ExxonMobil’s pursuit of Pioneer Natural Resources heralds an era of potential megadeals in the US shale oil industry, analysts say, in which the long-fragmented sector is controlled by a handful of larger operators.
The top western oil supermajor was in talks with Pioneer over a potential acquisition, people familiar with the matter said this week. A takeover of Pioneer, which has an enterprise value of $56bn, would be Exxon’s biggest since its landmark merger with Mobil in 1999.
A combined company would also be the undisputed leader in the Permian Basin, the vast field in western Texas and New Mexico that has powered America’s rise to become the world’s largest oil and gas producer. Analysts say a transaction could turbocharge merger and acquisition activity in the US shale patch as other companies seek to match Exxon’s unrivalled scale.
“This is a new era in the shale industry,” said Matthew Bernstein, senior shale analyst at Rystad Energy, a consultancy. “It’s hard to overstate the importance that this deal will have in terms of the Permian becoming consolidated.”
A flurry of big M&A deals in the late 1990s and early 2000s condensed control of US oil and gas production into the hands of fewer players as BP absorbed Amoco and Arco, Chevron swallowed Texaco and Exxon combined with Mobil.
Their dominance faded as wildcatting entrepreneurs, deploying horizontal drilling and hydraulic fracturing technology, bought up drilling rights from Texas to North Dakota and unleashed the shale revolution in the past decade and a half. Pioneer, led by chief executive Scott Sheffield, was among the challengers to the likes of Exxon.
Now, as drilling inventory dwindles, a new wave of mergers is under way in the shale patch. Companies prefer acquiring new acreage through M&A rather than undertaking expensive drilling.
But a deal between Exxon and Pioneer could spark a frenzy of activity as bigger companies become acquisition targets.
“Consolidation is going to happen, regardless of the outcome of Pioneer and Exxon — but a transaction of this size certainly puts large companies into play,” said Kevin MacCurdy, director of research at Pickering Energy Partners, a Houston-based financial advisory firm.
Other big players would likely be encouraged to pursue acquisitions more aggressively. Smaller groups could also seek to merge in pursuit of scale.
“A deal would increase the pressure on Chevron, which is competing with Exxon for US and global investors’ money,” said Ryan Todd, analyst at Piper Sandler. “It would increase the relative concerns in investors’ minds on the portfolio depth between the two companies.”
Darren Woods, Exxon chief executive, has told investors his goal is to ensure the company holds best-in-class positions in all sectors in which it operates. Woods and other Exxon executives told analysts during a visit to Goldman Sachs’ headquarters last month that the oil major preferred to buy assets in the Permian with “a large, contiguous acreage that was deeper in inventory”, according to a note published by the investment bank on Friday.
Exxon’s desire to expand its oil assets reflects its belief that fossil fuels will remain part of the global economy for years to come, despite warnings that demand must fall to protect the earth’s climate.
It said it could use its proprietary techniques and technology to improve its oil and gas recovery rate in the Permian. Exxon earned record profits in 2022, had about $30bn in cash on its balance sheet as of June, while its market capitalisation was $427bn on Friday.
Analysts said Permian-focused companies such as Diamondback Energy, Permian Resources and Matador Resources Company were now likely on the radar of larger operators hunting for deals. The shares of each of these companies jumped by about 4 per cent on Friday.
Exxon, Pioneer and Chevron all said they did not comment on market rumours or speculation. The talks between Exxon and Pioneer could still fall apart.
Much of Pioneer’s acreage in the Permian is situated next to Exxon’s and a merger could allow for significant cost savings, analysts said. Pioneer is the largest producer in the basin, with 9 per cent of gross production there, while Exxon is the fifth-largest at 6 per cent, according to RBC Capital markets. The Permian produces about 5.8mn barrels of oil a day, out of about 13mn b/d in total US oil production.
Jeffrey Oliver, an antitrust expert at Baker Botts, a law firm, said an Exxon-Pioneer deal would almost certainly prompt a telephone call and some questions from the Federal Trade Commission, the US competition regulator.
“Antitrust has almost become a religion, so there will be questions about whether a deal this size is destined to get really close scrutiny,” he said, although he predicted that a deal would eventually gain regulatory. approval.
News of the takeover talks between Exxon and Pioneer sent a frisson of excitement through the shale industry, although many executives declined to comment publicly on the speculation.
One shale executive told the Financial Times that if a deal went ahead — and gained a good reception from investors — it would likely spark a “feeding frenzy” with larger operators snapping up smaller rivals.
“Everyone has been a little worried about what would shareholders do and how would they respond to a big deal like this. Well, they’re about to see,” he said.
Read the full article here
