ExxonMobil to Take Over Celtic

The Canadian unit of ExxonMobil Corporation (XOM - Analyst Report) − ExxonMobil Canada − has agreed to acquire Calgary-based oil and gas driller Celtic Exploration Ltd., in a move towards expanding its footprint in the unconventional energy plays in North America. However, the deal is subject to approval by Celtic Exploration shareholders as well as Canadian government regulators.

Per the deal, ExxonMobil will pay C$24.50 per share that represents a 35% premium to Celtic’s closing price on the Toronto stock exchange on Tuesday. The total takeover amounts to C$2.59 billion ($2.63 billion). The deal is valued at C$3.1 billion after taking into consideration Celtic's convertible debentures, and Celtic's bank debt and working capital obligations.

Additionally, Celtic shareholders will also receive one-half share of a newly established unit − expected to be operated by Celtic’s management − that will hold assets not included in the transaction. These include acreage in British Columbia’s Inga area, Alberta’s Grande Cache area and interests in oil and gas properties located in Karr, Alberta.

This buyout agreement enables ExxonMobil to get a hold of approximately 545,000 acres of undeveloped, mostly natural gas acreage on the Montney field and another 104,000 acres on Duvernay. This is the two vast shale formations that span the British Columbia-Alberta border.

The acreage on transaction has a current daily production of around 72 million cubic feet of natural gas and 4,000 barrels of crude, condensate, and natural gas liquids (NGLs). These assets hold around 128 million oil equivalent barrels of proved plus probable reserves, 24% of which are crude, condensate, and NGLs and 76% is natural gas, as of December 31, 2011.

With the XTO Energy Inc. acquisition, ExxonMobil gained access to significant unconventional resources with a major handle on North America's newest energy discoveries. The latest Celtic deal is the biggest opportunity since then that will help ExxonMobil to expand its presence in the world’s largest energy market.

The company’s efforts to build an unconventional resource portfolio both in North America and overseas are aimed at increasing production through increased exposure to large energy resources with long reserve life and low field declines. Despite the collapse in natural gas prices, ExxonMobil expects unconventional gas to play a dominant role in future supplies owing to the rapid decline in conventional production. Since the XTO acquisition, the company possesses more than 1.4 million unconventional acres in the U.S. and Canada.

Last month, the company and its subsidiary, XTO Energy, entered into an agreement with Denbury Onshore, LLC, a subsidiary of oil and natural gas company Denbury Resources Inc. (DNR - Analyst Report), to acquire all of Denbury’s Bakken shale assets. The deal will increase its production in the Bakken oil shale region.

Longer term, we maintain our Neutral recommendation.