On Tuesday morning, before the market opens, oil giant Exxon Mobil Corporation (NYSE:XOM) will post its fourth quarter numbers. That report isn’t the most important thing on the minds of XOM stock holders right now though … not even close. Rather, all eyes are on company’s recent decision to acquire a massive stake in the Permian Basin’s oil potential.
Specifically, Exxon Mobil has committed up to $6.6 billion — mostly in XOM stock — for 275,000 prime oil acres in New Mexico’s Delaware Basin.
It would be hyperbole to call the acquisition a make-or-break deal for Exxon Mobil. On the other hand, it wouldn’t be overstating the matter to say the purchase in the Permian Basin is going to take the lead in what the company’s books look like going forward.
And Exxon Mobil could definitely use some help on that front.
Adding to Permian Basin Exposure
The property in question is actually a collection of companies owned by the Bass family — a name that turns heads within the energy sector.
The new property will double Exxon’s exposure to the Permian Basin … the largest oil field in the United States. After completion, XOM will be able to boast reserves of around 6 billion barrels. There’s an estimated 3.4 billion barrels of oil-equivalent waiting to be extracted from the Bass family’s assets.
The new acreage’s current operation is producing 18,000 barrels of oil-equivalent per day; 70% of what’s in production is liquids. As the reserve tally suggests though, that’s not the sites’ peak output capacity though. The company currently yields about 140,000 barrels per day from its other Permian assets, with a lower estimated reserve number.
Perhaps as important (if not more so), the Permian’s oil is low-cost oil in terms of drilling expenses. Exxon Mobil’s margins for the field’s assets are between 35% and 40% stronger than for the company’s assets elsewhere. That shouldn’t change with the Bass family’s properties about to be transferred.
It won’t necessarily be cheap, however. XOM will be issuing 64.1 million shares of XOM stock, totaling $5.6 billion, to get the deal done. The Bass family can collect another $1 billion through 2032 if the field performs well.
The purchase is the biggest Exxon has made since its 2010 acquisition of XTO Energy.
A Much-Needed Boost for Exxon Stock
As it stands right now, Exxon is operating ten rigs on its current Permian properties. The company intends to boost that rig count to 25 in order to maximize the output of the new property.
The revenue potential largely depends on the price of oil in the foreseeable future. But, assuming the property produces twice the current output of 140,000 barrels per day, the new deal could drive approximately $2.5 billion in revenue annually. For perspective, the company has generated $196.9 billion in revenue over the course of the past four reported quarters.
And, it’s from that perspective one has to wonder why the deal is even newsworthy — it’s only a drop in the bucket. Remember though, this is high-margin revenue, and company needs help on that front.
Exxon Mobil’s operating margins are sub-2% for the past year, as the company has struggled to shake off the ill effects of oil’s 2014/2015 implosion. Newly created debt has pumped up XOM’s long-term obligations to $28.9 billion, which now costs the outfit roughly $100 million per quarter. That number has been getting bigger, though.
Exxon is profitable, producing income $2.6 billion in the last quarter alone. That number is trending higher too. It’s still a relatively weak organization, however, compared to rivals like Chevron Corporation (NYSE:CVX), which appears to be coming out of the oil funk much healthier than Exxon appears to be.
Looking Ahead for XOM Stock
It’s possible — though not necessarily likely — Exxon Mobil will serve up some more details on the deal when it unveils last quarter’s earnings on Tuesday. It will almost certainly be a featured topic to some degree, though. While it’s a relatively small deal, the potential profitability of the deal is somewhat oversized relative to the price. Throw in the fact that crude oil prices are expected to rise (albeit gently) for the foreseeable future, the Permian Basin acquisition isn’t something to dismiss.
As of the latest look, analysts expect XOM to report a profit of 70 cents per share on revenue of $62.6 billion Tuesday morning. The company earned 67 cents per share of Exxon stock on sales $59.8 billion in the fourth quarter of 2015.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
