Exxon Mobil Corp.'s proposed acquisition of XTO Energy Inc. has bolstered the market's confidence in the natural gas industry, industry observers say, and could have far-reaching effects on future M&A activity in the U.S. upstream sector, particularly deals involving companies with major stakes in unconventional natural gas plays.

"It really shows the value in what independents have been pioneering in the last two decades," Fred Lawrence, vice president of economics and international affairs for the Independent Petroleum Association of America, told SNL Energy. "It is largely independents who have been working on the shale plays and a lot of the domestic coalbed methane and tight gas plays and using new technologies like hydraulic fracturing and horizontal drilling to uncover vast amounts of new resources in the Lower 48."

He said the deal shows that shale gas is becoming a global concept. "Exxon might be interested in exporting these technologies oversees to Europe or Asia where it also has access to some of these shale resources," Lawrence said.

David Bloom, a partner in Mayer Brown LLP's Washington office, said some market consolidation and reshuffling could be at hand because technologies related to shale exploration have now grown relatively mature. "I think that we could see a repeat of a situation in which some smaller players or people who want to cash out get bought up by either the majors or some of the other independents," he said.

Both Lawrence and Bloom said, because only so many companies have the financial wherewithal to complete a large-scale transaction like Exxon's deal for XTO, many different types of strategies may be pursued going forward. Larger independents may continue to assert themselves as major players, and some smaller entities may be bought out.

"They call it follow-the-leader acquisitions and, if companies can't increase their production or reserves organically, then they're going to look at acquisitions to do so," Lawrence said. "But there's some other options as well, such as joint ventures that have been occurring over the past few years."

Deal success dissected

Tom Ellacott, a senior analyst with consulting firm Wood Mackenzie, said much of the deal's success depends on the ability of Exxon to hang on to XTO's 3,000-person work force.

"You've got a company which has an extremely experienced work force, a reputation of being a technological innovator in unconventional gas exploitation," Ellacott said. "So I think the retention of key staff will be quite a key challenge for Exxon Mobil as it looks to exploit the full potential of the portfolio that it's acquired."

Ellacott said North American unconventional natural gas plays are emerging as a battleground for the upstream sector; the economics of these plays are improving all the time as technology evolves and costs come down, creating enormous long-term potential.

Rehan Rashid, an analyst for FBR Capital Markets and Co., told SNL Energy the deal contains a lot of interesting subtext, including the objective to accelerate global expansion of shale E&P, which may be a determining factor of how fruitful the acquisition becomes. Rashid said the reduced carbon emissions associated with gas compared to oil could be a major factor, too.

"Natural gas is less carbon-intensive as compared to oil and, if I'm Exxon Mobil and I have a decent amount of oil in my portfolio, one way to hedge or mitigate the impact of whatever carbon cost might come down the pike might be to put some lower-carbon-intensive fuel in my mix," he said. "The rest of the integrated oil companies are beginning a nascent effort to figure out the global gas share phenomenon, and I think that this will help accelerate Exxon's learning and globalization of that phenomenon."

Still, he said, it seemed as if the same objectives could have been accomplished at a much cheaper price. On a 3P — proved, unproved and potential — basis, the rating of Devon Energy Corp., one of the top independent gas producers in the U.S., was at 31 cents per Mcf "after yesterday's run-up while XTO's bid was $0.91 per Mcf [equivalent]. So I understand a bit of a premium for the right technical team, the right asset base, but it seemed excessive on a relative basis," he said.

In an FBR report, "XTO Valuation Implies Higher Revaluation for E&P Unconventional Peers," issued Dec. 15, Rashid elaborated on the metrics. "Exxon Mobil's acquisition of XTO Energy, Inc. provides a long-term boon for North American natural gas, in our view, with a 3P acquisition price of $0.91/Mcfe, which, if applied to 14 other unconventional gas shale players, would imply almost 150% equity upside," FBR said in the report.

Role of climate change, gas markets

Analysts said the deal reinforces the future of natural gas in the U.S. economy, including any climate change developments or regulatory activity that could be adopted.

"It is a very important public statement in the view that natural gas is going to be a primary fuel and … that it is very likely to be a cornerstone of any approach to global warming," Bloom said. "I think that it can get people to really focus on what role is natural gas going to play for the next 30 to 50 years because it appears like we're going to be able to rely on it.

"It clearly brings to bear all of the resources and economic power of Exxon Mobil to continue to develop some gas plays that have radically changed the prospect for natural gas in the U.S. compared to where we thought we were five or six years ago," Bloom said. The deal provides optimism for future natural gas prices and creates a market for natural gas companies that could be fascinating to watch, he added.

"I think it gives a lot of people confidence that, even though natural gas prices may temporarily be low, that there will be enough of a rebound in natural gas prices in the future to make these plays attractive on a longer term basis," Bloom said.

Fitch: No impact on Exxon ratings expected

The agreement for Exxon to exchange 0.7098 shares per XTO share, an estimated $41 billion transaction including the expected assumption of approximately $10.4 billion in XTO debt, should not impact Exxon's ratings, according to Fitch Ratings.

"The transaction is expected to significantly enhance Exxon Mobil's unconventional resource base and technical capabilities. ExxonMobil has sizable global unconventional resources including large net acreage positions in North America (Marcellus Shale, Haynesville, Piceance Basin, Horn River Basin), Europe (Germany, Hungary, Poland) and South America (Argentina)," Fitch said in a Dec. 14 news release. "XTO has strong expertise in unconventional resources and is exposed to all major unconventional resource basins in the U.S."