By Jian Wee Soh, Yagnesh Patel, Aaren Tan, Arfred Garcia, Bharath Sivakumar, Gulled Bulhan (Imperial College London), and Heather Leung, Annabel Lai, Sanghyeon Kim, Freya Zhang (HKUST)
Photo: Chris LeBoutillier (Unsplash)
Overview of the deal
Acquirer: Exxon Mobil Corporation
Target: Pioneer Natural Resources
Implied Equity Value: $59.5 billion
Total Transaction Size:
Closed date: H1 2024
Target advisor: Goldman Sachs, Morgan Stanley, Petrie Partners, and Bank of America Securities (financial), Gibson, Dunn & Crutcher LLP (legal)
Acquirer advisor: Citi (lead financial) and Centerview Partners (financial), Davis Polk & Wardwell (legal)
Exxon Mobil (NYSE: XOM) announced on October 11, 2023, its acquisition of Pioneer Natural Resources (NYSE: PXD) in a $59.5 billion all-stock transaction, valuing Pioneer's shares at $253 each. As part of the agreement, Pioneer shareholders will receive 2.32 shares of Exxon for each Pioneer share. The acquisition, including debt, will require a commitment of approximately $64.5 billion by Exxon.
Upon the completion of this transaction, Exxon's production volume in the Permian Basin, widely recognized as the most prolific oil field in the United States, is projected to more than double, reaching a daily output of 1.3 million barrels. This acquisition will establish Exxon as the leading producer in the Permian Basin and significantly expand its portfolio of undeveloped unconventional resources in the United States.
This deal represents a significant strategic consolidation within the US energy sector, leveraging technology, operational expertise, environmental awareness, and robust financial resources. The acquisition will combine Pioneer's substantial land holdings, entrepreneurial culture, and extensive industry knowledge with Exxon Mobil's strong financials, cutting-edge technologies, and industry-leading capabilities in project development. The transaction is anticipated to yield significant double-digit returns by efficiently utilising more resources while also minimising environmental impact.
“Their [Pioneer] tier-one acreage is highly contiguous, allowing for greater opportunities to deploy our technologies, delivering operating and capital efficiency as well as significantly increasing production. As importantly, as we look to combine our companies, we bring together environmental best-practices that will lower our environmental footprint and plan to accelerate Pioneer’s net-zero plan from 2050 to 2035.” - Darren W. Woods, Chair and CEO (Exxon Mobil)
Company Details (Acquirer - Exxon Mobil)
ExxonMobil is an American multinational petrochemical and energy conglomerate with a strong focus on the exploration for, and production of crude oil and natural gas. The company’s operations encompass revenue streams derived from production, trade, transport, and sale of crude oil, natural gas and other energy-related specialty products. With a diversified portfolio, ExxonMobil operates across four key business segments: Upstream, Energy Products, Chemical Products, and Specialty Products, the latter including Finished Lubricants, base stocks and waxes, synthetics, and elastomers and resins. In terms of revenue mix, the Energy Products segment holds the largest share, followed by the Upstream segment responsible for exploration and production of crude oil and natural gas. The Upstream segment accounts for the most of the company’s earnings.
Founded in 1882, headquartered in Spring, Texas
CEO: Darren W. Woods
Number of employees: ~62,000
Market Cap: $433.74bn (as of 24/10/2023)
EV: $445.71bn
LTM Revenue: $367.98bn
LTM EBITDA: $79.14bn
LTM EV/Revenue: 1.23x
LTM EV/EBITDA: 4.97x
Recent Transactions: $4.9bn acquisition of Denbury (Jul 2023); $436mn acquisition of PT Federal Karyatama (Jun 2018); $2.5bn acquisition of InterOil (Feb 2017)
Company Details (Target - Pioneer Natural Resources)
Pioneer Natural Resources is an American oil and natural gas exploration company that operates primarily in the Cline Shale, which is part of the Permian Basin, owning over 850,000 net acres. The company produced approximately 650,000 barrels of oil equivalent per day during 2022, of which the majority was petroleum (58%), natural gas liquids (23%) and natural gas (18%). Pioneer has a strong emphasis on sustainability, with aims of reducing freshwater usage to 20% by 2026, and reaching net-zero by 2050.
Founded in 1997, headquartered in Irving, Texas
CEO: Scott D. Sheffield
Number of employees: 2,076
Market Cap: $55.67bn (as of 29/10/2023)
EV: $61.15bn
LTM Revenue: $20.39bn
LTM EBITDA: $10.11bn
LTM EV/Revenue: 3.00x
LTM EV/EBITDA: 6.04x
Projections and Assumptions
Short-term consequences
In the short-run, ExxonMobil is set to increase the production of key hydrocarbons, such as crude oil and natural gas, by integrating larger volumes from Pioneer's expanded Permian assets. Within a year of completing the acquisition, ExxonMobil will rapidly expand its operational scale in the lucrative Permian Basin by adding over 850,000 acres from Pioneer's assets, accessing higher daily production from the Midland Basin and efficiently distributing increased supplies to meet energy demand.
