Exxon’s Permian Assets Will Drive Its Value In The Near Term
Despite a sustained improvement in commodity prices over the last few months, Exxon Mobil (NYSE:XOM) is among the few integrated energy companies that have not fared well this year. The company’s stock has dropped by almost 10% since the beginning of 2017, while the crude oil prices have recovered more than 10% over the same period. This might prompt investors to believe that the company has not performed well throughout the year. However, on the contrary, the company’s operational performance has improved significantly over the last few quarters, backed by its strong results from its Permian Basin assets. Thus, in this note, we discuss how Exxon’s Permian operations have expanded over time and are likely to be a key driver of its value going forward. We currently have a price estimate of $84 per share for Exxon Mobil, which is in line with its market price.
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Expanding Presence In The Permian Basin
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At the beginning of 2017, Exxon Mobil had acquired an estimated resource base of 3.4 billion barrels of oil equivalent (boe) in New Mexico’s Delaware Basin, which is considered to be a highly prolific, oil-prone section of the Permian Basin. As a result, the company’s estimated resources base in the basin doubled to approximately 6 billion boe, making it one of the most prominent producers in the largest and most economical oil plays in the US.
Soon after this, the company executed five other acreage transactions, adding a combined total of 22,000 operated acres for an implied cost of about $20,000 per acre. This acreage is adjacent to the company’s current holdings in the area, making it capital-efficient for the company to drill longer lateral wells, and enhance the productivity of its existing wells. Thus, the new acreage is expected to add more than 400 million BOE of low-cost resources to Exxon’s portfolio.
Since the Permian Basin is known for the abundance and high quality of its oil reserves, the cost of production in the region is significantly lower compared to the other oil plays in the country. Being the largest operator in the region, Exxon has a cost advantage over its peers and is likely to deliver higher profits and returns. As per the company estimates, it can yield 30-35% higher margins from its Permian assets compared to its other assets. Thus, given the high quality of its acreage and a strong cost advantage, the company plans to further ramp up its Permian operations by adding 10 more rigs to its existing 20 rigs by the end of 2018. The company will continue to drill longer-lateral wells to realize capital efficiency and further improve its unit development costs.
Exxon currently produces over 200,000 boe per day from the Delaware, Midland, and Bakken basins. However, backed by the aggressive expansion plans, its overall production is expected to grow at a compounded annual rate of 20% until 2025. A majority of this growth will be driven by its Permian assets. The company anticipates its Permian assets to expand at a compounded annual rate of 45% over the remaining years of this decade, driving the company’s growth in the near term.
In the chart above, we show how Exxon’s liquids production will grow over the next few years, bolstering its revenue as well as EBITDA. You can create your own scenarios for the company’s liquids production and visualize its impact on its top-line and operating profits using our interactive platform.
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