In late July 2009, Rex Tillerson, then the chairman and CEO of Exxon Mobil Corp., received a phone call that would kick-start the shale industry's biggest merger and one of Exxon's most expensive missteps.

Jack Randall, an XTO Energy Inc. board member and senior member of Jefferies & Co. Inc., suggested they meet to talk about XTO.

After four months of negotiating, the supermajor struck a $41 billion deal to acquire the shale pioneer. A decade later, even Tillerson admitted "we probably paid too much."

At the time of the deal, Exxon was eager to get into the shale game and was convinced of a positive outlook for gas. Exxon said the rationale for the deal included XTO's "outstanding asset base" of unconventional gas interests across the U.S., followed closely by XTO's "technical expertise" with shale.

That desire for shale assets and expertise blinded Exxon to a scary outlook that XTO executives seemed to be coming to grips with: a gas glut was on the horizon.

"Increasing competition in the U.S. unconventional natural gas industry, together with technological advancements in drilling methods, could result in increased supply of natural gas and could adversely affect natural gas pricing and profitability of producers," XTO said in the deal registration statement issued in 2010.

Ten years later, those words look prophetic.

In an anniversary that few in the industry appear to be celebrating, Dec. 14 marked 10 years since Exxon announced its intention to buy XTO in what would become the first megadeal in the U.S. shale space and the onset of a new era for energy in the U.S.

Placing a huge bet that natural gas would emerge as the fastest-growing domestic fuel, Exxon hoped that the merger would be the first step in a journey of shale development across the world. It was half right. Gas demand took off, but drillers unlocked so much production at such a frenzied pace that prices collapsed. That price collapse left analysts questioning the timing and cost of the acquisition, which was Exxon's biggest since it bought Mobil in 1999.

"Exxon's acquisition of XTO stands out as a textbook example of how not to do M&A," Raymond James equity analyst Pavel Molchanov, who expressed reservations with the deal after it was announced in December 2009, said in a Dec. 4, 2019, email. "It was an ill-timed bet on U.S. natural gas prices, which have trended down throughout the past decade. As such, it caused long-term pressure on Exxon's profitability metrics."

The XTO deal's massive price tag — $30 billion in Exxon stock plus the assumption of more than $10 billion in XTO debt — led to shareholder dilution that took years of buybacks to offset. From 2010 to 2015, the company reduced its outstanding shares to 4.16 billion from 5.1 billion, according to data from CFRA Research.

Exxon was late to the shale party, or 'just wrong'

In the years leading up to the shale boom, Exxon had turned its attention away from the Lower 48. The company instead focused on overseas operations, Tillerson said at KPMG's Global Energy Conference in June. Arriving late to the shale party, it was eager to jump on the bandwagon.

Exxon emerged from the 2008 financial crisis foreseeing a runway of production growth from the oil- and natural gas-rich Permian Basin in West Texas and New Mexico and began to weigh its options for entering the shale space: Build a business organically in 10 to 15 years or purchase an established company with existing shale assets and a strong management team, Tillerson said.

Exxon decided on the latter and began its search for a company with not only attractive assets but one with leading fracking and drilling technology. Enter XTO, which had technological expertise and the equivalent of 45 Tcf of gas reserves at the time.

"[W]hat they did not foresee was that the success of fracking ultimately would lead to an oversupply that made the purchase price [for XTO] seem high looking backward," Price Futures Group analyst Phil Flynn said in an email.

Calling the XTO acquisition "the AOL-Time Warner merger of the energy sector," Robert W. Baird & Co. analyst Ethan Bellamy said the XTO deal was timed poorly.

"In 2015, Tillerson argued that the timing was off by a year or two. Make that a decade or two. One cliché in the investing world is 'never wrong, just early.' I think you could say that Exxon was just wrong. Natural gas supply has done nothing but rise since that deal," Bellamy said.

Tillerson: 'We probably paid too much'

In 2008, the benchmark spot Henry Hub price peaked at $13.00/MMBtu. Exxon announced its bid for XTO in mid-December 2009 when the Henry Hub price was around $5.00/MMBtu. The deal closed in June 2010, but gas prices fell below $4.00/MMBtu in September 2011 and broke below $2.00/MMBtu in April 2012.

"We probably paid too much," Tillerson said in June 2019. "The general consensus was that [natural gas] would stay around $5, maybe $6 [per MMBtu], but of course we never saw those numbers again ... I wish I would have gotten [XTO] for less money."

S&P Global Ratings analyst Carin Dehne-Kiley said the rating agency saw little financial risk ahead for Exxon based on the acquisition when it was first announced. Apart from the attractive reserve base and technological expertise that Exxon obtained, the merger was funded by stock.

"In other words, it didn't have to use its cash balances or borrow new money to acquire XTO," Dehne-Kiley said in a Dec. 6 phone interview. "From a credit perspective, this is more favorable than a cash transaction because the company is not adding incremental debt but still getting the full EBITDA/cash flows. So in many cases, an all-stock transaction can improve the leverage — i.e. debt/EBITDA — of the acquirer."

From a strategic standpoint, the XTO acquisition did pave the way for Exxon to segue into tight oil, Dehne-Kiley said. Tillerson was still at the helm in 2017 when XTO acquired more than $6 billion of Permian acreage and assets from the Bass family of Texas, which more than doubled Exxon's potential from the region.

"The [XTO] acquisition gave us a wealth of expertise in unconventional oil and gas development and improved our position in the Permian Basin, one of the most prolific oil and gas production regions in the world," Exxon spokesperson Julie King said in an email.

In early 2018, Exxon announced plans to spend $50 billion on building out its U.S. upstream operations over five years, shifting its focus to short-cycle shale projects in the Permian Basin and Bakken Shale and away from other longer-cycle development projects around the world, Dehne-Kiley said.

Through XTO, by as early as 2024, Exxon aims to increase production to 1 million barrels of oil equivalent per day from the Permian. In the third quarter, Exxon's Permian output was 293,000 boe/d, soaring more than 70% on the year. Operating as a subsidiary of Exxon since 2010, XTO has operations in 14 U.S. states, with holdings in every major shale play.

But Exxon's intent to also unlock unconventional resource development and production worldwide has not quite panned out, Molchanov said. "The premise of using XTO's shale expertise to develop shale gas internationally did not materialize, at least not to any significant degree."