(XOM) ExxonMobil’s $1.7 Billion Marcellus Deal

Irving-based ExxonMobil Corp. (XOM) has bought two privately held natural gas companies –– Phillips Resources Inc. and TWP Inc. –– for $1.69 billion, picking up about 317,000 acres for exploration in the high-return Marcellus Shale. ExxonMobil, the largest U.S.natural gas producer, stated that the two companies had combined proved reserves of 228 billion cubic feet equivalent of natural gas.

The XTO Energy acquisition last year gave ExxonMobil access to significant unconventional resources. Now, the company is trying to get hold of North America’s newest natural gas discoveries, as it looks forward to expanding its share in the world’s largest energy market. The XTO acquisition helped ExxonMobil to grow its resource base by 45 trillion cubic feet of gas at a cost of about $30 billion.

ExxonMobil is bullish on natural gas markets for the long term and forecasts that power generation in developing countries will lead to greater demand for clean fuel in the coming years. In this regard, we see the Phillips and TWP transactions as part of the company’s long-term strategic plan to focus on growth in its gas business.

Phillips and TWP will be accommodated into XTO Energy, ExxonMobil’s Marcellus operating unit, while XTO will be moved to Phillips’ Warrendale office space, according to company sources. ExxonMobil plans to retain all Phillips employees, estimated at around 200.

ExxonMobil –– the largest U.S. oil firm by market value ahead of Chevron Corp. (CVX) –– is the best-run integrated oil company in the world given its track record of superior return on capital employed. It has long been a core holding for investors seeking a defensive name with continued dividend growth.

However, as access to new energy resources becomes more difficult, ExxonMobil, like most of its peers, will face headwinds to replace its reserve. Given its large base, achieving growth in oil and natural gas production has been a challenge for the company over the last several years. With the established oil producing regions of Europe and North America well beyond their prime, the search for growth has pushed ExxonMobil into riskier regions.

ExxonMobil currently retains a Zacks #3 Rank, which translates into a short-term Hold recommendation.

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