On January 17th, ExxonMobil announced the acquisition of companies owned by the Bass family of Fort Worth, Texas, for un upfront cost of $ 5.6 billion to be paid in ExxonMobil shares.
An overview of conventional and shale oil extraction techniques
Conventional oil
Conventional oil production is usually accomplished through a vertical well and a standard pipe and pump production process.
More specifically, a well is drilled down until it reaches the oil deposit. The next move is the installation of a pumping system which will facilitate the extraction of the oil to the surface. This process has gone through some refinements during the last decades, allowing companies to extract oil very cheaply. The cost-per-barrel varies among countries, from the $ 10 of Saudi Arabia oil deposits to $ 20-25 of more expensive locations such as Russia and Brazil.
The conventional oil production processed are also used in the deep-water drillings, whose production costs are however higher because of the increased difficulty of drilling wells more than 1000 meters under the ocean level.
Shale oil
New extraction techniques have led to a significant increase in the use of horizontal drilling methodologies.
Differently from conventional oil wells, the perforation is not only done through a vertical well: when a deposit is reached, the drilling will be rotated of 90 degrees and will continue horizontally. In this way, it is possible to extract the so-called shale oil, i.e. oil compressed between rocks and whose extraction would be impossible through the standard production techniques.
However, shale oil drilling requires a massive amount of water, materials and chemicals to maintain the productivity of the well.
These complexities obviously have an impact on the production costs of this technique. However, the collapse of oil prices of the period 2015-2016 has led to a significant reduction in costs and a correspondent increase in productivity of shale oil wells. In the Texas Basin for example, some wells can be drilled at a cost of about $ 25-30 per barrel, significantly below the 55-60 $ per barrel required just three years ago.
Companies overview
ExxonMobil Corporation is an American multinational oil and gas company, formed in 1999 by the merger of Exxon and Mobil. It is the largest refiner in the world, headquartered in Irving, Texas, United States. ExxonMobil explores and produces crude oil and natural gas, manufactures petroleum products, and is engaged in the transport and sale of crude oil, natural gas and petroleum products.
The company also manufactures and markets petrochemicals and various specialty products. It operates through the upstream, downstream, chemical, corporate and financing segments. The upstream segment explores and produces crude oil and natural gas. The downstream segment manufactures and sells petroleum products. The chemical segment manufactures and sells petrochemicals.
ExxonMobil has acreage holdings on North and South America, Europe, Asia, Africa and Australia.
Exxon Mobil will buy companies operating in the Permian Basin from the Bass family in Fort Worth, Texas. The companies Exxon is acquiring from the Bass family, including BOPCO, hold 275,000 total acres producing more than 18,000 barrels per day in one of the highest prolific, oil prone section of the Permian Basin.
Industry Overview
The deal represents a strategic shift within the US oil shale extraction industry, with its epicenter located in the Permian Basin region encompassing Texas and New Mexico. It is worth mentioning that US shale oil accounts for 52% of total U.S. crude oil production today and its gain in prominence during the early 2010s is responsible for the almost doubling of US oil producing capacity in this period. Production has varied greatly due to a global oversupply leading to weaker oil prices, however the US now sits on a bounty of shale resources that could potentially last for decades. Globally, the recent OPEC production cuts have greatly benefited US shale oil production. Dr Fatih Birol, the IEA’s executive director mentions that “We are witnessing the start of a second wave of US supply growth’’. The IEA forecasts US shale production to grow by 1.4 million barrels per day by 2022 if prices remain around $US60 a barrel and by more than 3 million bpd if prices rise to $US80 a barrel.
The Permian Basin, where the acquisition is taking place, is an area stretching 250 miles wide and 300 miles long. According to the U.S. Energy Information Administration (EIA), the six newly discovered formations: Delaware, Glorieta-Yeso, Bone Spring, Wolfcamp, Abo-Yeso, Spaberry, fueled a 60% increase in the Permian’s output since 2007. With output totaling more than 2 million barrels per day, the Permian is the second largest oilfield in the world behind Saudi Arabia’s Ghawar field. The top 5 producers in the basin are as follows:
The Permian Basin has long been a vital energy resource for the United States, but given the fact that more recent technologies started unlocking the oil and gas trapped within the tight (shale) rocks, it is quite possible that the peak production capacity is yet to be reached.
Structure of the Deal
In the deal, ExxonMobil acquires multiple companies from different owners (worth noting is the operating entity BOPCO) for $6.6bn. A large fraction of the price ($5.6bn) is payed upfront with ExxonMobil shares while the remaining $1bn will be paid through a series of contingent cash payments beginning in 2020 and ending no later than 2032.
The companies include drilling rights across 250,000 acres in Texas and New Mexico. ExxonMobil is expecting the land to hold around 3.4bn barrels of oil. The price tag is in line with other acquisition prices for assets in this region. The acquisition just came ahead of rumours of a further rise in the prices paid for acre of drilling rights in the region.
ExxonMobil implicitly paid about 24.000 $ per acre of drilling rights, while the maximum price paid this year was 50.000 $.
Drivers of the Deal
The main driver behind this acquisition is the shift of attention of large oil companies from complex and inherently expensive multi-year projects to developments which are less costly and characterized by reduced operational risk.
Given the current volatile oil price environment, the flexibility of shale oil wells is a feature very much appreciated by investors.
A second important driver of the deal is that the acquisition will enable Exxon to significant increase the company’s reserves by more than 3.4 billion barrels of oil equivalent, more than doubling its presence in the prolific Permian Basin, the world’s lowest-cost area for shale oil production.
A spokeswoman for ExxonMobil said that the company has 10 rigs working in the Permian and plans to add 15 or more after the acquisition closes in the first quarter of 2017.
ExxonMobil daily production in the Permian Basin will also see an increase of 18.000 net oil equivalent barrels per day, about 70 per cent of which are liquid.
Sources and References: Bloomberg, Companies’ websites, Financial Times, The Wall Street Journal, workboat.com
To contact the authors:
Matei Apolzan apolzan.matei@yahoo.com
Adrian Galer adi117ro@gmail.com
Marta Naidenova marta.naidenova@gmail.com
Stefano Rovelli stefanorovelli@hotmail.it
Malte B. Schmitter malte.schmitter@cass.city.ac.uk
Bocconi Students M&A Circle 
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