Commodities
Exxon investors ready to embrace buying existing oil over new drilling
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© Reuters. FILE PHOTO: The logo of Exxon Mobil Corporation is shown on a monitor above the floor of the New York Stock Exchange in New York, December 30, 2015. REUTERS/Lucas Jackson/File Photo
By Sabrina Valle
HOUSTON (Reuters) -Exxon Mobil’s investors now prefer the company use its share price and financial might to acquire existing oil and gas production rather than spend on drilling that could take years to pay off.
In the last four years energy investors have dumped stocks in oil companies that boost capital spending, favoring higher returns over spending on costly, long-term new projects. But Exxon shares last month hit a record high of $120, lifted by returns on its oil, gas and refining businesses.
Its talks to acquire Pioneer Natural Resources (NYSE:), the No. 2 Permian shale oil producer, for $60 billion, signals it is ready to pay up for production after missing its own output targets in the Permian.
A deal would bring Exxon to about 1.33 million barrels of oil and gas per day, the largest in the oilfield. In 2019, it set a 1 million barrel per day goal for 2025 and more recently pushed it back to 2027.
“There is incredible political pressure against drilling new holes in the ground to find oil and gas,” said Bill Smead, chief investment officer at Smead Capital Management, which manages $5.2 billion in funds, 25% of which are devoted to oil and gas.
“So it makes complete sense to buy a smaller company. Pioneer has fantastic reserves,” he said.
Pioneer’s balance sheet makes it a good candidate for acquisition, said Vince Lorusso, president of hedge fund Clough Capital Partners, which manages $1.3 billion in client assets. It has good reserves, growing production, spending in check and debt at healthy levels, he said.
“Management has been really good stewards of capital,” Lorusso said. “From the perspective of Exxon this acquisition would make a lot of sense.”
The surge in oil and gas prices following Russia’s invasion of Ukraine underscored the need for fossil fuels despite rapid gains in solar and wind energy. Reduced spending by U.S. oil producers allowed OPEC members to increase global oil prices this year by cutting their production.
Analysts say acquisitions are readily embraced if a deal can generate high cash flow for the acquirer, said Rystad’s head of Shale Research Alexandre Ramos-Peon.
“These companies are sitting on record amounts of cash,” he said. “You buy a cash positive business, with cash that is otherwise not going to be used.”
Exxon was hoarding cash this year after paying off the huge debt it ran up in 2020 during the COVID-19 oil-price collapse. It has been holding some $30 billion in cash for the past year to give it the financial leeway to act when oil cycles turned, the company’s Chief Financial Officer Kathryn Mikells said in July after second-quarter earnings.
KING OF THE PERMIAN
A deal would not be Exxon’s first or second in shale. It paid $36 billion to acquire XTO Energy in 2010 after missing the first phase of the U.S. shale revolution. In 2017, it followed up that with a $6.6 billion purchase to bulk up its Permian assets from the billionaire Bass family.
That track record worries some.
“Exxon’s endeavor to acquire large U.S. producers has not been widely seen as successful by investors,” said Scott Hanold, a RBC Capital Markets oil analyst. “The cultures tend to differ quite a bit between U.S. E&Ps and larger, more integrated entities.”
But in recent years, the oil industry has turned away from drill-bit exploration and embraced purchases of existing production rather than untapped fields. Oil firms have grown accustomed to making routine purchases, say analysts.
A Pioneer acquisition would expand Exxon’s Permian acreage position by about 84% to around 2 million acres. And consolidate its spot in two giant oil producing regions in the Americas – U.S. shale and Guyana.
Exxon holds 45% stake in a Guyana consortium that aims to produce 1.2 million barrels by 2027, with most of the capital spending already budgeted.
“If ExxonMobil (NYSE:) is crowned the undisputed king of the Permian in the coming days, the shale sector will fundamentally become a more mature consolidated business,” said Matthew Bernstein, a senior shale analyst with consultancy Rystad Energy.
Commodities
Oil prices settle lower after weak August jobs report adds to demand concerns
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Investing.com — Oil prices settled lower Friday, ending the week with a loss as weaker U.S. nonfarm payrolls stoked concerns about an economic-led slowdown in crude demand.
