Exxon Deal Looking Greener Today

After a day of reflection, the post-game analysis of the ExxonMobil-XTO Energy deal is turning more to our positive viewpoint, so much so that the New York Times' green energy blog is laudatory about the increasing mix of natural gas in the portfolio. It does make sense.

ExxonMobil is a company that uses return on average capital employed (ROCE) as a key metric for the effectiveness of their business model. Their five year average ROCE is an impressive 30.7%, while the return in their most recently reported fiscal year was 34.2%. Looking through their extensive and useful disclosures, what they call "upstream activities" comprise their basic oil and gas operations. For all the complaints about difficulties of dealing with foreign governments and state-owned oil companies, ExxonMobil's ROCE in non-US petroleum operations is significantly above the corporate average. It's interesting to note that with the acquisition of additional natural gas resources through XTO, and a recovery in natural gas prices as inventories are worked off and economies recover, the ROCE in the worldwide gas operations looks to have substantial upside, which should really benefit shareholders and add value.

A December presentation at the Morgan Stanley Energy Conference also reiterates some of the rationale for the large acquisition. Talking about ExxonMobil's natural gas operations, a slide notes (1) gas is one of the fastest growing energy sources from the present until 2030; (2) unconventional gas resources will be key to supplying the markets in the future, and (3) technologies for efficient exploitation of the unconventional resources will be key.

Again, for some of the rightful criticism of the company in the past, its historical returns on capital have been very strong, and this deal has the potential to enhance them significantly in the medium and longer-terms, which is where governance theories say managements should be focused.