Is Exxon Betting on $100 Oil?

Includes: APC, CEO, TUWOY, XOM
by: Retired User

The Jubilee oil field offshore Ghana was discovered by Tullow in partnership with Anadarko in 2007. It's a remarkable story in several respects. The deepwater Tano Basin had been previously surveyed and drilled by Phillips in the 1970s, by Arco in the late 1980s, and successively by Amoco, Hunt, and Dana Oil in the 1990s based on two 3D seismic surveys commissioned by Ghana's national oil company. Tullow did a splendid job of finding a reservoir that everyone else missed.

Privately-held Kosmos Energy LLC of Dallas was awarded a block in 2006 that overlaps about 2/3 of Jubilee and became an investment partner with Tullow and Anadarko. I haven't looked at the details of that deal, but Kosmos had $100 million in private equity cash to fund four exploration wells.

That $100 million is now worth $4 billion, according to the Wall Street Journal.

Exxon is close to inking a $4 billion deal to acquire a stake in the Jubilee oil field off the coast of Ghana, the oil company’s biggest investment in a decade. Exxon would buy the 23.5% stake held by Kosmos Energy.

Let's say hypothetically that Jubilee has 400 million bbl recoverable, and that Tullow's estimate of $5 billion subsea and topside expense is correct. Exxon (NYSE:XOM) paid $4 billion for a 1/4 share of production and probably have to pony up another $1 billion as its share of development expense. That values Jubilee at $20-$25 billion if you consider cost overruns and interest expense on borrowed money. Let's assume that the Republic of Ghana is going to get something in taxes, royalties, fees, local goods and services, training, and special gifts under the table. So Jubilee is a $28 billion asset.

400 million bbl x $50 = $20 billion

Ooops. Obviously there's something wrong with my arithmetic. Maybe Exxon's $4 billion includes its capex contribution, which values the project at $20 billion total (breakeven at $50 a barrel).

I'm certain Tullow and Anadarko will flip their shares to CNOOC and Shell, both of which expressed interest and prompted Exxon to move fast and first. Some industry analysts expect Exxon to make a corporate takeover offer for Tullow, which is exactly how supermajors grew oil reserves in the past couple decades -- by merger and acquisition.

But Exxon's $4 billion says they aren't betting on $50 oil, the long term average. They need $100 a barrel to make Jubilee a risk-free investment with 10% annual return in my opinion.

Disclosure: no position in companies mentioned, ETFs, or oil options.