Texas. On Thursday, ExxonMobil XOM CEO Rex Tillerson offered an update on the acquisition of XTO Energy. The deal, which closed June 25, makes ExxonMobil the largest natural gas producer in the United States. During the conference call, management discussed the immediate financial impact of the acquisition. While the company expects production and cash flow to be accretive, the effect on near-term earnings per share will be dilutive.
The company plans to leave XTO's hedges for 2010 and 2011 in place, but in keeping with its previous policy, will not hedge any future production. The acquisition resulted in a roughly 9% increase in outstanding shares and the assumption of $11 billion worth of debt. ExxonMobil plans to repurchase $3 billion worth of shares in the third quarter, an increase from the previous quarterly rate of $2 billion before completion of the acquisition. When economical, it will look to restructure the assumed debt.
Tillerson emphasized that the acquisition does not alter ExxonMobil's entrenched focus on returns. However, he was willing to concede that attractive returns on investment may be a few years away, given the long-term nature of the acquisition. In the current price environment, ExxonMobil will look to optimize its investments by drilling only the most attractive wells and holding on to currently uneconomical resources at the lowest possible costs. With its financial strength and little threat of lease expiration, the company can bide its time and drill opportunistically compared with many smaller exploration and production companies. In the meantime, ExxonMobil will seek to create value through reverse integration of XTO's processes into its lower 48 conventional and unconventional operations. The company believes after years of limited investment in the region, it has room to improve its cost structure and enhance its capabilities by leveraging XTO's expertise. The company plans to export XTO's knowledge to its global portfolio once international activity accelerates. If ExxonMobil can integrate XTO's operating expertise with its disciplined capital-allocation strategy, the acquisition should ultimately prove to be a winner.
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