How to play the Exxon news
Today's Financial News - Posted December 14, 2009
Exxon Mobil is making big news today. What does it mean for natural gas investors? Are the bears still in charge or does this change it all?
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): You don’t become one of the world’s largest and most profitable companies by making dumb moves. Exxon Mobil (NYSE:XOM) proves it once again.
The Street is buzzing today thanks to news that Exxon is printing some $31 billion worth of new shares in order to purchase XTO Energy (NYSE:XTO), one of the nation’s natural gas producing giants. It’s a major deal that has hearts skipping across a variety of sectors.
Of course, nobody is as excited as XTO shareholders. They woke up to news of a buyout worth a 17% premium to Friday’s closing price.
Shares of the oil and gas producer slipped by double-digit proportions over the past few months as natural gas prices slide. But now that demand is rising and gas prices are following suit, Exxon officials saw it was time to make their move. With XTO prices reaching short-term lows, Exxon made its move.
What’s next?
Now that a major non-conventional gas player is making headlines, investors have their eyes on all sorts of potential buyouts. It’s almost impossible to find a company in the energy industry not trading in higher territory today.
Two stocks you will hear a lot about over the next couple of weeks are Chesapeake Energy (NYSE:CHK) and Range Resources (NYSE:RRC).
So far today, Chesapeake is up by over 6%, with shares trading close to $25.50 each. The company, with major holdings in all of the popular shale regions, has been a long-term target of buyout rumors. Maybe this time the speculators will be right.
But my money is on Range Resources. It is a major player in the Marcellus region that just happened to announce significant expansion in the area this morning. Coincidence? Doubt it. It looks more like advertising.
Range is the right size for a buyout. With a current market value of $7 billion and another $3 billion or so in debt, a buyout could come with a price tag of just over a third of Exxon’s purchase. Whoever decides to grab the company (think Shell or BP) would automatically get more than 180 Mmcf of daily gas production out of the Marcellus region.
Plenty of bears remain
Of course, this is a long-term play. With gas prices plunging to ultra-low territory in recent months, any company purchasing gas assets now has a long-term outlook. With non-conventional plays hotter than a barroom pistol, major producers like Exxon are flocking to the sector in hopes of finding larger profits than their current low-margin deepwater prospects.
For all of you fans of deepwater drilling, that is bad news, even horrid.
It means the tens of billions of dollars in exploration and development expenditures expected to roll in over the next few years are likely to stay in non-conventional domestic plays. That’s why shares of Transocean (NYSE:RIG) are not enjoying the jubilation of their onshore kin.
Of course, TFN Strategic Trader members should be celebrating the news. On Friday, I recommended they buy put contracts for an offshore drilling equipment provider. Today’s news will certainly put a damper on any thoughts of a near-term rise in share price.
If you’re looking to take advantage of the action, buy domestic drillers, especially those with shale assets, and ditch offshore gas producers and international players. When it comes to natural gas, America is king.
Next Article: TFN penny stocks: Emtec, Inc. (ETEC) and Kerex Biopharmaceuticals (KERX) spell free money for TFN regulars
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