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.


RELATED COMPANIES
Company: Exxon Mobil Corporation more info
 - Oil Majors Offload Gulf of Mexico Fields to Hunt Bigger Finds (Oct 12)
 - Offshore Guyana Pipe Coating Contracts Go to Shawcor (Oct 05)
 - ExxonMobil Cranks Up New Unit in Beaumont (Sep 27)
Company: Equinor ASA more info
 - Norwegian Sea Gift Keeps on Giving (Oct 05)
 - Norway's Equinor To Start Drilling Brazil's Carcara Field In 2018 (Sep 05)
 - In Brazil, Equinor Aims To Repeat Norway's Oil Boom (Aug 29)
Company: ConocoPhillips more info
 - ConocoPhillips Strikes First Oil at New Alaska Site (Oct 10)
 - ConocoPhillips to Divest Timor Sea Acreage (Oct 01)
 - KBR, ConocoPhillips to Develop Off-the-Shelf LNG Tech (Sep 18)
Company: Chevron Corporation more info
 - Saturno Brazil Pre-Salt Acreage Goes to Shell and Chevron (Sep 28)
 - Canada Shale Drillers Feel Permian Pain as Prices Collapse (Sep 20)
 - Exxon, Chevron and Occidental Join Oil and Gas Climate Group (Sep 20)
Company: ENI more info
 - Offshore Mexico FPSO Contract Goes to Modec (Oct 12)
 - Eni Makes New Gas Discovery in Egypt (Aug 30)
 - Eni Acquires Leases on Alaska's Eastern North Slope (Aug 29)
Company: XTO Energy more info
 - XTO Energy Closes Headquarters; Relocates Hundreds to Houston (May 15)
 - One Killed, 3 Hurt in North Dakota Well Explosion -AP (Jun 20)
 - Exxon Said to Be on the Hunt for West Texas Shale Bargains (Sep 18)
Company: Devon Energy more info
 - Permian Auction Doubles 2008 Record with near Billion-Dollar Sale (Sep 07)
 - Shale Companies Sink On Investor Disappointment, Hedging Losses (Aug 01)
 - Devon Energy Plans to Lay Off 9 Percent of Staff to Boost Returns (Apr 10)
Company: Quicksilver Resources Inc. more info
 - US Bankruptcy Court Weighs 'White-Hot' Energy Pipeline Dispute (Mar 04)
 - Oil, Gas Companies Cut Hundreds More Jobs in Texas (Feb 01)
 - American Eagle Energy Seeks Bankruptcy After Oil Price Drop (May 11)
Company: Chesapeake Energy Corporation more info
 - Shale Companies Sink On Investor Disappointment, Hedging Losses (Aug 01)
 - Chesapeake to Sell Utica Shale for $2B (Jul 26)
 - Chesapeake Says To Raise 2018 Output On Lower Spending, Shares Jump (Feb 22)