Exxon Mobil Corp. (XOM), the world’s largest energy company by market value, agreed to pay about $2 billion in cash and assets to expand in the U.S. Bakken Shale after efforts to exploit overseas shale fields foundered.
Exxon will acquire drilling rights on 196,000 net acres in North Dakota and Montana from Denbury Resources Inc. (DNR) for $1.6 billion in cash and the exchange of two fields. The agreement will boost Exxon’s holdings in the region by about 50 percent, Irving, Texas-based Exxon said in a statement today.
The acquisition, Exxon’s largest since its $35 billion purchase of XTO Energy in 2010, follows the company’s unsuccessful effort to transfer intensive drilling techniques that revived U.S. oil and natural-gas output to similar geologic formations in Poland. The deal also adds crude to Exxon’s portfolio as cratering domestic gas prices hurt profits from fields amassed in the XTO transaction.
“XTO was a natural-gas deal and given what’s happened to gas prices since then it really was incumbent on Exxon to get more involved in oil plays,” Allen Good, an analyst at Morningstar Investment Services in Chicago, said in an interview today.
Gas prices reached a 10-year low in April on the New York Mercantile Exchange. Surging Bakken output has made North Dakota the largest oil-producing state behind Texas, according to the Energy Department in Washington.
The combined value of the cash and oilfields in Texas and the Rocky Mountains that Exxon will exchange for the Bakken assets approaches $2 billion, Denbury Chief Executive Officer Phil Rykhoek said during a conference call with analysts today.
Alan Jeffers, an Exxon spokesman, declined to comment on Denbury’s valuation estimate.
Exxon said separately today that it plans to surrender two of its six shale-drilling licenses to the Polish government after deciding in June to quit the country. Two exploratory wells drilled in 2011 failed to flow at sufficient rates to justify bringing them into production, David Rosenthal, vice president for investor relations, said during a Jan. 31 conference call.
Exxon will return its Werbkowice license owned jointly with Total SA and the Legionowo permit in central Poland and hasn’t decided about the future of the remaining four licenses, Adam Kopysc, the company’s public and government affairs adviser in Warsaw, said today in an e-mailed statement.
Exxon CEO Rex Tillerson is seeking to halt a yearlong production slump. In a March presentation to analysts at the New York Stock Exchange, Tillerson warned that shale-drilling techniques that unlocked bonanzas of oil and gas in North America were failing in Europe and China. New equipment and techniques would have to be invented to tap some of those formations, he said.
In the U.S., Bakken crude production has tripled in four years to reach a record 610,000 barrels a day in the third quarter, according to data compiled by Bloomberg Industries. Bakken crude began trading at a premium to U.S. benchmark West Texas Intermediate this month as producers skirted pipeline bottlenecks by shipping it to refiners by rail.
The addition of Denbury’s acreage will vault Exxon to the fifth-largest holder in the Bakken, tied with EOG Resources Inc., according to data compiled by Bloomberg Industries. Continental Resources Inc. is the largest, followed by Hess Corp., Whiting Petroleum Corp. and ConocoPhillips.
Denbury, based Plano, Texas, rose 3.7 percent to $17.34 at the close in New York. Exxon rose 1.1 percent to $91.52.
Along with the cash, Denbury will get Exxon’s stake in the Hartzog Draw field in Wyoming and Webster field in Texas, Denbury said in a separate statement.
Denbury sought to trade or sell its Bakken assets for old fields that could be flooded with carbon dioxide to force more crude to the surface, Rykhoek said during today’s call. The company also sought fields close to existing CO2 pipelines to keep capital costs to a minimum, he said.
The Webster field is 8 miles from a pipeline Denbury opened in 2010 to carry CO2 from Mississippi. The Hartzog Draw field in the Rocky Mountains region is 12 miles from a Denbury CO2 conduit under construction.
Denbury estimated the Webster and Hartzog Draw fields may yield a combined 80 million to 105 million barrels of crude. The Bakken assets being sold to Exxon hold proved reserves equivalent to 96 million barrels, according to company figures.
“Our strategy works particularly well for the incremental acquisitions like the two we announced today,” Rykhoek said during the call.
Denbury earns a 39 percent internal rate of return on Gulf Coast region carbon dioxide-flooded fields, compared with 27 percent on its Bakken fields, assuming an average oil price of $90 per barrel, the company said in slides prepared for today’s call.
Denbury also agreed to either buy a stake or purchase some carbon dioxide reserves from an Exxon field in Wyoming.
Denbury will use the proceeds to resume a $500 million stock buyback program, buy more fields amenable to carbon- dioxide flooding or pay down debt, according to the statement.
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