Exxon Seeking Shale Acquisitions as Texas Wells Pump Profits
Exxon Mobil Corp. (XOM), the largest U.S. natural-gas producer since last year’s purchase of XTO Energy Inc., is evaluating more acquisitions with an eye toward expanding its gas holdings.
Exxon is assessing targets in more than a dozen gas-rich shale-rock formations worldwide, Jack Williams, president of the Irving, Texas-based company’s XTO unit, said yesterday in an interview. The company has spent almost $3 billion to amass shale leases in Texas, Pennsylvania, Arkansas and Louisiana since closing the $34.9 billion purchase of XTO in June 2010.
The company’s desire for additional gas comes amid a series of multibillion-dollar shale transactions. BHP Billiton Ltd. agreed last week to pay about $12.1 billion for Petrohawk Energy Corp. to expand its presence in U.S. shale. Since June 1, companies including Exxon, Marathon Oil Corp. and Malaysia’s Petroliam Nasional Bhd have announced at least $7 billion worth of North American shale-gas deals.
Exxon is also expanding its international shale-gas reach, starting hydraulic fracturing on formations in Poland this year and last week agreeing with China Petrochemical Corp. to jointly assess the resource’s potential in China.
Williams said he favors so-called bolt-on transactions that include gas fields adjacent to existing Exxon assets. Three years after Exxon abandoned the Barnett shale in north Texas because of lagging returns, XTO-operated wells in the region are among the most profitable in the company’s portfolio, even after a 67 percent slide in U.S. gas prices since 2008, he said.
“The economic returns are very good,” Williams said during the interview in XTO’s offices in a 90-year-old bank building in Fort Worth, Texas. “We’re running economics on every individual well. We’re making sure each well makes economic sense before we drill it. We’re not drilling anything that’s losing money.”
Exxon has purchased shale fields that hold more than 10 trillion cubic feet of gas since the XTO transaction, the company’s biggest purchase in more than a decade, Williams said. Ten trillion cubic feet of gas is enough to supply U.S. household demand for two years, based on Bloomberg calculations.
Exxon has risen 45 percent since the XTO deal closed on June 28, 2010, outperforming the Standard & Poor’s 500 index and U.S. crude oil futures, which increased 25 percent and 27 percent, respectively, through today’s close of trading. The company gained $1.72, or 2.1 percent, to $85.02 at 4 p.m. in New York Stock Exchange composite trading.
With $12.8 billion in cash and cash equivalents, Exxon has no need for joint-venture partners to help finance its shale projects, said Williams, whose previous assignments for Exxon included overseeing Alaskan oil production from 2000 to 2003.
Rival gas producers such as Chesapeake Energy Corp. (CHK) have signed joint-venture agreements with international energy companies including Total SA to secure financing amid a gas glut that has depressed U.S. prices for the fuel. Benchmark gas futures traded in New York have averaged $4.30 per million British thermal units this year, 32 percent below the 2006-2010 average.
“I would love to have a higher gas price, but we’re pleased with the returns we’re seeing,” Williams said. “If you get a good position in a play and you view that as capable of providing attractive returns, why would you want to dilute that by bringing somebody else in?”
Exxon’s post-XTO shale acquisitions have included the $695 million purchase of Ellora Energy Inc. in July 2010 and the $1.69 billion transaction for Phillips Resources Inc. and TWP Inc., a pair of closely held explorers active in the Marcellus formation in Pennsylvania and neighboring states.
XTO plans to drill 40,000 wells worldwide and more than double gas production during the next decade, Williams said. In the Barnett shale near Dallas, the company expects to drill 4,000 more wells in coming years to augment the 1,700 wells it already operates in the region, he said.
The Barnett shale, where Houston billionaire George P. Mitchell pioneered the hydraulic fracturing and horizontal drilling techniques in the late 1990s that triggered the shale- gas boom, probably is less than 50 percent developed, Williams said. That means it’ll take years of drilling before the region begins to fade as a gas producer, he said.
XTO has eight rigs drilling in the Barnett formation, little changed since the merger with Exxon, Williams said.
Return to Barnett
Exxon abandoned the Barnett formation in October 2008 after returns failed to meet expectations. The company sold its stakes in gas fields and an 80-mile (129-kilometer) pipeline to closely held Harding Energy Partners LLC of Dallas, which in turn sold the assets to Chesapeake. Other big producers in the Barnett include Devon Energy Corp. (DVN), EOG Resources Inc. (EOG) and Quicksilver Resources Inc.
Exxon’s return to the Barnett region has been profitable, thanks partly to XTO’s well designs, drilling expertise and leases in some of the most prolific zones, Williams said. He declined to provide specific figures for returns on investment or per-well profits.
“Some of the best returns in the company are here in the Barnett shale,” Williams said. “We have very good positions in the heart of the play. Our drilling speed has doubled in the past five years and our finding-and-development cost is 50 percent lower than it was five years ago.”
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