Energy stocks have started the year strong, with the Energy Select Sector SPDR ETF up 13.5% in the first quarter. Two of the stocks helping power those returns are the ETF's top two holdings: ExxonMobil (XOM 1.37%) and Chevron (CVX 0.63%). The two companies continue to have some of the best prospects in the energy patch and share a lot in common.
NYSE: XOM
Key Data Points
Guyana is a prized asset
One of the most exciting oil projects in the world is an offshore oil project off the coast of South American country Guyana. ExxonMobil found 11 billion barrels of reserves in the region and is expecting gross production from its Stabroek block project to reach 1.2 million barrels a day in 2027. However, that reserve amount could grow, as the company is still searching for new discoveries in the region.
While the size of the discovery is massive, just as important, the project has some of the best drilling economics outside of the Middle East. Energy research firm Rystad estimates the project to have breakeven costs of approximately $28 a barrel. By comparison, the average breakeven in the U.S. is about $54 a barrel with the Delaware Permian the lowest in the U.S. with an average breakeven around $46 a barrel.
For its part, ExxonMobil operates the project and owns 45% of the Stabroek block. Chevron, meanwhile, is in the process of acquiring Hess, which owns a 30% stake in the project. China's CNOOC owns the remaining 25% of the project.
ExxonMobil should be a big beneficiary of the basin in the years to come, while Chevron should benefit if the Hess deal closes. However, ExxonMobil and CNOOC have both filed arbitration that they have a right of first refusal when it comes to a sale of the Guyana stake. Chevron disagrees, and many institutional shareholders of the company have taken that view as well. However, the fact that this arbitration is even taking place shows how highly prized this Guyana project is.
Image source: Getty Images.
Permian growth driver
Another big basin that ExxonMobil and Chevron are both focused on is the Permian Basin in Texas and New Mexico. The Permian has been the fastest-growing oil basin in the U.S. with the Delaware Permian having the lowest breakevens in the country and the Midland Permian having the second-lowest breakevens at around $52 a barrel.
The Permian has been a big growth driver for Chevron, with the basin delivering record production for the company in Q4 of 867,000 barrels of oil equivalent per day. The company is looking to increase its Permian production to 900,000 barrels of oil equivalent per day by the end of 2024 and to 1 million barrels of oil equivalent per day by the end of 2025.
ExxonMobil is also focused on growing its Permian production as well. The company will look to grow its Permian production to 650,000 barrels of oil equivalent per day at the end of this year, and take it to 1 million barrels of oil equivalent per day by the end of 2027 on a stand-alone basis. Overall, it's looking for production growth of about 13% a year from the basin.
However, ExxonMobil is in the process of acquiring Pioneer Natural Resources to get an even larger position in the Permian. Combined, it is looking to increase its Permian production to 2 million barrels of oil equivalent per day by the end of 2027. Most of Pioneer's acreage is in the Midland part of the Permian, and ExxonMobil thinks it can extract about $2 billion in synergies from the deal, largely coming from improved resource recovery and drilling and completion cost efficiencies.
NYSE: CVX
Key Data Points
Two great oil stocks
When investing in oil stocks, what basins the companies are in and their economics is important. Oil prices will fluctuate over time, so having low cost production is paramount to riding out various commodity cycles. When taking into consideration pending acquisitions, ExxonMobil and Chevron give investors solid exposure to two of the best oil basins in the Americas: Guyana and the Permian.
Chevron's pending deal with Hess and the arbitration over Hess' Guyana stake do add some risk, but that shouldn't deter investors. Even if the Hess deal does not go through, Chevron investors are left with a strong Permian play that is one of the largest positions in Warren Buffett's portfolio. Both companies should be long-term winners.
