Integrated oil giant Exxon Mobil Corp (NYSE: XOM) has offered 0.7098 of its common shares for each share of Wildcatters Portfolio recommendation XTO Energy (NYSE: XTO). The all-stock deal valued XTO at more than $31 billion.

The deal is important for three main reasons in my view. First, as a result of the transaction, XTO Energy is trading up roughly 16 percent this morning; based on our initial entry price and including all dividends paid, our total current return on XTO is just under 40 percent. 

More important, XTO Energy is a US-based unconventional natural gas producer. For the past few years I’ve written about the importance of the US unconventional natural gas plays such as the Barnett Shale of Texas, the Marcellus in Appalachia and the Haynesville Shale in Louisiana. In fact, as I noted in the Sept. 23, 2009, issue of The Energy Strategist, “Top Three Energy Themes,” a 2010 recovery in natural gas-related stocks in one of my top three investment themes for the New Year.

The Exxon buyout of XTO validates the value of these plays, Exxon Mobil is not known to waste money and clearly views US unconventional gas as an important growth business.

The deal effectively increases the value of all US-focused natural gas plays with exposure to unconventional fields. I also suspect that other integrated oil companies–notably BP (NYSE: BP)–have been on the hunt for acquisition targets; this deal might force their hands, prompting them to put together a similar bid sooner rather than later. Top acquisition targets in the TES Portfolios include: Chesapeake Energy (NYSE: CHK) which we play through the Chesapeake Energy 4.5% Preferred D (NYSE: CHK D) shares, Anadarko Petroleum (NYSE: APC) and EOG Resources (NYSE: EPG). All three are up sharply in today’s session.

Finally, there’s the question of timing. If this were any company other than Exxon, one might say that improving credit markets were the driving force behind the deal. After all, Exxon not only had to buy the company but also assume about $10 billion in XTO’s debts. But this is an all-stock deal, and Exxon has more than enough cash on the books to make the purchase without accessing the credit markets.

The only other motivation I can think of is that Exxon may expect US natural gas prices to trend higher this year and the market for unconventional gas acreage to heat up again. At the very least, Exxon’s offer suggests the firm sees long-term value in buying US natural gas at current still-depressed prices.

For now, I recommend holding onto your position in XTO Energy. The value of the stock will fluctuate with movements in Exxon’s shares because it’s an all-stock deal; I feel the market is punishing Exxon stock too harshly this morning. Hold XTO and we’ll look to sell out at an opportune time over the next couple of weeks.

Also note that the acquisition of Australian coal mining firm Felix Resources (Australia: FLX) is nearing completion, and the stock was suspended from trading in Australia today. I discussed this deal at length in the August 19, 2009, issue of The Energy Strategist, “Mapping the Cycle”

In local currency terms, the total return on this recommendation is roughly 34 percent; in US dollar terms it’s 43 percent due to the appreciation in the Australian dollar. I will consider my Felix Resources recommendation closed as of today.

The portfolio tables posted on the website have been updated to reflect these deals and my current advice.