ExxonMobil’s (XOM) nearly $60 billion acquisition of Pioneer Natural Resources (PXD) underscores Big Oil’s continued appetite for shale producers.
The deal, The move, announced earlier this week, will make the oil giant the largest player in the U.S. shale oil sector. It gives ExxonMobil a massive presence in the Permian Basin, allowing the company to double its presence in the largest oil producing region in the U.S. and strengthen its upstream portfolio. Upstream refers to the initial stages of oil and gas production such as exploration, drilling and production.
Major oil companies are increasingly turning to the Permian Basin for oil and gas, where technological advances and infrastructure have led to lower production costs.
“People are definitely going to run out of supplies in the next few years,” Pioneer CEO Scott Sheffield said during the company’s most recent earnings call on August 2. This “should lead to extreme consolidation.”
Analysts point out that consolidation has been a way of life in the oil sector for some time. In recent years, supermajor Chevron (CVX) acquired Nobel Energy, an oil and gas explorer with 92,000 acres in the Permian Basin. A year later, ConocoPhillips (COP) bought Shell’s Permian Basin business for $10 billion and Concho Resources for $17 billion.
In 2019, shale oil producer Anadarko was acquired by Occidental Petroleum (OXY) with help from billionaire Warren Buffett’s Berkshire Hathaway (BRK-A, BRK-B).
Last year, Occidental Petroleum was the best-performing stock in the S&P 500, up a whopping 119%.
“Some remain, but in the Permian Basin production began to concentrate in the hands of Chevron, Occidental, ConocoPhillips and ExxonMobil,” Peter said McNally, global sector leader for industrials, materials and energy at Third Bridge.
Citi analysts recently noted: “The logic of consolidation in the highly fragmented Permian shale remains compelling as significant gains can be achieved through economies of scale by minimizing asset expenses, optimizing drilling and reducing G&A.” [general and administrative] spend.”
The story goes on
The Pioneer acquisition 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 moving toward an economy less dependent on fossil fuels. The acquisition of Exxon highlights the challenges of this change.
“Everyone knows there will be an energy transition, but it will take much longer. It will be much more difficult. It will be much more expensive,” Roger Read, senior energy analyst at Wells Fargo, told Yahoo Finance.
“So when you look at that aspect, it shows why you would invest in oil and why Exxon would do this transaction.”
Third Bridge analyst Peter McNally points to another benefit of the merger, in addition to increasing capacity to produce more oil and gas for its downstream operations.
“ExxonMobil advances Pioneer’s net-zero plan by 15 years – to 2035 – as the company can implement its emissions reduction targets across a larger footprint,” he added.
Net zero refers to a commitment to remove the same amount of carbon from the atmosphere that a company releases, thereby offsetting the impact.
An Exxon gas station sign is seen on April 25, 2017 in Nashville, Tennessee. (Mark Humphrey/AP Photo, File)
The merger announcement comes as Pioneer’s longtime CEO Scott Sheffield is set to retire at the end of the year.
Sheffield was Pioneer’s founding CEO from 1997 to 2016. He returned to the chief executive role three years later and steered the company through the acquisitions of private rival DoublePoint Energy in 2021 and Parsley Energy in 2020, as the industry suffered from lower oil prices continued through the pandemic.
Pioneer shares had risen sharply last week amid speculation that ExxonMobil would buy Pioneer in a deal worth up to $60 billion.
On Wednesday, ExxonMobil fell 4% to trade at over $105 per share after the merger was announced. On September 28, the stock reached an all-time intraday high of $120.70.
Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre.
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