ExxonMobil’s (XOM) recent acquisition of Pioneer Natural Resources (PXD) at the beginning of this week underscores the growing appetite of major oil companies for shale producers.
With this deal, ExxonMobil is poised to emerge as the leading entity in the U.S. shale oil market. ExxonMobil will double its scale in the Permian Basin, the largest oil-producing region in the U.S., bolstering its upstream portfolio. The term ‘upstream’ refers to the initial stages of oil and gas production, including exploration, drilling, and extraction.
Large oil corporations are increasingly relying on the Permian Basin due to technological advancements and infrastructure improvements, which have reduced extraction costs.
Scott Sheffield, CEO of Pioneer Natural Resources, mentioned in a recent earnings call on August 2nd that “there will certainly be a shortage of inventory in the coming years,” leading to “intense consolidation.”
Analysts point out that consolidation has been a common occurrence in the oil sector for a long time. Over the past few years, major oil company Chevron acquired Nobel Energy, an oil and gas exploration company with 92,000 acres in the Permian Basin. A year later, ConocoPhillips purchased Shell’s Permian Basin operations for $10 billion and Concho Resources for $17 billion.
In 2019, shale producer Anadarko was acquired by Occidental Petroleum with the assistance of billionaire Warren Buffett’s Berkshire Hathaway.
Last year, Occidental Petroleum was the best-performing stock in the S&P 500, surging by 119%.
Peter McNally, Global Head of Industrials, Materials, and Energy at Third Bridge, stated, “Although there are fewer companies left, production in the Permian Basin has started to concentrate in the hands of Chevron, Occidental, ConocoPhillips, and ExxonMobil.”
Recent Citigroup analysts mentioned, “The logic of consolidating the Permian Basin remains attractive, given the significant benefits from economies of scale, minimizing facility expenditures, optimizing drilling, and reducing G&A expenses.”
This acquisition of Pioneer is Exxon’s largest since its merger with Mobil in 1999. The deal comes at a time when the U.S. and other countries are transitioning to economies less reliant on fossil fuels. Exxon’s acquisition highlights the challenges of this transition.
Senior energy analyst at Wells Fargo, Roger Read, told Yahoo Finance, “Everyone knows there will be an energy transition, but it will take much longer, be much more challenging, and cost much more.”
Peter McNally of Third Bridge highlighted additional benefits of the merger for ExxonMobil beyond increasing its capacity to produce more oil and gas for downstream operations.
He added, “ExxonMobil can expedite Pioneer’s net-zero plan by 15 years to 2035, as it can align emission reduction targets over a broader operational scope.”
News of the acquisition comes as Pioneer’s long-time CEO, Scott Sheffield, is set to retire by the end of the year.
Sheffield, who was Pioneer’s founding CEO from 1997 to 2016, returned as CEO three years later and led the company through the acquisition of Parsley Energy in 2020 and DoublePoint Energy in 2021, as the industry grappled with oil price declines due to the pandemic.
Pioneer’s stock price surged last week amid speculations of ExxonMobil acquiring it for a value reaching $60 billion.
ExxonMobil’s stock price remained above $105, dropping 4% after the merger announcement on Wednesday. The company’s stock had hit an all-time high of $120.70 during trading on September 28th.
The deal is expected to conclude by mid-2023, subject to regulatory approvals and other conditions.
ExxonMobil stated in a press release, “This deal will advance our growth strategy, strengthen our foothold in the U.S. shale assets, and diversify our global upstream portfolio.”
Scott Sheffield of Pioneer commented, “This transaction represents the next step for Pioneer’s growth and value creation.”
The deal is one of the major transactions in the oil and gas industry in recent years.
Last year, Occidental Petroleum acquired Canadian oil company Nexen for $45 billion.