Bob Simpson was a tax accountant who wore his slacks stuffed inside his cowboy boots. When he was a young boy, an aunt brought him periodically to downtown Fort Worth, Texas, to shop at Leonard's department store, a wonderland of toys, sporting goods, and furniture. Crumbling brick buildings dating to the Texas oil boom of the early twentieth century surrounded Leonard's. Simpson grew up in modest circumstances in a small town nearby, graduated from Baylor University, took an accounting job in Fort Worth, and never left. When he began to earn big money, he bought up and restored many of the decrepit buildings he had seen as a child. On one occasion he paid $160,000 for the grand champion steer at the Southwestern Exposition and Livestock Show and donated the animal to the Fort Worth Zoo. Increasingly, he was one of the city's most active patrons.
Simpson was a numbers man. He kept books and organized tax returns for others until 1986, when he founded Cross Timbers Oil. Over the next two decades he built the company into a Wall Street darling. He acquired onshore American natural gas fields abandoned by the large international oil companies as they moved overseas and into deep-water offshore oil drilling in search of large new reserves. He also managed operations and financial strategy very tightly; Simpson became a master at growing through acquisitions.
He renamed Cross Timbers as the more ticker-friendly XTO; its profits grew very rapidly, from $186 million in 2002 to $1.9 billion in 2008, which vaulted XTO to number 330 on the Fortune 500 list of the largest stock market-traded corporations headquartered in the United States. Barron's named Simpson one of the thirty most-respected business leaders in the world for four consecutive years, alongside Warren Buffett and Steve Jobs.
His thinning hair had turned gray, and as he reached his sixties, he grew a not-so-Wall Street white beard. He gave up day-to-day management responsibilities at XTO, while remaining chairman, and the beard hinted that he might be ready for a further change of lifestyle. XTO now employed three thousand people, all of them in the United States, a third of them in Fort Worth. Simpson's stock option-incented executives and his Wall Street shareholders had become used to rates of profit growth that could not go on forever, certainly not in an industry whose performance was tied to volatile commodity prices.
In the summer of 2009, Simpson and XTO's senior executives and directors attended the corporation's annual management retreat at the Fairmont Chateau Whistler, tucked beneath the mountains of British Columbia, Canada. Simpson repaired to the hotel bar with Jack Randall, an XTO director who was a partner in an investment bank that specialized in oil and gas mergers. As they munched bar food, they talked about the industry and options for future strategy, including the possibility of a merger or an acquisition of XTO by one of the oil majors.
The American natural gas business was in the midst of a historic boom as new drilling techniques unlocked huge reserves of domestic "shale" gas -- natural gas trapped in shale rock formations -- and other unconventional sources. XTO was a leading producer of shale and unconventional gas. It owned positions in most of the major shale gas plays in the United States, including the Marcellus Shale on the East Coast, which was exciting interest. The corporation's headquarters in Fort Worth stood near the Barnett Shale, one of the country's best-known shale gas reserves, where XTO owned a large and lucrative position. A natural gas rush gripped Fort Worth as drillers, land men (who specialize in leasing land for drilling), and financiers scoured the region to grab positions. The nationwide boom atmosphere meant that natural gas production would likely rise and gas prices would fall. The financial crisis and recession of 2008 to 2009 had also dampened total energy demand, at least temporarily.
Also, some of XTO's success had been due to Simpson's financial wizardry in the futures and derivatives markets -- his ability to enhance profit by locking in hedges on high gas prices, to guarantee strong cash flow and protect against market price declines. If prices fell for a prolonged period, hedging wouldn't produce the same degree of benefit. Big international oil majors continued to look at unconventional gas companies like XTO with avarice, despite the falling prices, because the majors had largely missed out on the domestic gas boom that XTO had ridden. For a wily numbers man like Simpson, these factors -- prices past a peak, a boom mentality in the industry, and hungry, cash-rich corporate buyers -- all flashed "sell."
Who would be an ideal purchaser, Simpson and Randall wondered? Chevron was in the midst of a leadership transition, and the corporation was being sued in Ecuador over an oil spill that might produce a major financial liability -- at a minimum, the lawsuit was a wild card. They considered Shell, too, which was active in onshore gas plays, and a few less likely contenders. Before the check for their snacks came, they had settled on BP and ExxonMobil, both cash-rich and highly interested in the unconventional gas market. Simpson told Randall to approach both corporations to see if they might be interested in a merger or other combination with XTO.
Randall owned a significant amount of stock in XTO -- nothing as large as Simpson's holding, but enough to motivate him. Simpson also agreed to pay Randall's firm, Jefferies Group Inc., a transaction fee of $24 million if a merger were completed. Randall had previously worked at Amoco for fourteen years, landing in the company's mergers and acquisitions group. He left to form an oil and gas advisory firm that later became part of Jefferies, an investment bank. He and his fellow directors at XTO had been thinking for years about how the corporation might eventually find an acquirer; almost all successful independents in the oil and gas business ultimately merged or were acquired. That was also the common exit strategy for a founder like Simpson, and a deal now would allow all of XTO's shareholders to benefit from his foresight. Like a marriage broker of old, Randall had already been cultivating a courtship between Bob Simpson and Rex Tillerson at ExxonMobil.
Randall had a personal tie to Tillerson: They had belonged to the same marching band fraternity at the University of Texas. Randall played trumpet; Tillerson played drums. They had both been engineering students in the marching band -- that is, double nerds. Randall was a couple of years ahead of Tillerson at U.T., and the men had not known each other well at the time, but the shared history reinforced their professional relationship when Randall became a Houston-based broker of oil and gas properties. At industry and university luncheons, Tillerson and Randall would occasionally run into each other and catch up on oil and gas matters or reminisce about university days.
Around 2007, Randall had suggested that Tillerson invite Bob Simpson on a hunting trip, so the two men could get to know each other better. Tillerson agreed, and he and Simpson spent a few days shooting together on ExxonMobil's vast ranch near Alice, Texas. They got along. Each had been reared in unglamorous circumstances in rural Texas and had now achieved transforming wealth and success. Each had put down roots in the Dallas-Fort Worth area and reveled in the region's history and ranch culture. Each regarded himself as a disciplined leader devoted to operational perfection. Their corporations occasionally partnered on deals and worked compatibly.
After his Fairmont Chateau Whistler bar summit with Simpson, in late July, Jack Randall telephoned Tillerson.
"Rex, I need to come to see you," he said. "It's very, very important. It's very confidential."
Tillerson invited him to Irving, to meet in his office. When Randall arrived on August 6, he explained that Bob Simpson was thinking about a "strategic combination" between XTO and ExxonMobil. Might ExxonMobil be interested?
"Yes, I think we'll be interested," Tillerson answered. "Let me take some time to soak on it."
From "Private Empire: ExxonMobil and American Power" by Steve Coll.
Reprinted by arrangement of Penguin Press, a member of Penguin Group (USA) Inc. Copyright (c) 2012 by Steve Coll.