ExxonMobil buys shale giant Pioneer Natural Resources in major resource boost

ExxonMobil on Oct. 11 announced a definitive agreement to buy US shale pioneer Pioneer Natural Resources in an all-share deal worth $59.5 billion that it said would more than double its Permian Basin footprint.

The US major estimated the combination of Pioneer's acreage, regarded as the highest quality resource position in the Permian, with its own would lift its total in-basin resources to 16 billion barrels of oil equivalent and enable combined production in the basin of approximately 2 million boe/d by 2027.

"When combined with our technology and industry-leading operational capabilities, we know that together, we can unlock far more value than either of us could alone," ExxonMobil CEO Darren Woods said Oct. 11 during a conference call discussing the merger.

Acreage positions

The deal "combines Pioneer’s more than 850,000 net acres in the Midland Basin with ExxonMobil’s 570,000 net acres in the Delaware and Midland Basins, creating the industry’s leading high-quality undeveloped US unconventional inventory position," according to the merger announcement.

ExxonMobil estimated Pioneer's assets would yield a cost of supply below $35/b and facilitate double-digit returns.

According to S&P Global Commodity Insights, Pioneer currently has roughly 5,706 wells in the Midland Basin, with the bulk of those high quality, with breakevens ranging from $60.15/b to $71.71/b. ExxonMobil has roughly 1,907 wells in the Midland. The bulk of those have breakevens ranging from $67.84/b to $84.05/b.

At the close of the deal, ExxonMobil’s Permian production volume would more than double to 1.3 million boe/d, based on 2023 volumes.

Woods boasted of the quality of Pioneer's assets and said the contiguous nature of the company's acreage would be complementary to ExxonMobil's ambition to drill longer laterals of up to four miles and to get the most out of its wells.

"The long laterals, if you can do them is one thing. Making sure those laterals are in the right place and producing at the right rate, that's a whole other game," Woods said Oct. 11, expressing that ExxonMobil has developed superior fracturing and well completion techniques.

"If you then couple that with Pioneer's acreage and the fact that they have the best acreage in the Midland Basin, and you bring some of these techniques that we picked up from around our broader experience set, that is a powerful combination."

Pioneer most recently guided to 697,000-717,000 boe/d for its full-year 2023 outlook.

According to TPH Energy analysts, ExxonMobil may look to "accelerate production" on Pioneer's assets in order to reach a 2027 output target of 2 million boe/d.

Combined crude and condensate production in the Permian Basin is expected to grow to 6.78 million b/d by the end of 2024 from 6.35 million b/d in August, according to S&P Global analysts.

Market analysts generally viewed the acquisition as a very favorable deal for ExxonMobil for adding considerable depth to the major's resource inventory and strengthening its advantages as a force across oil and gas business segments.

"Over the past five years, ExxonMobil has invested heavily to build out a large, integrated 'machine' on the US Gulf Coast, leveraging its growing Permian production across refining, petrochemicals, and even carbon capture," analysts with Piper Sandler said in a note. "We expect this deal to both accelerate and extend the benefits of this Gulf Coast position."

ExxonMobil in July announced its acquisition of Denbury for $4.9 billion, driven primarily by carbon storage and storage opportunities.

ExxonMobil said it envisions the combination of its own and Denbury's assets and capabilities with the potential to profitably reduce emissions by more than 100 mt/year in one of the nation's highest-emitting regions.

Decoupling from volatile oil prices

Despite having $29.5 billion in cash on its books, ExxonMobil chose to use its stock as currency because it decouples the deal from volatile commodity prices, Woods said Oct. 11.

"We think a stock transaction actually helps insulate us from the particular part of the commodity cycle that you're in," Woods said. "Both Pioneer stock and our stock moves with commodity cycles… Currency grows with the commodity cycle and declines as the commodity cycle comes off. And therefore, we've got some insulation from that exposure and why we were comfortable doing a stock transaction."

While touting the $5 billion in fresh free cash flow that Pioneer will add to ExxonMobil's results next year, ExxonMobil executives would not commit themselves to a dividend increase or a change in share buyback plans in 2024. ExxonMobil plans to buy back $17.5 billion worth of its stock in 2023 and 2024, CFO and Senior Vice President Kathryn Mikells said on the call.

Because of financial regulations, Pioneer will only pay 25% of its anticipated variable dividend for the fourth quarter 2023 and 50% in the first quarter of 2024, Mikells said. Its base dividend will remain intact. Prior to the deal, Pioneer spent 75% of its free cash flows on returns to shareholders — base dividend, variable dividend and share repurchases — for a total of $25.44 per share in 2022 and $8.92/share for the first two quarters of 2023.

As for ExxonMobil, "I am never going to get out in front of ExxonMobil's board of directors," Mikells said, although she expects the board to take up dividends in the fourth quarter as it has done in the past.

M&A momentum

The $60 billion deal "is the largest ever reported US shale transaction," bringing year-to-date activity to $98.2 billion, said S&P Global analyst Rene Santos.

Total US shale M&A activity in 2022 totaled 34.5 billion, according to S&P Global data.

The acquisition, which has been rumored since the spring, will revive memories of ExxonMobil's earlier major shale acquisition, that of XTO Energy in 2010, for which the major was widely considered to have overpaid.

"The unique, complementary fit of Pioneer’s contiguous acreage will allow ExxonMobil to drill long, best-in-class laterals -- up to four miles -- which will result in fewer wells and a smaller surface footprint," ExxonMobil said.

The proposed combination adds to the more than half-dozen Permian Basin transactions to be announced in 2023, the most recent of which was Civitas Resources' agreement to acquire Midland assets from Vencer Energy for $2.1 billion in cash and stock.

The ExxonMobil purchase of Pioneer may spur more M&A activity in the Permian Basin, according to analysts.

While Pioneer "is an unmatched pure-play Midland Basin player with a deep inventory across a large contiguous acreage position, we believe this transaction is a positive read-through to the sector overall, particularly the Permian Basin players, as the Majors are now likely to step up to try to compete with [ExxonMobil], driving up valuations for the high-quality players remaining," said Gabriele Sorbara, managing director of equity research at Siebert Williams Shank & Co. The most likely "takeouts," according to Sorbara, are Devon Energy, Diamondback Energy, Marathon Oil, Matador Resources, and Permian Resources.