The Exxon Mobil (NYSE: XOM) acquisition of XTO Energy (NYSE: XTO) is a strong validation of the independent exploration and production business model of developing the U.S. unconventional resource base as a key future source of energy.
The deal calls for Exxon Mobil to issue 0.7098 shares of Exxon for each share of XTO Energy. Exxon Mobil will also assume $10 billion of XTO Energy debt, making the deal worth $41 billion.

While all the majors still have substantial positions in North America, most of these are legacy assets that the companies hold for cash flow with very little development or growth. The independent exploration and production companies picked up the slack and have spent the last 10 years developing and proving up assets in basins that were thought too mature or non-commercial.

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What Exxon Mobil Gets
Exxon Mobil is buying 13.862 trillion cubic feet equivalent (TCFE) of proved reserves as of the end of 2008, with estimated 2009 average daily production of 2.87 BCFE per day. Exxon Mobil also is buying a large inventory of future drilling locations in virtually every shale play in the United States.

XTO Energy also has substantial positions in other non-shale basins including the Permian Basin, San Juan Basin and Freestone Trend. The Freestone Trend provides almost one-third of the company's production, as of the third quarter of 2009.

One interesting fact about the deal is that Exxon Mobil is buying back some of its own properties. In May 2004, XTO Energy purchased properties in the Permian Basin and Powder River Basin from Exxon Mobil for approximately $336 million. A year later, XTO Energy bought more Permian Basin assets from Exxon Mobil for $215 million.

Who's Next?
Other large independent exploration and production companies would also make attractive targets:

Devon Energy (NYSE: DVN) has proved reserves of 2.4 billion barrels oil equivalent (BOE) as of the end of 2008. The company does not deal exclusively in unconventional onshore gas, however, and has properties in Canada, the Gulf of Mexico and internationally. Devon Energy is also in the midst of selling these offshore and international assets.

EOG Resources (NYSE: EOG) also has enviable positions in the Bakken Shale, Haynesville Shale, Barnett Shale and Horn River Basin, a relatively new play in British Columbia.

Chesapeake Energy (NYSE: CHK) has an unparalleled position in four of the largest shale plays in North America: the Barnett, Marcellus, Haynesville and Fayetteville Shale. The company has 12 TCFE of proved reserves and more than 15,000 drilling locations in these four shale plays.

Exxon Mobil's Concession
After years of insisting that the best oil and gas prospects were located internationally, Exxon Mobil seems to have conceded that it missed the boat on developing the huge resource base that its smaller and nimbler competitors have mastered. Other deals may follow as the investment world is not the only one with a herd mentality. (Learn more about the oil and gas industry; read Oil And Gas Industry Primer.)

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Tickers in this Article: XTO, XOM, DVN, CHK, EOG

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