What ExxonMobil’s Merger With Pioneer Means For U.S. Shale

Whenever a merger like this week’s deal between U.S. major ExxonMobil
XOM
and Permian Basin pure-play independent Pioneer Natural Resources
PXD
is announced, the analyst community is going to produce an array of competing views about whether the transaction is wise for either or both companies. Certainly, that has been the case this week.

Will Chevron now pursue a similar deal to try to keep pace with ExxonMobil’s new scope and scale? What about ConocoPhillips and Oxy? Will the Biden Federal Trade Commission try to delay ExxonMobil’s deal from closing? These and other questions are all rising to the surface now in the wake of Tuesday night’s announcement.

The markets themselves have been non-committal on the matter, as ExxonMobil stock dropped by about 3% in the wake of Tuesday night’s announcement while Pioneer stock rose by about 1% Wednesday. It is interesting to note that Pioneer shares have not risen to the $253 valuation the deal places on it as of Thursday’s opening, though not really determinative. Obviously, many factors are impacting energy stock prices at the moment – including a new war in the Middle East – of which this merger is just one.

Analyst views on the deal appear to be generally positive. Andrew Dittmar, Director at energy consultancy Enverus, said in an email that “The offer represents an 18% premium to the undisturbed share price and a 9% premium to the 30-day volume weighted average price.”

Dittmar noted the merger’s price implies a value of more than $4 million for each of Pioneer’s drilling locations, a premium over previous Permian Basin-focused deals. “But,” he adds, “Pioneer represents a nearly unique and high-quality asset and Exxon is justified in paying a premium to secure the Permian as a foundation of its production portfolio.”

Gabriele Sorbara, managing director of equity research at Siebert Williams Shank & Co., seemed to agree with Dittmar’s view, saying the deal “is a positive read-through to the sector overall, particularly the Permian Basin players.”

“XOM will now unleash one of the most sophisticated engineering teams on a large asset footprint that will lead to more innovation and increase production growth,” Rob Thummel, Senior Portfolio Manager at Tortoise Investments, said in an email, adding that the deal “indicates oil is going to be around for awhile and the Permian Basin is going to be important globally to keeping the global oil market supplied.”

IEEFA
EFA
analysts Clark Williams-Derry and Tom Sanzillo took a contrarian view of the transaction. Noting that ExxonMobil’s stock had declined more than its peer companies since rumors of a potential deal began to circulate last week, they asserted in an email that “Markets have good reason to question the price tag for the Pioneer acquisition, since ExxonMobil has a history of overpaying and misreading the dynamics involved with major upstream asset purchases.”

FTC Review Possible

Hanold also raised the possibility of the Biden administration conducting a review of the deal for anti-trust concerns, given the formidable position ExxonMobil would assume in the Midland Basin. “A Federal Trade Commission review is quite possible but the market share of this combination appears to be under thresholds typically warranting action,” Hanold said.

Dittmar was skeptical that any FTC review would delay the deal from its anticipated closing in the first half of next year. “We don’t anticipate any significant issues,” he said. “XOM will still just control a fraction of the Permian Basin and the Permian, while central to US shale production, is integrated into national and global markets without a unique regional market.”

Dittmar also pointed to the fact that the FTC has allowed another big shale basin to become much more consolidated than the Permian would become after the completion of the Exxon/Pioneer merger. “The DJ basin is far more consolidated with just three significant participants now (OXY, CVX
CVX
and CIVI) and the FTC did not step in to block the CVX/PDC deal,” he noted.

More Big Deals Coming Soon?

Another logical question that arises in the wake of this announced merger between two U.S. shale giants becomes, who’s next? Which shale whales are hunting for other big fish to swallow up as the shale sector’s consolidation process proceeds apace?

Dittmar says to watch ExxonMobil’s U.S. rival major Chevron. “Chevron seems the most likely to respond with a transaction of its own,” he said. Dittmar notes that potential targets of varying sizes and regional positions remain standing. Reuters reported in September that at least one such company, Crownrock LP, was publicly positioning itself to be sold.

But Dittmar adds that Chevron might be looking for even bigger fish. “Chevron might prefer to make a more significant deal targeting a large-cap company like Coterra Energy or Devon Energy
DVN
which have 2,000 and 2,400 net high-quality locations, respectively.” He adds that ConocoPhillips
COP
is another company that might be talking a look at the same companies.

Sven Del Pozzo, Director of Research and Analysis at S&P Global, told Reuters that timing for more deals is right. “There is an excellent opportunity to create value now via consolidation because the stock market has been giving bigger companies better valuation multiples, making smaller companies relatively cheap if acquired by bigger companies in all-stock deals,” he said.

Del Pozzo’s view is shared by Roth MKM analyst Leo Mariani. “I generally think you are going to see some more deals,” he said Friday in an interview on CNBC. “I think the bottom line is we are kind of in a sweet spot for oil prices. I think you’ve got more sellers coming out of the woodwork now because the view is that the global economy could turn south over the next year and it’s probably a decent time for us to put our companies up for sale.”

The Bottom Line

The general consensus seems to be forming that this deal between ExxonMobil and Pioneer sets a new valuation baseline for further Permian-centric consolidation, and that pressure will now grow for ExxonMobil’s peer companies in U.S. shale to pursue deals of their own.

Further consolidation does seem inevitable given the key role economies of scale play in improving economics in the shale sector. So, absent a move by the FTC to step in to try delay this merger’s closing, it seems reasonable to expect the rumors and deals to keep coming.