 2010

Nearly a year ago, Exxon Mobil made a multibillion-dollar bet on its vision that natural gas will become a dominant fuel during the next few decades.

Tuesday, Chevron made a similar -- albeit smaller -- wager on a domestic natural-gas producer. As Chevron starts to sell its Atlas deal to shareholders, Exxon continues to have trouble convincing its investors it made the right move.

Still, Exxon isn't veering from its long-term strategy of bulking up on U.S. natural gas. In December, the oil company announced plans to buy XTO Energy Inc. of Fort Worth, Texas, making Exxon the largest gas producer in the U.S. This summer, it bought gas producer Ellora Energy Inc. of Boulder, Colo., for $695 million, and opened a terminal along the Gulf Coast to import natural gas from the Middle East.

All the while, the price of natural gas has been falling -- and is off 21% since Exxon announced the $25 billion XTO deal. On Tuesday, natural gas futures contract for December settled up 12.2 cents at $4.210 a million British thermal units on the New York Mercantile Exchange. The commodity is trading at low prices after newly developed drilling techniques exploited tight shale-gas rock formations during the past decade, creating a glut.

The XTO acquisition lifted Exxon's energy output by nearly 14%, but brought in only about $150 million in net earnings in the third quarter, the first in which Exxon reported financial data that included XTO. That is about 3% of what the company earned from the sale of oil and natural gas during that period.

Exxon says it is still convinced the XTO deal makes sense. "We are very pleased with how the XTO integration is proceeding and the potential benefits we see over the long term," said David Rosenthal, Exxon's vice president for investor relations, during a late-October earnings call.

Exxon's efforts to persuade shareholders that it made the right move underscore one of the major challenges facing the energy industry. While the executives of global behemoths such as Exxon make decisions based on outlooks that span decades, the market tends to zero-in on near-term results.

Shares in Exxon are down about 3% from a year ago, lagging peers such as Chevron which has seen an 8% increase in the value of its shares. Fellow oil giant ConocoPhillips, whose $35 billion buyout in 2005 of conventional-natural-gas company Burlington Resources Inc. led to write-offs, rose 19% as it shed assets and reduced debt.

Analysts have begun to wonder whether the Texas oil giant's famously high return will fall, as they see natural-gas prices staying depressed for the foreseeable future. "We have been unable to understand how the XTO deal generates an accretive return for ExxonMobil," Deutsche Bank analysts wrote in a note published earlier this fall as they downgraded Exxon, the world's largest oil company, from "buy" to "hold" because of the low return expected in natural-gas investments in the near term.

Some Exxon shareholders, however, share the company's long-term view. Lee Tawil, managing director with asset-management firm Neuberger Berman, said that the timing of Exxon's purchase of XTO was "somewhat unfortunate," because the oil giant could have acquired XTO for less had it waited a few months, but "they got a good resource they can build upon."

While natural gas is widely regarded as a global fuel with bright prospects, its future in the U.S. might not be so shiny. The International Energy Agency, which analyzes global energy trends for economically developed countries, said Tuesday that it doesn't expect any growth for U.S. natural-gas consumption through 2035, even as China, India and the Middle East boom.

Still, Exxon said it believes its natural-gas acquisitions will ultimately be very profitable. The fuel's cheapness and its relatively low environmental impact -- it emits less carbon dioxide than coal -- are likely to encourage power companies to build more natural-gas-fired plants, said Bill Colton, Exxon's vice president of corporate strategic planning, in an interview.

Phil Weiss, an analyst with Argus Research, said, "Given Exxon's strong financial position, it is the kind of company that can think long-term and make decisions that may not look great today."

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