What Exxon’s Ghana Deal Means For Crude Oil ETFs

by on October 8, 2009 | ETFs Mentioned:

Energy giant Exxon Mobil has agreed to buy a minority stake in an oil field off the coast of Ghana for $4 billion, the company’s first major purchase in nearly ten years. Exxon is purchasing a 23.5% stake in the Jubilee field from Dallas-based Kosmos Energy, an oil and gas exploration company that was part of the group that made the massive offshore find in 2007.

Oil Platform Off the Coast of BrazilThe Jubilee field is estimated to hold 1.8 billion barrels of oil, more than just a drop in the bucket of global supply. According to the Energy Information Administration, the world’s 15 largest oil producers delivered about 64 billion barrels per day in 2008.

Despite a strong balance sheet, Exxon has been slow to make acquisitions since the start of the financial crisis. “It also underscores a growing interest in west Africa by the oil majors, which have been limited in their ability to expand by rising resource nationalism in places such as Russia and Venezuela,” writes Martin Arnold.

There are conflicting opinions on the direction of oil prices. Some analysts believe that fundamentals are too weak to support even the current $70 level, while others see crude prices skyrocketing over the next few years. As Exxon begins looking to new corners of the world to boost its reserves (the company is also exploring areas near the Philippines, Madagascar, and Greenland), it appears the oil industry may be bullish on long-term prices.

ETF Plays On Exxon’s Ghana Deal

Drilling off the coast of Ghana likely won’t begun until at least 2010. The outcome of the project, which is far from certain, could have wide-ranging impact on energy markets around the world.

  • Energy Select Sector SPDR Fund (XLE): Exxon accounts for nearly 20% of XLE’s holdings, but the relative size of Jubilee deal (about 1% of the company’s market capitalization) makes it unlikely that any proceeds from the field will have a significant impact on the company’s share price. But some analysts view the deal as an indication that the traditionally-conservative Exxon is bullish on the long term prospects for crude oil prices, and is looking to replenish its reserves gradually. If oil prices do indeed trend higher over the long term, XLE should see continued strong performance.


  • Emerging Global Shares Energy (EEO): This ETF invests in companies focused on the development and production of crude oil and natural gas, as well as firms that provide drilling and other energy-related services in emerging markets. As the world’s largest energy companies begin to tap previously untouched emerging markets, components of EEO could benefit. EEO’s largest holdings are in Russia, India, and China.


  • Market Vectors Africa Index ETF (AFK): While about 50% of AFK’s holdings are in South Africa and Nigeria, this ETF does maintain a small allocation to Ghana (about 1% of holdings). But the Jubilee transaction could signal that the oil industry is optimistic about potential oil production in offshore Africa. A separate exploration group recently discovered another massive field about 700 miles from the Jubilee field, leading some energy analysts to believe that the stretch between the two finds could contain billions of barrels of crude oil. “Exxon’s entry amounts to a seal of approval,” writes Russell Gold. If the venture in the region proves successful, Africa could see a flood of foreign investment over the next decade. AFK’s largest individual holding is in Tullow Oil PLC, a company that owns about 35% of the Jubilee well.


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Disclosure: No positions at time of writing.