At 2:30 p.m. ET (1430 GMT), the futures (WTI) traded fell 2.1% to settle at $67.67 a barrel, while contract fell 2.2% to $71.06 per barrel.
U.S. economic slowdown worries resurface after weak jobs report
The US economy added fewer jobs than anticipated in August, but rose from a sharply revised July figure, according to Labor Department data that could factor into the Federal Reserve’s next policy decisions.
Nonfarm payrolls came in at 142,000 last month, up from a downwardly-revised mark of 89,000 in July. Economists had called for a reading of 164,000, up from the initial July mark of 114,000.
Following the release, bets that the Fed will introduce a deeper 50 basis-point rate cut — rather than a shallower 25 basis-point reduction — increased.
Concerns about the demand come just a day after OPEC+ said it had agreed to postpone a planned increase in oil production for October and November.
U.S., Europe working on Iran sanctions
Geopolitical tensions ratcheted up on Friday after the U.S. and Europe they were working on sanctions to impose on Iran after the Tehran sent missiles to Russia.
The U.S. had previously warned Iran about transferring missiles to Russia, saying it would represent a major escalation in Iran’s support of Russia’s war against Ukraine.
Commodities
Goldman Sachs expects OPEC+ production increases to start in December
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(Reuters) – Goldman Sachs adjusted its expectations for OPEC+ oil production saying it now expects three months of production increases starting from December instead of October, the bank said in a note on Friday.
OPEC+ has agreed to delay a planned oil output increase for October and November, the producers group said on Thursday after crude prices hit their lowest in nine months, adding it could further pause or reverse the hikes if needed.
However Goldman Sachs maintained its range of $70-85 per barrel and a December 2025 Brent forecast at $74 per barrel.
The investment bank expects the effects of a modest reduction in OPEC+ supply in the upcoming months to be counterbalanced by easing effects from the current softness in China’s demand and faster-than-expected recovery of Libya’s supply.
“We still see the risks to our $70-85 range as skewed to the downside given high spare capacity, and downside risks to demand from weakness in China and potential trade tensions,” Goldman Sachs said.
Brent crude futures were down $1.63, or 2.24%, to $71.06 a barrel on Friday, their lowest level since December 2021. U.S. West Texas Intermediate crude futures fell $1.48 on Friday, or 2.14%, to $67.67, their lowest since June 2023. [O/R]
Commodities
Citi, Bank of America see oil prices potentially going to $60
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Investing.com — Strategists at Citi Research said oil prices could decline to around $60 per barrel by 2025, citing a significant market surplus as the primary driver.
While recent supply disruptions in Libya and a delayed production cut unwinding by OPEC+ have offered short-term support for Brent prices in the $70-72 range, Citi views this as temporary.
“At the time of writing, markets have not reacted to the OPEC+ decision, with Brent around flat to the 4 September close. Still, the Libyan situation could take months rather than a week to resolve, strategists wrote.
They highlight the likelihood of a strong market surplus emerging next year, pushing prices lower.
“We recommend selling on a bounce toward ~$80 Brent, as we look ahead to moves down to the $60 range in 2025 as a sizeable market surplus emerges,” the note states.
OPEC+ has delayed the start of its planned production cut unwind from October 2024 to December 2024, with the process now set to conclude by the end of 2025. This decision comes in response to recent market weakness and price declines, despite ongoing disruptions to Libyan oil supplies and broader economic concerns in the U.S. and China.
Separately, Bank of America’s Commodities Research team has revised down its price forecast to $75 per barrel for the second half of 2024, down from nearly $90, and for 2025, reduced from $80.
The team cites concerns about growing global oil inventories despite assuming OPEC+ will delay planned production increases. They note that weaker demand growth, combined with record OPEC+ spare capacity exceeding 5 million barrels per day, has dimmed the outlook for oil prices.
“In effect, we now see Brent oil prices moving from the top toward the middle of our unchanged $60-80/bbl medium-term range faster than previously warned,” BofA strategists said. This surplus in capacity, along with slower demand, also reduces the risk of price spikes from potential geopolitical disruptions.
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