IRVING, Texas (
( XTO) is a stamp of approval on an investing idea that has paid off big in 2009. Exxon Chief Executive Officer Rex Tillerson has placed a bet that natural gas is going to be huge.
The $29 billion deal, announced Dec. 14, valued XTO at a 25% premium over the stock-market price at the time, suggesting Exxon sees deep value. Exxon's diversification from traditional oil operations is a clear signal that even the biggest and most powerful oil company in the world is feeling the pinch. With stifling politics polluting most major oil-producing countries and drilling becoming more expensive as deep-water rigs are increasingly necessary, alternate fuels that can offer fewer headaches are attractive.
While major oil deposits lie in countries such as Venezuela, Sudan, Saudi Arabia and Iran, which makes accessing oil difficult to nearly impossible, natural gas is available in abundance in the U.S. Even though some deposits may be locked in shale previously thought to be too costly to access, advancements in drilling, such as hydraulic fracturing, has made reserves more easy to extract and improved the viability of natural gas as a partial replacement for dirtier fossil fuels.
Several other natural-gas stocks, like
, got a shot in the arm from the Exxon-XTO deal as many see it as a validation of the natural-gas thesis. Such an abundant resource is going to become increasingly important, one way or another, as electricity generators shy away from dirty coal to more environmentally friendly alternatives like natural gas. Others, like oilman T. Boone Pickens, have advocated using natural gas in transportation applications.
In the days since the Exxon-XTO announcement, CARBO Ceramics, a maker of materials used in hydraulic-fracture drilling, has risen 6.2%. Even more impressive, Southwestern Energy has jumped 9.2%. Now that almost 3% of Exxon's revenue will be derived from natural gas, investors are speculating that the push toward natural-gas alternatives will begin in earnest with Big Oil helping to push.
The deal is the biggest since Exxon and Mobile merged in 1999, a deal worth about $75 billion that reunited two pieces of the former Standard Oil, a company synonymous with monopolies. While the oil industry is too huge for any one company to create a monopoly, Exxon comes close -- it had revenue of nearly half a trillion dollars in 2008.
Exxon has the most to lose if oil teeters. Buying XTO is CEO Tillerson's way of diversifying at least a piece of its fortune. Exxon has now shifted from an oil firm to an energy company. It would be wise to bet on further deals and initiatives to bolster this position and, in turn, lift other natural-gas plays.
In one fell swoop, Tillerson upstaged Exxon's major competitors, including
, which look downright stodgy compared to Exxon's forward-looking diversification. Exxon's competitors are totally reliant on oil. Even with BP's catchy "Beyond Petroleum" motto that makes it seem like a green beacon of hope in the energy world, the company still has only a negligible amount of revenue derived from alternative sources, making it no different from most other oil companies.
Exxon has a lot of weight to throw around. CARBO Ceramics and Southwestern already have felt the bounce. Exxon is smart to make this move, and it's probably not the last deal the company will ink to prepare for the future.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.