ExxonMobil’s Guyana Oil: A Trillion Dollar Opportunity?

There are two main reasons for ExxonMobil, (XOM) ahead of crude oil’s relatively tight price range of $70 to $80, the most in the past year. The first is the Guyana production ramp, Stabroek, and the related kerfuffle with Chevron, (CVX) over the nature of the proposed acquisition by Hess, (NYSE: HES). The second is the ongoing digestion of the Pioneer assets and the acceleration of Permian production towards 1.2mm BOEPD.

XOM is a huge company with a lot of irons in the fire – LNG, chemicals, carbon capture, refining, biofuels, and heck, it’s even mixing with lithium. None of this really matters for the stock in the short term. XOM moves with higher or lower oil and gas prices and is likely to perform at the same time as these commodities and in the future. Darren Woods, CEO kicked things off with a succinct comment on the Q-2 call that reveals this company’s firm priorities, regardless of other “puddles” they’re dipping their oars into-

“At the end of this month, we will publish our global outlook, which projects global energy demand to be 15% higher in 2050 than it is today. We see oil demand holding steady at around 100 million barrels per day in 2050, while demand for renewables and natural gas is growing considerably.”

Let’s give Mr. Woods credit. As the CEO of a company that produces ~4.3mm BOPD of crude oil, it is fair and reasonable to assign a solid probability that he is right. In this article, we’ll focus on what we believe are key needle movers for the company.

Guyana

As noted in early August, the Bloomberg piece by Kevin Crowley, Liza’s 2015 discovery almost didn’t happen. Guyana’s waters were a minefield of more than 40 dry holes accumulated over the years, and XOM’s management was not convinced that this prospect met their capital allocation criteria. Even more critical was the fact that XOM’s concession was about to expire, if they were going to do it, it had to be then. Read Crowley’s article for more of the back story, but Liza’s success changed the company and the country. Quoting Crowley from the article-

“Today, Liza is the world’s largest oil discovery in a generation. Exxon controls a block that holds 11 billion barrels of recoverable oil, worth nearly $1 trillion at current prices. The discovery has he transformed Guyana from one of the poorest countries in South America to one that will pump more crude oil per person than Saudi Arabia or Kuwait by 2027. Guyana is about to overtake Venezuela being South America’s second largest oil producer, after Brazil.”

Now with more than 30 Discovery Probes6 projects sanctioned, current daily production of ~650K BOPD rising to 750K in 2025 with Yellowtail commissioning, 1mm+ BOPD in 2027 with Whiptail commissioning and up to 1.5mm BOPD with 7 commissioningth project- Hammerhead, the company is increasing production in Guyana at a rate of approximately 20% annually. The “Guyana effect” appears in total return comparisons with key competitors and the overall S&P 500 index, as noted in Crowley article.

Guyana appears to have a long ramp for future development in Stabroek, as reporting indicates that two other fields, Fangtooth – now in delineation drilling, and the Haimara discovery – new appraisal wells planned for later this year, could take reserves well in excess of the 11 billion BOIP now booked.

If the company can keep up the pace of announcing a new project for Guyana every eighteen months or so, it’s not hard to imagine daily production hitting the 2.0mm BOPD level in the XOM chart below in the early 2030s.

As a final point about Guyana, the low cost of supply is everything in long-term oil production. With supply costs below $35 per barrel, Stabroek fits well into the low-cost category, ensuring profitable production at any likely Brent price.

XOM, CVX, Hess kerfuffle

Chevron-CVX has lagged behind Exxon in terms of reserve replacement in recent years, thus OilNow article emphasize. Although down from its 2018 peak of ~24 bbl, XOM is comfortably ahead of Chevron at 16.9 bbl, compared to CVX’s 11.1 bbl. Chevron’s motivation for its takeover bid for Hess, ( HES ) is pretty clear. With HES’s 30% stake in Stabroek, CVX saw an easy way to tap into several billion barrels of reserves with its dollars.The offer of 53 billion for HES. Shareholders of both companies approved the deal, but roadblocks began to appear.

