XTO acquired by XOM

XTO acquired by XOM
Best of the Best is acquired at a not great valuation. Will anyone ask why?


1. XTO will be acquired for EVx of 6.0x and CFOx 6.9x (2009e). These multiples are roughly the eight-year average trading multiples for XTO. It seems to me a rationale seller would not use an average valuation multiple off depressed cash flow. Especially if you thought gas prices were going higher than today’s $5/mcfe. (Even if you argue that the multiples are appropriate, XTO would get a higher EV valuation as gas prices rose and lifted Ebitda and CFO. So why not wait?)

2. Acquisition multiple of EV/mcfe of $2.90/mcfe (proved reserves only) seems high except that it gives no value to the 14.2Tcfe on “2P” reserves that are part of existing reserve fields. XOM is picking up an additional 14.2 Tcfe of “2p” reserves, which XTO estimates will cost roughly $1.80/mcfe to develop. Even taking into consideration PV issues, this seems very cheap. Note also that 14.2Tcfe of reserves would be a very large company by itself and is greater than the 13.9 Tcfe of proved reserves acquired.


3. Lastly, I monitor a unique metric that calculates a company’s EV/mcfe as a percent of the market price of natural gas. Historically, XTO has average 25% (that is XTO’s EV/mcfe has averaged 25% of the market price of natgas). XOM is acquiring XTO for an EV/mcfe to natgas price of 53%.

XTO, in my estimation and as reflected in its peer beating operating metrics, is the premier North America E+ P Company. (Some XTO peer beating metric include: ROIC, CFO/mcfe, FCF generation, Low F+D costs, Reserve growth per share, low debt/mcfe, etc)

Therefore, I find it curious that smartest, best run E+P company is selling out when gas is at a depressed $5/mcfe range and valuation multiples suggest no upside. This strongly suggests XTO management sees no further upside to gas prices!!

As the market absorbs this fact, the recent run up in E+P stocks from “M+A madness” will recede, and market will re-calibrate valuation benchmarks for E+P valuation. Assuredly downward!
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