What Does ExxonMobil’s Permian Basin Deal Mean?



ExxonMobil’s Permian Basin deal

ExxonMobil (XOM) has penned a huge deal with the Bass family to acquire its companies, which include vast oil resources in the Permian Basin.

The companies have ~250,000 acres in the promising basin. They also hold ~3.4 billion barrels of oil equivalent (or boe), which will double ExxonMobil’s Permian resources to 6 billion boe. These resources (3.4 billion boe) are expected to contain 75% liquids.

ExxonMobil’s Permian Basin production stands at 140,000 net boe per day. The companies to be acquired include BOPCO, which produces ~18,000 net boe per day. BOPCO’s acquisition will give ExxonMobil a foothold in other producing fields in the United States.

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According to the deal, ExxonMobil is expected to make an upfront payment of ~$5.6 billion in shares. It’s also expected to make up to $1 billion in conditional cash payments in parts between 2020 and 2032, in line with resource development. ExxonMobil plans to drill longer lateral wells, which will likely result in lower costs for the company.

What this means for ExxonMobil

A back-of-the-envelope calculation shows that the deal is expected to result in equity dilution of ~1.5%, considering the closing price of XOM stock on January 17, 2017.

The incremental production from the acquired assets could bring in more revenue, but extra share units will also result in more dividend payments for XOM. Due to rising oil prices, it’s likely that incremental revenue could cover additional dividend payments.

Also, the huge resource base that the deal would be adding to ExxonMobil’s upstream portfolio will likely lead to future growth and development opportunities for the company. XOM stock closed 1.2% higher at $87.4 on January 17.

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A word from management

On the acquisition, Darren W. Woods, ExxonMobil’s chair and CEO, stated, “This acquisition strengthens ExxonMobil’s significant presence in the dominant U.S. growth area for onshore oil production. This investment gives us an exceptional Delaware Basin position in a proven multi-stacked play that can generate attractive returns in a low-price environment.”

Despite the low energy prices that the industry is facing, integrated energy majors continue to focus on their upstream portfolios. ExxonMobil’s peer Total (TOT) has formed a strategic partnership with Petrobras (PBR) to develop upstream assets. Chevron (CVX) and BP (BP) are also looking at the robust upstream portfolios to be explored and developed in the next couple of years.

If you’re looking for exposure to the integrated energy sector, you can consider the Vanguard Energy ETF (VDE). The ETF has ~38% exposure to integrated energy sector stocks.

Series outline

In this series, we’ll provide you with an update on ExxonMobil’s market performance along with a financial analysis of the company. In the next few parts, we’ll examine XOM’s latest stock performance, followed by its analyst ratings, dividend yield trends, beta positions, short interest changes, institutional ownership status, and implied volatility movements.

Later, we’ll look at XOM’s valuations and correlation to oil, then we’ll switch to a fundamental analysis of its business segment dynamics and upstream and downstream performances. We’ll also analyze XOM’s financial position by examining its leverage and cash flow position.

Move on to the next article to know more about the company’s recent oil discovery in Guyana.


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