During yesterday’s conference call, ExxonMobil Corp. (XOM: 58.3662 -0.4438 -0.75%) said, post-merger (XTO Energy acquisition completed on June 25), share buybacks are expected to be $3 billion per quarter (versus existing $2 billion) from the third quarter. While the market was expecting a buyback enhancement, the increase of $1 billion per quarter is a major positive, in our view.However, it will take more than two years to offset the share increase as Exxon issued 416 million shares (nearly 9% of total shares outstanding) for the acquisition. While the call highlights the growth factors such as a large resource base, global opportunities, and low finding development costs, the returns story was subdued although the company is known for its focus on return on capital employed.
The obvious question that arises — will this $41 billion (including debt) acquisition be able to generate a commendable return in the near to medium term? As we are tentative on this issue, we prefer to stay on the sidelines.
Exxon said, with this merger, the company will become the largest gas producer in the U.S. Natural gas production will be threefold at nearly 3.7 billion cubic feet per day, which coincides with its outlook of gaining traction in unconventional resources.
Exxon has acquired an unconventional resource base in excess of 45 trillion cubic feet equivalent at an attractive price. This resource base along with Exxon’s solid financial strength and operational capabilities will deliver long-term value for shareholders.
We believe that Exxon’s production and operating cash flow this year will increase on the back of XTO’s cash generating capability and attractive position in the five major gas shale plays: Barnett, Woodford, Fayetteville, Haynesville and Marcellus.
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