Exxon Bets Big on Natural Gas (UNG, XTO, XOM)

Exxon Mobil (NYSE:XOM) is taking out XTO Energy (NYSE:XTO) for $31 billion and with all the money riding on the future of natural gas, its making the United States Natural Gas Fund, LP (NYSE:UNG) look pretty.

Sure the UNG has its problems, but the fund is up 2% today thanks to the Exxon/XTO news.  How about this for a reason to go long natural gas:  Via the NYTimes -- Exxon Mobil’s acquisition of XTO Energy amounts to a $31 billion wager on natural gas becoming the fossil fuel of choice for power generation in the United States. The huge deal brings the world’s largest energy company back home to focus on what could be an expensive and time-consuming effort — something it wouldn’t have considered just a few years ago.

Exxon is not a company known for making rash moves. In fact, it is viewed largely as the most conservative company in what is arguably a very conservative industry. So some analysts were surprised by its decision to acquire a company that gets a large portion of its production from somewhat unconventional sources with limited export abilities.

XTO is mostly an onshore domestic natural gas company specializing in squeezing gas out of very tight and expensive reservoirs. The boom in natural gas prices in the past decade allowed it to grow and expand in areas once thought to be uneconomical to drill. At the same time, advances in technology helped lower costs and increase production.

Rampant speculation from financial players sent prices skyrocketing, allowing even the most unconventional of natural gas fields to be economical. But when the speculators rushed to the exits last summer, many drillers were left unable to sell their gas for market prices. Meanwhile, demand dropped as the financial crisis curbed energy use across the board.

The envisioned demand for natural gas just has not kept up with the amount of supply that was flooding the market. So even with the number of drilling rigs down to half the number operating just a year ago, there is currently a record 3.7 trillion cubic feet of natural gas in storage at the moment (equivalent to the nation’s average natural gas demand for eight weeks).

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