Exxon Mobil’s world view looks darn good – for Exxon. In its closely watched annual energy outlook, the $400-billion gorilla of the sector sees natural gas usage surging 65 per cent by 2040 and an even bigger jump in shale oil demand. If right, that would help support Exxon’s costly acquisition of XTO Energy four years ago. Even then, however, the deal might not stack up financially.
Exxon’s economists believe that Rex Tillerson, the chief executive, will look pretty smart some three decades from now – around the time of his 88th birthday. His decision to spend $31-billion on driller XTO tilted the biggest U.S. energy company sharply toward natural gas production and also gave it new capabilities in shale oil. The idea was to position Exxon to exploit an impending global boom in gas demand.
And in its outlook, Exxon predicts that increasingly onerous restrictions on dirty coal will help gas take over as the world’s second most important fuel source by 2025, with oil still in the lead. By 2040 the world will consume 40 per cent more energy from gas than coal. Meanwhile hydraulic fracturing techniques have brought within reach enough gas reserves to meet the world’s energy needs for about 80 years.
The output of shale oil, which Exxon’s XTO unit also produces, will grow more than tenfold by 2040, the company reckons. As early as 2015, shale oil output from North America will surpass the current total crude production of any member of the Organization of the Petroleum Exporting Countries except for Saudi Arabia.
Even if Mr. Tillerson does see his XTO purchase vindicated in the long term, timing matters in deal-making. In the two years following the acquisition, U.S. natural gas prices slumped by about half. Even now, gas still trades about a fifth below its price when Exxon announced the purchase. Meanwhile, Exxon’s shift toward cheaper gas helped more oil-centric rival Chevron surpass it in net income per unit of production in 2011 – a lead that is expanding, according to data from Raymond James. It’s no wonder that since the XTO deal Exxon’s shares have risen only 38 per cent against Chevron’s 60-per-cent gain.
To be fair, when Mr. Tillerson unveiled the XTO purchase he said he was thinking 30 years ahead. The investors of 2040 may thank him. But crunching the numbers on the time value of money may show that he paid too much, too soon.