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Exxon Deal May Be Green Light for Shale


By Jessica Resnick-Ault

(Bloomberg) — Exxon Mobil's (XOM) $30 billion purchase of XTO Energy (XTO), the largest U.S. petroleum takeover since 2006, may signal a wave of acquisitions as major producers seek to tap growing gas and oil output from shale formations.

Irving, Texas-based Exxon announced its deal yesterday, saying it plans to make XTO, the largest natural-gas producer in the U.S., the centerpiece of its global expansion in shale developments. XTO is among companies that drove a surge in U.S. fuel output by exploiting so-called shale plays, where rock formations are fractured with water and sand to make gas flow.

Exxon's stamp of approval on shale plays may be a watershed, encouraging companies that have already made investments in the segment to expand their positions, said Ryan Cournoyer, head of energy trading at Lighthouse Financial Group LLC in New York. The largest U.S. energy company also will help stabilize gas prices, making it easier for buyers and sellers to come together on acquisition values, he said.

"Exxon Mobil acquiring XTO is going to put a floor on natural-gas prices longer term," Cournoyer said. "These guys are finally coming out and acknowledging that they need to grow their reserves longer term."

Likely buyers include major oil companies that are struggling to boost output, such as Royal Dutch Shell Plc and Total (TOT), said Ted Harper of Frost Investment Advisors in Houston and Philip Weiss, an analyst at Argus Research Corp. in New York. They said takeover targets may include independent producers like Anadarko Petroleum Corp., EOG Resources (EOG), EnCana Corp., Ultra Petroleum (UPL), and Range Resources (RRC).

Race for Reserves "In terms of which deal gets triggered next, it's kind of a race to the altar," said Harper, who helps manage $6.1 billion, including 137,550 XTO shares and 932,268 Exxon shares, at Frost Investment Advisors in Houston. "There tends to be a certain me-too-ism."

New York gas futures traded at a seven-year low of $2.41 per million British thermal units in September, down from a July 2008 high of $13.69, after demand for the heating and power- plant fuel slumped and development of so-called shale plays in the U.S. drove gains in supplies.

Fort Worth, Texas-based XTO, Ultra and Chesapeake Energy Corp. (CHK) are among companies that have demonstrated they can successfully exploit shale plays.

'Follow the Leader' "As many of these companies have spent the vast majority of their capital resources and technical talent on unconventional assets and shale plays over the past few years, the risk to a potential acquirer has been greatly reduced," said Curtis Trimble, an analyst at Natixis Bleichroeder Inc. in Houston.

Trimble predicted "follow-the-leader" acquisitions as other major oil companies mimic Exxon in boosting production through takeovers.

Earlier this year, Paris-based Total backed away from a proposed C$830 million ($784 million) acquisition of Calgary- based UTS Energy Corp. after the target company said the sweetened bid was inadequate.

"Total has always privileged organic growth," Total spokesman Paul Floren said. "However, we're always looking at different opportunities in the market, and we've always said that if there are opportunities for corporate growth, we would take them as they arise."

Takeover Prospects Brighten Europe's Shell (RDSA) and BP (BP) of London are more promising as potential acquirers, Cournoyer said. BP entered into a joint venture to produce shale gas with Chesapeake last year.

Declines in gas prices has changed the landscape, favoring acquisitions over joint ventures, said Cameron O. Smith, senior managing partner at Rodman & Renshaw Capital Group Inc., a New York investment bank.

"It was so expensive to buy Chesapeake when prices went through the roof that a joint venture made a lot of sense," Smith said. "Now that prices are low, buying the stock itself makes lots of sense."

Fort Worth-based Range Resources, which rose 9 percent yesterday in New York trading after the XTO deal was announced, controls 1.4 million acres in the Marcellus Shale, a formation that stretches from southern New York through parts of Pennsylvania and West Virginia.

Ultra, EnCana Houston-based Ultra could be attractive because of the high profit margins on its wells, Trimble said. The company's assets in Wyoming have given it a portfolio that's difficult to replicate, he said.

EnCana Corp. of Calgary, Canada's largest gas producer, is a more palatable target after separating its oil and refining operations into a separate company, Frost's Harper said.

EnCana spokesman Alan Boras declined to comment on takeover prospects, as did Bill Tanner, a spokesman for The Hague-based Shell in Houston, and Ronnie Chappell of BP. Representatives of other companies identified as potential targets or acquirers didn't return calls seeking comment.

To contact the reporters on this story: Jessica Resnick-Ault in New York at jresnickault@bloomberg.net.

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