Exxon Makes Big Pay In West Texas

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What's going on?

Exxon Mobil, Americas biggest oil company, has agreed to pay more than $5 billion to buy a large swathe of drilling rights in Texas and New Mexico (tweet this). Its the largest energy deal in the US since the oil price crashed in 2014 (note: the oil price is still almost 50% lower than its 2014 level).

What does this mean?

Exxon is making a huge purchase in an area called the Permian Basin, land where the cost of drilling is relatively low (due to its geological advantages). The Permian already accounts for a large proportion of US oil production, but with oil prices having rebounded 50% from their low of a year ago, a rush of large oil companies are now buying up acreage (there have been numerous multi-billion dollar deals there in recent months).

Why should I care?

The bigger picture: The US energy industry is recovering which should benefit the economies of Americas oil-producing states.
Its been a rough few years for parts of Texas (e.g. Houston) and surrounding states as the oil price fell sharply beginning in 2014. The low cost of production in the Permian and the recent rebound in the oil price have made drilling for oil much more profitable and US oil production is now increasing after having declined for about two years.


For the stock: Building up its exposure to the Permian has been a strategic priority for Exxon but this accelerates the pace of its buildup significantly.
During the oil price crash, Exxon built up its presence in the Permian, but they were all quite a bit smaller than the one announced on Tuesday. This purchase doubles Exxons footprint in the Permian, albeit at a high price. The big bet is that drilling technology will continue to improve, sending down the cost of drilling further and enabling drilling of reserves that are currently un-drillable (included in this purchase is a huge amount of currently unreachable reserves).

Originally posted as part of the Finimize daily email.

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