ExxonMobil (XOM +1.99%) closed its roughly $60 billion megadeal for Pioneer Natural Resources in May. The transformational transaction will double its footprint in the resource-rich Permian Basin. It will also give it the fuel to grow its production to 2 million barrels of oil equivalent per day (BOE/d) by 2027, up from 1.3 million BOE/d after closing the deal.
The Pioneer transaction will also enable ExxonMobil to high-grade its portfolio by selling noncore assets. It recently put about $1 billion of oil and gas properties in the Permian Basin on the market. Here's a look at why the company is selling assets in an area that it recently spent billions of dollars to enhance.
NYSE: XOM
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Sharping its focus on the core
ExxonMobil is currently marketing 14 asset groups in the Permian Basin. It operates eight of those properties and owns non-operated interests in six others. Exxon is hoping to fetch $1 billion by selling these oil and gas properties.
What's important to note about these properties is that they're conventional production assets. These legacy oil and gas assets use a different production technique than the primarily unconventional shale assets Exxon picked up in the Pioneer deal. Since unconventional assets -- those developed with horizontal drilling and hydraulic fracturing -- produce more oil and gas than conventional wells, drilling these wells generates higher investment returns.
Exxon is selling these assets as part of its routine evaluation of its global portfolio. The company will regularly sell noncore assets to maintain a strong balance sheet and recycle capital into higher-returning new investments. The oil giant noted in its corporate plan update last December that "the portfolio value is being continuously upgraded through divestments of nonstrategic assets and continued investment in advantaged sites." For example, the company is also selling its oil and gas assets in Nigeria for $1.3 billion, as well as those it owns in Malaysia.
These sales build cash on its balance sheet. Exxon ended the second quarter with $26.5 billion of cash and a low 6% leverage ratio. That gives it the flexibility to continue investing in growing its business during periods of lower oil prices.
Following the leader
ExxonMobil isn't the only oil company with an active divestiture program. For example, rival Occidental Petroleum (OXY +1.86%) set a target to sell $4.5 billion to $6 billion of assets following its $12 billion acquisition of Permian-focused CrownRock. Whereas Exxon doesn't need to sell assets, Occidental's program will help it repay a portion of the debt it incurred to buy CrownRock. Occidental has already agreed to sell $1.7 billion of assets, including agreeing to an $818 million deal for its Barilla Draw assets in the Permian. Those sales, along with excess free cash flow, have the oil giant on track to achieve 85% of its initial debt reduction target.
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Fellow big oil behemoth Chevron (CVX +1.66%) also plans to launch an expanded asset sales program following its pending acquisition of Hess. With a stronger portfolio after closing the deal, the company plans to sell $10 billion to $15 billion in assets through 2028. It intends to sell some assets that will be highly attractive to other companies. Chevron can part with them because it has higher-quality assets in its upgraded portfolio. Those sales will enable it to high-grade its portfolio and build additional cash, giving it more flexibility to invest in growing its business and return money to investors during future periods of lower oil prices.
Buying and selling to get better, not bigger
ExxonMobil is working to build the best oil company it can. It does that by capitalizing on opportunities to improve its portfolio by acquiring core assets and then selling off noncore positions. That strategy enables it to continually strengthen its portfolio and financial profile. That's why rivals like Occidental and Chevron are following its lead by selling assets after their major acquisitions. This strategy of focusing on getting better and not necessarily bigger should create more value for their shareholders over the long term.