At the end of December 2023, The FTC filed a request for more information on the deal, but we have deferred any action pending the outcome ExxonMobil’s objection at the merger. Given that the three-judge panel only recently affirmed, recent reporting has a timeline of up to 2025 for any resolution.

The heart of the dispute lies in the interpretation of the Joint Operating Agreement-JOA, which contains a Right of First Refusal-ROFR section that governs the disposition of assets managed by the consortium. XOM believes that the HES action should be offered to it in ROFR language in the JOA. Chevron disagrees and has struggled to enforce the settlement The survival of HES as an entity, effectively eliminating the “change of control” provisions in the JOA. Analysts believe the outcome will come down to the arbitration panel’s interpretation of the “intent” of the CVX/HES deal with respect to the asset. M&A expert James English of law firm Clark Hill Law was quoted as saying:

“The key here is whether a change of control even occurred. The tthe three-person arbitration panel the appellant must decide in part whether to focus on the contract language or delve into Chevron’s intent. “A plain language approach would be very favorable to Chevron, whereas if you go with intent, Exxon might have a case,” English said.

There is no downside to XOM in this process in my view. The valuation of HES’s share is a closely guarded secret, but we can make a few assumptions and arrive at an estimate.

A $1 trillion valuation has been assessed on the $11 billion worth of reserves already booked, implying a Brent price of $90 – not out of place, but aspirational from current levels. That would put HES’s 30% share at about $335 billion, 6X+ above the $53 billion price. Depending on which estimate you use for the percentage attributed to 30% HES as part of the CVX offer -60-80% according to experts quoted in the Reuters articleit’s not hard to imagine a significant payday for XOM.

ExxonMobil is in the cat’s seat in this scenario. They could make a counteroffer for the HES stake, bid for a fraction of it, or receive compensation from Chevron if they win in arbitration. If it gets too expensive, CVX would leave, accepting $1.72 billion separation fee from HES.

There is no way to affect the outcome of this dispute. As we noted, there is no downside to XOM. A lot will come down to how the single intent word is interpreted.

Permian

As the first full quarter of Pioneer assets operating under the XOM umbrella approaches as Q-3 comes to a close, we’ll see how effectively this merger is implemented. The company passed a large number of bulletins – $2 billion in cost savings that will accrue from the merger annually. One Bloomberg articleCEO Darren Woods noted that these savings will come from improved technology and fracking and cube development techniques, as well as the logistical advantages of the merger in terms of lateral lengths and material supply. XOM projects supply costs at $35 per barrel from the Permian.

For the full year 2024, XOM projects daily Permian production of 1.2 mm BOEPD on their 1.4 mm acre position in the basin. The company aims to increase Permian production to 2.0 mm BOEPD by 2027, which implies a growth rate of 20% per year.

Your takeaway food

XOM is trading at some pretty rich multiples at current prices. EV/EBITDA is 7.65X and the flowing barrel statistic is $116,000 per barrel. Analysts rate the stock as Excess weight with price targets ranging from $110-$157.00 per share. The median is $130.00.

For those looking for well-covered shareholder returns, XOM generates about $26.5 billion in free cash annually on a TTM basis. The company distributed $8.1 billion in dividends and repurchased $16.3 billion in stock for a modest free cash yield of ~5%. The company beat EPS estimates by ~5% in Q-2, and estimates were raised for Q-3 to $2.14 per share. If they come in with a bang, we could certainly see a bigger move towards the midpoint of the estimates. The reverse is also true.

XOM should be part of every long-term energy investor’s portfolio for growth and income. It is currently trading near the top of its one-year range – $97-$123.00. The recent weakness in oil and gas prices would certainly argue for a judicious entry point that could come when Q3 earnings are released in November.

By David Messler for Oilprice.com

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