Exxon Mobil’s recent arbitration loss to Chevron over the significant $53 billion acquisition of Hess has left the company reassessing its strategic options. The arbitration panel rejected Exxon’s claim to a right of first refusal, enabling Chevron to finalize the acquisition of Hess’s stake in the lucrative Stabroek Block in Guyana on July 18. Despite this setback, Exxon reported impressive second-quarter earnings of $7.1 billion, or $1.64 per share, surpassing Wall Street’s expectations of $1.54. This strong performance was bolstered by record production levels of 4.6 million barrels per day, marking the highest output since the Exxon-Mobil merger over 25 years ago.
However, the company’s profits declined by 23% year-over-year, largely due to lower oil prices, which fell by 10% amid increased output from OPEC+. With CEO Darren Woods expressing a willingness to consider acquisitions, Exxon now stands at a pivotal crossroads: should it invest further in the Permian Basin or seek opportunities in deepwater assets to diversify its portfolio?
Exploring Permian Basin Opportunities
The Permian Basin continues to present attractive acquisition opportunities for Exxon. Following its $59.5 billion acquisition of Pioneer Natural Resources in 2024, Exxon has solidified its position in the region, which is known for its low-cost, high-output shale plays. Potential targets for further mergers and acquisitions include Occidental Petroleum, which possesses significant Permian acreage but is currently facing financial constraints. This makes it a viable candidate for a strategic buyer like Exxon.
Another possibility is Diamondback Energy, valued at around $42.7 billion, which boasts a solid presence in the Delaware Basin and has a proven track record of operational efficiency. Acquiring such assets would allow Exxon to capitalize on its existing infrastructure, potentially reducing costs and increasing output. Despite these opportunities, heightened competition and rising asset valuations in the Permian Basin may pose challenges for Exxon in securing favorable deals without risking overpayment.
Diving into Deepwater Assets
Alternatively, Exxon could shift its focus toward deepwater assets, particularly in regions like the Gulf of Mexico or offshore West Africa. These high-margin, long-life projects could provide a buffer against price volatility, complementing Exxon’s existing expertise in complex, capital-intensive operations, as demonstrated by its successful ventures in Guyana.
Potential targets in the deepwater space include Kosmos Energy, which holds stakes in Ghana and Equatorial Guinea, offering access to high-yield deepwater fields. Murphy Oil, with assets in the Gulf of Mexico, could also enhance Exxon’s offshore portfolio. Pursuing deepwater acquisitions would not only diversify Exxon’s geographic footprint but also serve as a hedge against risks specific to the Permian Basin, such as regulatory challenges or resource depletion. Nevertheless, deepwater projects typically require higher upfront investments and face increased environmental scrutiny, which may complicate integration and affect public perception.
A Focus on Shareholder Value
Instead of pursuing acquisitions, Exxon could opt to prioritize returning value to shareholders through its substantial free cash flow (FCF). In the second quarter, Exxon distributed a total of $9.2 billion to shareholders, which included $4 billion in dividends and $5 billion in share repurchases. The company is also on track to buy back $20 billion in shares this year. With FCF supported by cost reductions of $1.4 billion expected in 2025 and $13.5 billion since 2019, Exxon could consider increasing its dividend, currently yielding around 3.5%, to enhance shareholder returns without the risks associated with mergers and acquisitions.
This strategy would allow Exxon to avoid the challenges of integrating new assets and the potential pitfalls of overpaying in a volatile market. However, forgoing acquisitions might limit growth in reserves and production, potentially resulting in a loss of market share to competitors like Chevron, especially in high-growth regions such as Guyana.
As Exxon Mobil navigates its options following the Hess arbitration loss, the decisions made in the coming months will likely shape the company’s trajectory in the evolving energy landscape.