Exxon Is Not Likely To Swiftly Retire XTO Debt -Analysts

Following its bid to buy XTO Energy Inc. (XTO)--a $41 billion bet that the natural gas industry will continue to thrive--Exxon Mobil (XOM) seems unfazed about taking on nearly $10 billion worth of XTO's lower-rated debt--at least, that's what some market participants think.

Exxon, which announced its intent to acquire XTO on Monday, in a deal valued at $31 billion in stock and nearly $10 billion in debt, has $746 million in global debt outstanding, according to data provider Dealogic; XTO has nearly 10 times that much, or $9.8 billion.

The fact that Exxon hasn't retired its own existing debt while sitting on a huge pile of cash reserves suggests that Exxon doesn't think that XTO's debt would be a stone in its shoe.

Further, the weighted average coupon of XTO debt is 6.00%, while the weighted average coupon of XOM debt--including legacy debt from before Exxon and Mobil merged in 1999--is 7.76%. If Exxon was considering retiring any debt, traders and analysts said it would stand to reason they'd take out the pricier debt first.

Phil Adams, senior bond analyst at Gimme Credit in Chicago, suspects Exxon might leave the bonds outstanding and instead use its considerable cash for share repurchases or smaller property acquisitions.

CreditSights analyst Brian Gibbons said he couldn't rule out the possibility that Exxon would tender the debt, he said it was unlikely to do so. The average cost of capital of the XTO debt is 6%, it trades 10% above face value and yields 3.5% on average, he said.

"This is a relatively low cost of capital compared to the returns XOM can generate by using its cash balance and cash flows for re-investment in the upstream business or buying back stock," Gibbons said.

Additionally, a small amount of outstanding debt can also be a positive from a shareholder perspective.

"I think it is still generally accepted that a bit of debt in the capital structure is good for shareholder value, as the after-tax cost of this capital is far lower than the cost of equity capital," Adams said.

In a public filing concerning the merger Exxon said, "Regarding potential debt repayment, we will do a complete analysis of our options using our long-standing principles of focusing on shareholder value and maintaining a conservative capital structure."

A spokeswoman for Exxon returned a call seeking comment, but couldn't confirm the company's M&A strategy going forward.

"From a theoretical cost of capital perspective, it probably makes sense to just leave the existing bonds outstanding," Adams said.

-By Kellie Geressy-Nilsen, Dow Jones Newswires; 212-416-2225; kellie.geressy@dowjones.com

(Romy Varghese contributed to this report.)

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