ExxonMobil (XOM 2.89%) paid out a whopping $5.6 billion to the Bass family this week in exchange for some land in everyone's favorite basin, the Permian.
In this week's episode of Industry Focus: Energy, Motley Fool energy analyst Sean O'Reilly talks with special guest host and Fool summer intern Connor Lott about the background behind the deal. Find out why Exxon, along with most of the biggest shale producers, is so eager to drill in the Permian; just how huge this deal is and how long Exxon will be paying for it; why Exxon is just getting into the Permian now, while so many of its peers have been producing there for years; and more.
A full transcript follows the video.
This video was recorded on July 6, 2017.
Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, July 6, 2017, so we're talking about energy and industrials. I'm your host, Sean O'Reilly, and joining me today in studio is one of The Motley Fool's amazing summer interns, Mr. Connor Lott. He studied at Valparaiso University, attended Notre Dame through the ROTC, and has served our country for five years as part of the armed forces. Connor, welcome to Industry Focus. Happy belated Fourth of July, and thanks for entering the Fool and for your service.
Connor Lott: Sean, thanks so much for having me on here today. It's a real pleasure. I'm excited to be here and to be part of this.
O'Reilly: Have you ever podcasted before?
Lott: I have never podcasted, so this is a first on the bucket list.
O'Reilly: You're going to send this to your parents, aren't you?
Lott: I definitely am, yeah.
O'Reilly: Do you listen to a bunch of podcasts?
Lott: I do. Now I listen to all the Motley Fool podcasts.
O'Reilly: Of course.
Lott: Of course, yeah. I'm a loyal follower along with the dozens. And a couple other business ones, and some of those comedy ones, just for fun.
O'Reilly: For sure. On today's show, we're going to be diving into a multibillion-dollar purchase by ExxonMobil of some oil acreage in Texas' Permian Basin. But first, Connor, why don't you tell us a little bit about yourself, your journey toward becoming a Foolish intern?
Lott: I started listening to the Fool when I was serving in the Army. I was out at the 101st Airborne in Fort Campbell, and I wanted to learn more about investing. I didn't have a finance background, and I came upon the podcast, and the soothing voice of Chris Hill telling me about the ups and downs of the market every single day was --
O'Reilly: Was it a surreal moment when you finally saw him in person?
Lott: I fanboyed really hard.
O'Reilly: "That's Chris Hill!" [laughs]
Lott: I think he backpedaled a little bit. He was like, "Hey, let's take this a little bit slower." So, yeah, I started listening to the podcast because I knew next to nothing about investing, and I found it incredibly fascinating, and I loved how the Fool's mission was to educate, not just push a stock or try to make a buck for themselves. So I become a very passionate listener, I subscribed to Stock Advisor for a little bit -- did drop that. I still get the emails, though, so I count that as something.
O'Reilly: We'll convert you before you leave.
Lott: Absolutely. I was getting out of the army, and about a year ago I applied for the internship, and through fate and luck, I managed to land here, and it's been an incredible experience learning and being a part of this amazing company.
O'Reilly: Awesome. You're one of two of the interns that the fool.com editorial department has with us for ... are you with us for two months?
Lott: About two months, yeah, we'll say that.
O'Reilly: Split the difference, yeah. It was endearing to me -- you aren't explicitly assigned to the energy, materials, and industrials bureau, but you were like, "I really like the Permian Basin." And I was like, "Wow, this guy is nerding out over a part of Texas." [laughs] But the stars aligned a little bit, because recently, ExxonMobil, everybody's favorite giant integrated oil major, spent a whopping $5.6 billion, and they paid this to one of America's richest families to expand their presence in the Permian Basin. Why don't you walk us first through some basic details of the deal, and what happened?
Lott: This was a pretty earth-shattering move here by ExxonMobil. Back in January of this year, they announced they were going to be buy this huge, huge tract of land out in New Mexico and part of Texas in the Permian Basin sub-sector known as the Delaware Basin from the Bass family, that's out of Fort Worth, Texas. They believe the Permian is going to double their resources to over 6 billion barrels of oil equivalent, basically, through acquiring these pieces of land and companies that the Bass family previously owned. Really, this entire area, the Permian has been a hot spot --
O'Reilly: It's the one still profitable area.
Lott: It really is. It's like the Energizer Bunny. It keeps going. It's the most resilient play in the oil market right now in the continental United States, and it has been for years.
O'Reilly: For sure. On this show, obviously, we've been talking about the Permian, with me and Taylor Muckerman and Tyler Crowe, for, unfortunately, years now. Well, fortunately. It was interesting to me, because for a long time, Exxon hasn't done the shale thing. They really haven't.
Lott: Somehow they and Chevron have really stayed away from shale, which was kind of surprising to a lot of industry analysts, because this has been a huge growth area, especially for the past decade. It's done nothing but grow.
O'Reilly: You would think those two companies would have literally an army of geologists and scientists being like, "How do we stay at the forefront of getting oil out of the ground?" You would have thought they would be in on this.
Lott: And I'm sure they do, and I'm sure there's a lot of smart people at both Exxon and Chevron that have rang the cowbell saying, "We need to get into the Permian." And they've had a presence in the Permian for this entire time, but nothing to the extent of some of these smaller, more agile companies that have come in and really made a killing in there. It seems like the general corporate strategy for Exxon for the past decade or so has been, "Let's look abroad, let's look into countries like Russia or Iraq or off the coast of Africa," where there are incredible reserves out there.
O'Reilly: You hit the nail on the head. When you're as big as Exxon, which, their market cap is bigger than the GDP of most countries, you need to find something big to move the needle. This is the Warren Buffett-Berkshire Hathaway problem, too. It's like, "What am I going to do that's going to make us tens of billions of dollars?" So where has Exxon been making most of their money for the last 10 years?
