US natural gas markets surprised ExxonMobil by overperforming on output and underperforming on price, pushing back the expected payoff from the company’s $41 billion deal to buy gas producer XTO Energy.
ExxonMobil’s acquisition of XTO, completed in June 2010, proved somewhat ill-timed. It saddled the major with a major North American natural gas producer almost two years before spot Henry Hub prices fell below $2.00 per million Btu in April 2012. Prices have since recovered to the $4.00/MMBtu range.
“The XTO merger had an effect because gas prices had not yet bottomed out,” ExxonMobil Chief Executive Rex Tillerson told shareholders at the company’s annual meeting on May 29. “While we anticipated at the time of the merger that it would be non-accretive in the near-term, because we expected that natural gas prices had not yet bottomed out, they stayed low much longer than we expected.”
Tillerson added that ExxonMobil underestimated the US natural gas industry’s capacity to keep growing output through the low price period. “We missed, slightly, the industry’s pent-up capacity.”
“Maybe we were off a year or two,” Tillerson said.
The process of digesting the smaller firm has coincided with a period of massive up-front investments in long-lead projects that have yet to start paying dividends, such as the PNG LNG project.
“If you look at those capital expenditure numbesr over the last five years compared to any other period of time…they are at extraordinarily high levels,” said Tillerson. “You have a lot of capital on the books that’s not performing.”
Tillerson noted that the XTO deal was predicated on a 30-40 year outlook that sees natural gas growing in importance as part of the global energy mix. The company’s Outlook for Energy: A View to 2040 envisages global demand for gas will grow by 65% between 2010 and 2040, and overtake coal as the world’s second-most widely used source of energy.
But the market is looking at the deal, and at ExxonMobil, on a slightly shorter time horizon. “The market has looked at the capital intensity, the timing of the XTO deal, and it’s waiting to see how that’s all going to turn out,” Tillerson said.
ExxonMobil will be presenting its Outlook for Energy – A View to 2040 at the New York Energy Forum on June 11.