Exxon Is Expanding Its Downstream Operations To Leverage The Permian Advantage

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Exxon Mobil

Over the last three years, most of the US integrated energy companies have leveraged their downstream operations to offset the impact of plunging commodity prices. However, since the Organization of Petroleum Exporting Countries (OPEC) has extended its oil production cuts until 2018, the outlook for commodity prices has improved significantly. Thus, the commodity prices are expected to recover over the coming quarters, reducing the low cost of inputs that the downstream operations of large integrated companies have enjoyed over the last three years.

However, in order to be better prepared for the anticipated recovery in commodity prices, Exxon Mobil (NYSE:XOM), the world’s largest publicly traded oil company, is planning to integrate its Permian operations with its other businesses in order to leverage the cost advantage that it holds over its peers and augment the growth of its downstream operations. Below, we discuss some of the measures taken by the company to strengthen its downstream operations using its Permian advantage. We currently have a price estimate of $84 per share for Exxon Mobil, which is in line with its market price.

Not only is Exxon expanding its Permian acreage to enhance its upstream performance, it is also integrating it with other businesses to leverage the Permian advantage. The company plans to expand its logistics access to and from the Permian region to augment the growth of its refining and chemical businesses. For this, the company completed the formation of the Permian Express Partners pipeline joint venture with Energy Transfer Partners. The JV is aimed at creating an extensive pipeline system to transport the excess oil and gas produced in the region and, in turn, benefit from the high utilization rates and corresponding pricing.

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In addition to this, Exxon entered into an agreement with Summit Midstream Partners in July of this year to create a new natural gas gathering and processing system, that would process the production of Exxon and other producers in the Permian Basin. The system will initially include high-and low-pressure gathering and discharge pipelines, two compressor stations, and a cryogenic processing plant with 60 million cubic feet per day of processing capacity. The processing complex’s capacity could be expanded to more than 600 million cubic feet per day depending on customers’ needs. The project cost is expected to be around $110 million, to be invested by Summit, and the initial phase is likely to be operational by June 2018.

Lastly, Exxon acquired a crude oil terminal in Wink, Texas from Genesis Energy earlier this month to further enhance its logistics capabilities. This acquisition marks the company’s first oil terminal in the Permian Basin, which will be used to transport crude oil and condensate to the Gulf Coast refineries and marine export terminals. The facility is interconnected to the Plains Alpha Crude Connector pipeline system, and is permitted for 100,000 barrels per day of throughput with the ability to expand. The terminal will be available for use to Exxon as well as other Permian producers in the region. This will allow the company to not only accommodate and transport its own output, but will also establish it as a key midstream provider in the rapidly growing Permian Basin.

Thus, we figure that while the high quality assets in the Permian Basin will allow Exxon to capitalize on the anticipated recovery in the commodity markets, integrating these operations to its other businesses will open new and attractive opportunities for the company to bolster its downstream value, which will further enhance its overall value in the coming years.

See Our Complete Analysis For Exxon Mobil Here

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