Lott: Like I said, they've been making most of their money with offshore drills, off of Africa and parts of Asia. They've been focusing also on expanding into the Gulf of Mexico and the Arctic. Their tendrils have gone out all over the world, but they seemingly missed over Texas, which is ironic. I think with a company, like you said, as large as ExxonMobil, it's really steering the ship of state, and for eight to 10 years now, that ship has been concentrating on places like Russia and the Middle East and huge reserves that are still out there. And all of a sudden, now, the new CEO, Darren Woods, is steering that ship back toward Texas and what's available here in the United States.
O'Reilly: Right. So, obviously, over that time period, they've been doing pretty well with the refining and the more advanced stuff, so that's good. Why does everybody love the Permian? This is the eternal question.
Lott: Like you said, it's an incredibly resilient area for U.S. shale. Really, it's so cheap to produce there, and to drill out there. In terms of upstream production, you're looking at right around break even cost $30 a barrel, which even compared to the Bakken oil field up in North Dakota, that's hovering right around $38. So it's dirt cheap to produce there.
O'Reilly: Not only that, but it's closer to Houston, where all the refineries are. You have pipelines. The stars have aligned for all of this. And that, it's light-years ahead of, everybody's been backing out of, I'm sure you've been listening to our recent shows, we've been talking about oil sands in Canada and all that stuff -- they need $70-$80 to start talking about profitability.
Lott: Much more expensive, yeah.
O'Reilly: What surprised you the most about this deal?
Lott: I think what surprised me the most was we think of Exxon as this monolithic, huge company. And they've come in and obviously made a huge acquisition. But what they're doing now is contracting the drilling and the operations within this enormous tract of land that they now own, out to one of the companies they bought back in 2010, called XTO Energy Inc. XTO is lighter footprint. Management is basically giving as much leash as possible to go out there and really make rain for the corporation. Which I think has surprised a lot of analysts, and surprised the oil and gas industry, because you expect Exxon to come in and try to bureaucratically control everything. But again, I think they've realized over the past decades of producing that, "Let's let XTO, who are very good at what they do, go in there and produce for us."
O'Reilly: That seems really smart. You have Exxon, market cap of $340 billion, and it's an admission that, "Yeah, we probably aren't the best people for this. We have these guys, we bought them, they've been kind of hanging out over on their own." I assume they're specialists in shale, right?
Lott: Yeah. They absolutely are. They're going to be able to compete with companies out there like [Concho Resources] or Pioneer Resources and [Occidental Petroleum], who have been thriving in the Permian and are true masters of the craft.
O'Reilly: That's actually been the funniest thing to me. I started doing the energy show essentially right before the crash happened. It was like the Valentine's Day Massacre, the Thanksgiving Day Massacre. OPEC said no more. Thanksgiving of 2014, oil just plummets. But it's been amazing to me, in the funniest thing has been how Pioneer's stock price, it's fallen a little bit, but they've been incredibly resilient, and their cost kept dropping, and it was just amazing to watch. So, bringing it back around. This is, of course, The Motley Fool. We like investing. Good deal, bad deal for Exxon?
Lott: I think it's a good deal for Exxon. I don't think you're going to see a huge uptick or downtick in the share price for the company, but it's going to play out for the over the next 10 to 20 years. This is going to be a long-developed thing. The lease, the amount of money they're giving to the Bass family, has been divided up into almost $6 billion of Exxon stock, and a $1 billion cash payout until 2032. So they're going to be paying them yearly. Yeah. So, the Bass family, they're not hurting for money right now.
O'Reilly: That is OK. [laughs]
Lott: Yeah. I wish I had some connections. But no. They're going to be developing this until at least until 2032. That's the end of the payout to the Bass family, and that's kind of when I think they're geologists and scientists have estimated that maybe the wells start running dry. So this is a long-term play. You're not going to see a lot of volatility for Exxon. But down the road, it's going to continue to be profitable for them. And, again, it's so low-cost.
O'Reilly: Yeah. I really do wonder, and this is just speculation, it's kind of known that, like we were talking about earlier, Exxon needs to find these giant reserves. Because the reserves are dropping. And it doesn't help that the price of oil is falling and you can't count something as a reserve if it's uneconomical. So I have to think this is not going to be their last deal.
Lott: No, I don't think so. I think, like I said, Darren Woods, the new CEO, he has kind of an America-first policy now. The previous CEO, now our Secretary of State, Rex Tillerson, he was very internationally minded, which is great, but you run into a lot of complications --
O'Reilly: It's a hassle, quite frankly.
Lott: It is. It's a huge hassle. There's diplomatic, there economic complications. So Darren is looking at, what can we best harvest from the United States? Yes, the price of oil is going to remain low for the foreseeable future more than likely. But we can continue to be profitable, and we can keep our costs low, which is the most important thing, as renewables are on the rise.
O'Reilly: I think you cemented ExxonMobil's new strategy, it's the low-stress strategy. [laughs]
Lott: Yeah, let's not worry about what's going on in Iraq of all places. Let's worry about--
O'Reilly: If we can make money here, low-stress ...
Lott: Keep it in Texas, yeah.
O'Reilly: For sure. Listen, man, thank you for your time, all your awesome research. I can't wait to do this again.
O'Reilly: And thanks again for becoming an intern. This has been really rewarding.
Lott: Sean, thanks so much for having me on, it was a true pleasure, and I look forward to next time.
O'Reilly: You bet. That's it for us, folks. Be sure to tune in tomorrow for the Technology show with Dylan Lewis. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at email@example.com. As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Connor Lott, I'm Sean O'Reilly. Thanks for listening, and Fool on!