Exxon (NYSE: XOM) Goes Unconventional, Gobbles Up XTO Energy (NYSE: XTO)

Brian Hicks

Updated December 14, 2009

You may have never heard of Edwin Drake, but when it comes to the oil industry he is something of an early legend.

In fact, he practically started it all in 1859 with a clever new drilling technique brought on by an epiphany.

His brainstorm? It was as simple as driving a pipe down the well to keep the hole from caving in.

And contrary to popular opinion, it didn’t happen anywhere near any Texas oilman. The truth is those guys and their ten-gallon hats didn’t even exist yet.

Instead, the first commercially viable oil wells were drilled in Pennsylvania, which is why there is such a thing as Quaker State and Pennzoil in the first place.

Pay dirt for Colonel Drake came 70 feet beneath the surface in Titusville, PA., making him the first person to ever successfully drill for oil. And with that single well, the Pennsylvania oil rush was born as speculators from all over the place gobbled up Pennsylvania land in the name of crude.

One of them was a guy you might even of have heard of. His name was John D. Rockefeller Sr., the world’s first billionaire.

Now some 150 years later, it’s happening all over again with the renewed interest in the Marcellus shale formation, an area that runs through Pennsylvania, Ohio, West Virginia, and New York.

But it’s not oil this time that has everyone so excited, it is natural gas.

That’s part of the reason Rockefeller’s brainchild, Exxon Mobil Corp (NYSE: XOM), returned in part to its Pennsylvania roots this morning with the purchase of XTO Energy Inc. (NYSE: XTO ) for $41 billion.

A big player in unconventional gas plays, XTO has operations in many of the big shale plays—such as the Bakken and Marcellus—that have been responsible for a big up tick in U.S. natural-gas production.

Here are the details from this morning’s surprise acquisition…

From MarketWatch by Steve Gelsi entitled: Exxon Mobil to buy XTO Energy in $41 billion deal

“Exxon Mobil Corp. said Monday that it will buy domestic energy giant XTO Energy Inc. in an all-stock deal valued at $41 billion as it moves to boost its presence in the unconventional natural-gas business.

The transaction value includes $10 billion of existing XTO debt and is based on Friday’s closing share prices of Exxon Mobil and XTO.

Exxon Mobil has agreed to issue 0.7098 common shares for each common share of XTO. The deal represents a 25% premium to XTO stockholders.

The agreement, which is subject to XTO stockholder approval and regulatory clearance, will “enhance Exxon Mobil’s position in the development of unconventional natural gas and oil resources,” Exxon Mobil said.

Exxon Mobil said XTO’s resource base is the equivalent of 45 trillion cubic feet of gas and includes shale gas, tight gas, coal bed methane and shale oil.

“These will complement ExxonMobil’s holdings in the United States, Canada, Germany, Poland, Hungary and Argentina,” Exxon Mobil said.

The deal also provides a way for a company as big as Exxon Mobil to offer production growth to its investors.

In the third quarter, XTO said it managed to boost production by 23%, despite a lower profit tied to a drop in natural-gas prices. By contrast, Exxon Mobil’s production grew 3% in the third quarter as it ramped up its liquid natural-gas business.

The move by Exxon Mobil also marks a major bet on natural gas, a cleaner-burning fuel than oil, as governments around the world look to Copenhagen talks this week to stem the flow of greenhouse gases into the atmosphere to combat global warming.”

Of course, as surprising as this deal was to the rest of the market, this is something we have been expecting for some time now. After all, Wealth Daily editors have been writing for years about the potential profits in unconventional oil and natural gas.

To us, deals like this one were only a matter of time.

As for Drake, he never did make much money for his troubles. He failed to patent his new drilling technique and missed out on a fortune.

Luckily for Wealth Daily readers this is another one we beat the curve on.

Needless to say, this is a big endorsement for the major shale plays.

Related Articles:

New Techniques Unlock Unconventional Oil and Gas

The Rush to Big Natural Gas Profits

Natural Gas Price Forecast

Haynesville Shale Natural Gas

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