Petroleum Economics Project 2010

Exxon’s Acquisition of XTO Energy

Jonathan ShimJason Kok

Transaction Validity

• As of 12/11/2009 (on the day of the deal)• Stock price of XTO: $41.49• Stock price of XOM: $72.83• Outstanding Stock Volume – 583.34M• Common share equivalence– 1 XTO stock to 0.7098 XOM stock

Transaction Validity

Company Value = Price of Stock (12/11/2009) x Common Share Equivalence x Outstanding StockCompany Value = $72.83 * 0.7098 * 583.345MCompany Value = $40.1 Billion

Total Resource Base

• Total Resource Base – 45 Tcfe– Proved Reserves – 13.9*– Low Risk Upside – 14.2*– Additional Potential – 17*– Total = 45.1 Tcfe– If this information is correct, then XTO would have

paid 0.89 $/MSCF (inclusive of current daily production)

*Information obtained from Oil and Gas Financial Journal

Assumptions

• Drilling cost $ 6 Million – $ 10 Million• Royalty Interest 20%• Constant decline of production of 7% each

year• Operating cost of $0.50 per MSCF• 2 different gas prices – $6 constant per MSCF– $6 increasing by 2% each year per MSCF

Assumptions

• Minimum rate of return of 12%• Gas well spacing of 160 acres• Oil well spacing of 640 acres• No Taxes• No Depreciation

XTO’s Decision to Hedge Commodity Prices

• By hedging commodity pricesYear Hedge Price $/MSCF

Received after Hedging

Actual Price $/MSCF Received with Actual Price

2009 Gas - $8.79/MSCFOil-$117.11/STB

10.67 Gas - $5.55/MSCFOil-$79.36/STB

6.9

2010 Gas - $7.49/MSCFOil-$95.7/STB

9.62 Gas - $5.47/MSCFOil-$81.95/STB

7.53

2011 Gas-$7.02/MSCF

7.02 Gas-$5.69/MSCF

5.69

Lease Bonus

Lease Bonus paid per acre to XTO from XOM($/Acre)

Best Case Scenario Worst Case Scenario

8055.1 2817.3

Knowing the F&D cost per MSCFE, reserve potential, and total net acreage owned by XTO, we use the information to calculate how much XTO receives in lease bonus per acre in the $41 Billion transaction.

NPV per wellGas Price Constant at $6/MSCF Gas Price Increasing at 2%

annually from $6/MSCF

Formation Best Worst Best Worst

Freestone Trend $1,588,186.96 $1,241,268.03 $1,760,799.10 $1,428,889.91

Haynesville Shale ($96,385.91) ($550,897.63) ($83,896.29) ($537,367.21)

Barnett Shale $2,291,804.70 $1,903,560.94 $2,536,755.49 $2,179,130.59

Marcellus Shale ($492,063.93) ($2,081,717.27) ($469,513.22) ($2,055,945.03)

Mid Continent Region $2,912,193.95 $2,107,862.40 $3,237,046.16 $2,465,199.83

SJR-Raton $311,916.37 $144,151.63 $349,801.56 $184,562.49

SJR-NaturalButtes $288,808.04 ($65,205.66) $333,174.47 ($17,289.92)

Permian $3,865,142.04 ($6,918,572.57) $4,736,612.90 ($5,959,954.63)

Gulf Coast Region $4,547,047.85 $594,740.10 $5,180,101.41 $1,649,829.36

NPV Per FormationGas Price Constant at $6/MSCF Gas Price Increasing at 2%

annually from $6/MSCF

Formation Best Worst Best Worst

Freestone Trend $3,970,467,408.50 $2,854,916,461.06 $4,401,997,743.11 $3,286,446,795.67

Hayneville ($250,603,373.20) ($1,322,154,320.64) ($218,130,354.71) ($1,289,681,302.15)

Barnett Shale $4,125,248,457.62 $3,045,697,510.17 $4,566,159,886.46 $3,486,608,939.02

Marcellus Shale ($393,651,141.07) ($1,457,202,088.51) ($375,610,575.24) ($1,439,161,522.69)

Mid Continent Region $3,203,413,348.19 $2,107,862,400.75 $3,560,750,773.40 $2,465,199,825.96

SJR-Raton $499,066,195.32 $216,227,439.51 $559,682,496.50 $276,843,740.70

SJR-NaturalButtes $389,890,853.76 ($81,507,072.59) $449,785,532.31 ($21,612,394.04)

Permian $850,331,249.79 ($1,383,714,513.52) $1,042,054,837.46 ($1,191,990,925.86)

Gulf Coast Region $1,136,761,962.03 $89,211,014.59 $1,295,025,351.44 $247,474,404.00

Total Reserves

• Assuming well spacing of 160 acre and 640 acre for gas and oil respectively– EUR = 25.7 Tcfe, RF = 57.11%

• Assuming well spacing of 80 acre and 640 acre for gas and oil respectively (Reduced)– EUR = 44.9 Tcfe, RF = 99.7%

Fair Price of XTO based on NPV

• Gas Price Constant at $6/MSCF– Fair price: $42.2 Billion

• Gas Price Increasing at 2% from $6/MSCF– Fair price: $43.9 Billion

• All values exclude the $10 Billion debt of XTO

Dividend Analysis Approach

• Using trading information as of 4/27/2010 and apply it to year 2009

• Fair Price of XTO – $46.8 Billion• This value is slightly higher because we utilize the most recent

payout ratio and return on equity rather than the information on the date of the transaction

• Another reason could be that the value of outstanding stocks could be less than the current value to match the 41 B$ transaction

Our Opinion

• From our values of XTO’s worth, we conclude that XOM’s 41 B$ transaction falls below our estimated range (between 42.23 and 46.75 B$)

• However, the difference in values could be due to the utility of inaccurate information which is not existing at time of transaction

• Since the percentage difference is acknowledgeable (3%<%Diff<14%), we believe that XOM made a slightly unfair bid for XTO.– The deal is dilutive on earnings