The merger between energy giant Exxon Mobil (NYSE:XOM) and Pioneer Natural Resources (NYSE:PXD) is easily the biggest U.S. energy-industry deal this year, and perhaps even in your lifetime and mine.
Pioneer Natural Resources specializes in shale-oil drilling in America’s petroleum-rich Permian Basin region. Once considered rivals in the traditional-driller-versus-shale dynamic, Exxon Mobil can now create a synergistic effect with access to Pioneer’s considerable Permian resources.
Of course, there are implications for investors, and a well-known senator is weighing in on the potential impacts of this mega-merger. Some will cheer the Exxon Mobil-Pioneer deal, while others will oppose it, but no one can afford to ignore this game-changing energy combination.
A hefty price tag… or is it?
All told, Exxon Mobil will have to cough up an eye-popping $64.5 billion to subsume Pioneer’s assets and debt. However, investors should consider what Exxon Mobil stands to gain in the long run.
For one thing, Exxon Mobil now gets to operate aggressively in the Permian shale oil patch. As a result, this move should serve to diversify the company’s business model. In fact, there’s no better fit for this merger than Pioneer Natural Resources.
To quote Exxon Mobil CEO Darren Woods, “Pioneer is a clear leader in the Permian with a unique asset base and people with deep industry knowledge.”
Pioneer Natural Resources is reportedly the largest well operator in the Permian oilfield, accounting for 9% of the gross petroleum production there.
Woods also hinted at the synergistic effect of the business combo, stating, “The combined capabilities of our two companies will provide long-term value creation well in excess of what either company is capable of doing on a stand-alone basis.”
Of course, this remains to be seen, but the CEO’s optimism is understandable.
Furthermore, the $64.5 billion outlay should provide an ongoing return on investment (ROI) for Exxon Mobil, as the company expects to more than double its U.S. petroleum-production rate in the Permian Basin to around 1.3 million barrels per day. Astoundingly, Exxon Mobil claims that, post-merger, it will be able to produce 2 million barrels of oil per day in the Permian Basin by 2027. In fact, the company is targeting 5 million barrels of global daily petroleum production by 2027.
On the other hand, Exxon Mobil is reportedly paying $253 per share of Pioneer Natural Resources in an all-stock deal, and the current PXD stock price is around $240. Yet, certainly Exxon Mobil is thinking long-term and not quibbling over minor share-price fluctuations. Besides, if the takeout price values Pioneer Natural Resources at 5.9 times its earnings before interest, taxes, depreciation and amortization, it sounds like Exxon Mobil is getting a shale-patch power player at a reasonable valuation multiple.
Prepare for scrutiny… and opportunity
We’ve considered the economic implications of this historic business combination, but the ripple effects will certainly transcend dollars and cents. The merger isn’t expected to close until early 2024, but there’s already been political pushback that could create roadblocks along the way.
Sen. Elizabeth Warren, who’s on the Senate Banking panel, reportedly expressed concerns that the Exxon Mobil-Pioneer Natural Resources buyout would raise fuel costs and should be investigated by regulators.
“Oil company profiteering hits American consumers right in the wallet,” she warned, adding that the “massive acquisition will reduce competition and drive up costs.”
Warren concluded that U.S. regulators “should closely scrutinize this big oil merger.” Whether her recommended probe gains traction on Capitol Hill remains to be seen. In a time of bitter division in the U.S. government, I have my doubts.
What I can more easily envision than a congressional crusade against Big Oil gobbling up Little Oil is a surge in Permian Basin M&A activity. Bloomberg suggested that the Exxon Mobil-Pioneer Natural Resources is “poised to usher in a new era of industry-shifting takeovers,” and I tend to concur with this forecast.
After all, the simplest way for Big Oil to deal with shale-niche competitors threatening their bottom lines is to just buy them out. That’s exactly what Exxon Mobil is doing, and if the government doesn’t block the deal from going through, other energy giants will undoubtedly follow in its footsteps.
Despite this headline-grabbing news, Exxon Mobil stock has declined sharply from its recent $120ish peak. Thus, Exxon Mobil stock looks like a prime buy-the-dip opportunity for the remainder of 2023 as the company combines with a Permian powerhouse and broadens its operational business model.
