Exxon Mobil Corporation (NYSE:XOM) was busy over the last few days writing some big checks. And no I’m not talking about finalizing outgoing CEO Rex Tillerson’s pay and severance package. We’re talking about something XOM should have been doing for the last few years … as in, making some major M&A moves. The world’s biggest oil company is finally adding some serious acreage to its portfolio.
Perhaps more importantly, this added acreage in one of America’s best drilling spots has the ability to be a real game-changer for the firm and eliminate some of the struggles that have plagued Exxon over the last few years.
In the end, Investors need to buy XOM stock on its big oily buy.
XOM Stock Doubles Down
When it comes to America’s shale fields, there are as few as prolific as the Permian Basin. The area in Texas and New Mexico — which is about the size of South Dakota — has a unique geology.
The Permian is stacked like a layer cake, with various geology segments on top of each other. This stacking means that an energy producer can drill just once and hit multiple layers of the cake and get extra oil from each one. As a result, the Permian features some of the cheapest well costs out there. And in the age of low-priced oil, it’s become the hotbed of activity in the country. More than half of all rigs currently working in North America are in the Permian.
And XOM has just doubled its size there.
Exxon will pay the prominent Bass Family of Texas a cool $5.6 billion in XOM stock upfront as well as cash payments worth up a $1 billion per year over 2020 to 2032 based on how the production cycle goes to get its hands on roughly 275,000 acres in New Mexico’s Permian. Exxon’s new acerage currently produces around 18,000 barrels of oil equivalent (BOE) per day.
That may seem like a lot of coin for little current production. But this is a deal about the long term, as the potential for the acreage is monstrous. XOM will add about 3.4 billion barrels of oil equivalent to its reserves. Exxon will have more than six billion barrels worth of energy in Permian shale.
And it did so cheaply. XOM is paying around $20,000 per acre. This compares to the roughly $33,000 per acre that Noble Energy, Inc. (NYSE:NBL) agreed to pay Clayton Williams Energy, Inc. (NYSE:CWEI) the day before.
A Major Win For Exxon
That extra 3.4 billion barrels is just what XOM needed to get over its current production funk. The funk of dwindling reserves and lower production has plagued the integrated major for years now. Well, it’s a plague no more. The real beauty is that buyout is really just a bolt-on for Exxon. That’s because this is XTO Energy’s backyard.
Exxon’s purchase of XTO made it the fracking kingpin of natural gas. But where it derived most of that natural gas was from the Permian.
XTO’s focus on unconventionals production makes it an ideal choice to tackle the multi-layer strata of XOM’s new acreage. But running it through XTO as planned, Exxon will be able to “churn and burn” with relative ease.
But here is where it gets really exciting for XOM stock. The buyout acreage is oily. About 75% of the total reserves picked-up in the buy are covered with shale oil and natural gas liquids (NGLs). That’s important, as they feature higher margins thanks to their higher prices versus natural gas. These higher margins should help the company met its lofty profit goals.
It also helps grow Exxon’s oil cut. Since its XTO purchase and other recent moves, XOM stock was at risk of becoming too “gassy.” And that’s not okay when it comes to earnings or cash flows.
And the new acreage should provide those cash flows in spades. As we said before, the layer cake means that the Permian is a low-cost place of production. Most wells there can be profitable at around $53 per barrel. This compares to the nationwide average of around $60 per barrel.
According to Exxon spokeswoman Suann Guthrie, the acreage it just snagged can provide “attractive returns” at just $40 per barrel. Lower oil price environment be damned.
Buy XOM Stock
While it’ll take time to really develop the vast acreage in the region, it does set up XOM rather nicely for the future. You have more oil and liquids production coming in, that is profitable at lower levels per barrel. And with such a huge reserve amount, it has the potential to keep the music going for decades.
That’s exactly what the doctor ordered for Exxon. You have to wonder why they didn’t pull the trigger before.
But you don’t have to wait to pull the trigger. XOM stock barely blipped on the news. The stock has moved higher over the tail-end of 2016 on the backs of rising oil prices. But it is still cheap when looking at its peers. And that 3.5% dividend seems awful intact with higher oil prices. I’ll only get better when the new Permian acreage starts humming.
Bottom line? XOM made one honey of buyout. The property will work wonders on its bottom line for years to come
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.