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ExxonMobil Eyes Cost Reduction in Permian to Boost Profits

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Permian Basin has attracted many producers in the last few years, primarily due to its low cost of production and huge reserves of premium quality hydrocarbons. Exxon Mobil Corporation XOM, a major operator in the area is eyeing further cost reduction to increase profitability in the prolific region, per Bloomberg. The company is planning to reduce the cost to around $15 per barrel, which is only comparable to the oilfields in the Middle East. The company operates in the basin through its subsidiary, XTO Energy.

Surging Output & Low Cost to Drive Profits

The lower cost of production can boost the company’s profit levels from the basin, wherein its recoverable resource base is estimated to be about 10 billion oil equivalent barrels. In the last reported quarter, ExxonMobil reported strong earnings – beating estimates – despite weakness in crude prices due to ramped-up production from the Permian. Notably, in fourth-quarter 2018, production from the company’s Permian assets jumped 12% sequentially and 93% from the year-ago period. Margins are expected to be higher from the basin considering that West Texas Intermediate, the American benchmark, is improving and hovering close to $60 per barrel.

Notably, to pump out five times more oil from the Permian to around 1 million barrels per day (BPD) through 2025, ExxonMobil is investing billions in the basin. It intends to deploy 55 rigs in the Permian in 2019, the most by any producer in the area. Moreover, the company is hopeful that its investment in the Permian will enable it to generate $5 billion in cash flow from operations within the next four years.

Handling Bottlenecks With Care

Although the basin took a setback in the last few quarters due to takeaway capacity constraints, major infrastructure projects are expected to come online this year and 2020, which will further boost producers’ morale. ExxonMobil is also investing in midstream assets in the region. In June 2018, the energy major created a partnership to build a multi-billion dollar pipeline, which will carry more than 1 million barrels of oil a day out of Permian to refining and export markets along the Gulf Coast. Moreover, ExxonMobil created a partnership with Microsoft Corporation MSFT on Feb 22, 2019 to improve its operational efficiencies in the Permian Basin, with the help of cloud technology.

Like ExxonMobil, other energy companies are also planning to make the most out of the basin’s low cost and premium reserves.

Competition in the Basin

ExxonMobil has Chevron Corporation CVX as a competitor in the region, which also eyes strong growth from the basin. Chevron intends to increase output from the basin to 900,000 BPD by 2023. Another energy major, Royal Dutch Shell plc RDS.A, which currently produces 145,000 barrels of oil equivalent per day in the region, intends to lift its Permian output by 30% every year. The company is on the prowlfor additional acreage in the basin in its attempts to keep up with peers.

Price Performance & Zacks Rank

Irving, TX-based ExxonMobil has gained 8.1% in the past year compared with 4.1% rally of the industry it belongs to. Currently, the company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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