Upon closure of the transaction, the current top executive team at Pioneer, led by CEO Scott Sheffield, will step down. As per the deal's terms, the COO, Rich Dealy, is expected to assume a new position at ExxonMobil. Exxon CEO Darren Woods has assured that job cuts will be minimal during the integration process, with a focus on retaining most employees through cross-training, coordination among leaders, and preservation of operational roles throughout the transition.
ExxonMobil's all-stock acquisition of Pioneer Natural Resources is expected to be financially accretive in the short run, strengthening its portfolio in the lucrative Permian Basin with high-quality assets. The integration of operations is projected to generate substantial cost synergies and revenue gains, potentially resulting in around $2 billion in "merger synergies" for Exxon. These synergies are expected to outweigh the one-time deal costs.
Additionally, although there was an initial 3.6% decline in Exxon's stock following the announcement, the acquisition did not significantly burden the balance sheet with new debt. While leverage ratios may increase incrementally, Exxon is acquiring Pioneer's resources at a cost below $35 per barrel, despite the acquisition's price tag exceeding $60 billion. As a result, the deal is expected to have an immediate positive impact on Exxon's earnings per share (EPS) and free cash flow.
Long-term Upsides
Exxon, one of the world's largest oil producers, gains further access to oil reserves in the lucrative Permian Basin with this $60 billion deal, valuing Pioneer above its current market worth but acquiring Pioneer’s resources at a cost below $35 per barrel. Exxon’s technological and longer depth drilling advantages can increase the efficiency of Pioneer’s extraction techniques through the newly made synergy. Exxon also has a portfolio of pipelines in which they can integrate the newly acquired basin to the midstream and downstream assets along the US Gulf Coast, giving Pioneer newly available export capability and trading optionality. This long term vision to increase free cash flow is also coupled with the fact that Pioneer’s acreage in the Midland Basin is one of U.S.’s largest untapped fields, thus providing mid to long term accretion for Exxon’s EPS and FCF. With the strengthened Permian footprint, this alleviates shareholders’ pressure on Exxon to increase oil reserves, but in a way that receives less political scrutiny as compared to the conventional methods such as drilling more holes.
Exxon in the long term also benefits from Permian’s accelerated plan of reducing greenhouse gas emissions to net zero by 2035. This eases political pressures faced by Exxon throughout the energy transition, and provides ample opportunities for Exxon to integrate their ‘aggressive’ fugitive methane detection techniques.
In terms of growth, the merger provides a substantial revenue boost, potentially bringing Exxon's sales 37% above pre-pandemic levels. The combined power after the merger could produce 2 million barrels a day in the Permian by 2027, which represents almost 2% of the total global oil supply. As for earnings, Exxon's profitability is expected to decrease in the short term but stabilise and grow in 2024. Its forward P/E ratio is slightly above the industry average but well below the S&P 500's. Pioneer's earnings are also set to dip in the near term, with a rebound anticipated in 2024, and its forward P/E ratio is in line with the industry average, offering a discount compared to the benchmark.
Risks and Uncertainties
While uncertainties are prevalent on multiple facets of this transaction, we believe that macroeconomic and ESG risk pose the greatest threat to this transaction. The most important question to ask is, “Does this transaction make sense for the shareholders?” With an 18% premium to share price and an ambitious projection of $2 billion in synergies arising from recovering more resources, the transaction is complex and hard to predict. A potential reason for this premium is that Pioneer has benefited from an improvement in productivity in their drilling processes which has boosted their results and market cap. This is most likely to be short lived and a near term benefit which is unlikely to translate into material synergies that will be beneficial to shareholders. Exxon is counting on the price of oil to remain higher than the $84 a barrel mark at the time of acquisition which is significantly higher than the EIA’s forecast of $61 a barrel in 2025 and $73 a barrel by the end of the decade. Governments around the world have made pledges to net zero targets and if enforced, could lead to oil demand halving by 2050. This is a major risk that is simply out of Exxon’s control and would render the deal dilutive. Another key metric to look at is the declining rig activity which may suggest the start of a decline in the overall oil and gas production.Thus, Exxon may increase market share through this transaction but however, with the market decreasing in size as a whole, it would have minimal impact on shareholder value creation.
From an ESG perspective, Exxon has articulated an ambition to expedite Pioneer’s greenhouse gas reduction agenda by 15 years. With three of Exxon’s largest shareholders being institutional investors that have strong ESG agendas, there will most likely be heightened scrutiny towards management to deliver on this promise and avoid greenwashing penalties. Making big claims about accelerating greenhouse gas emissions give less leeway for management, coercing them to take big decisions under a shorter period of time and hence compromising the level of due diligence that could be performed. This breeds a culture of extra risk-taking which may lead to a compounding effect of management making poorer decisions in the future.
A pivotal enabler of this ambition is the continuous acreage of Pioneer, which allows ExxonMobil to drill extended laterals through the horizontal segments of the well. This approach could potentially lead to a reduction in the number of wells, thereby minimising the overall surface footprint. However, realising this ambition might present challenges, given the dispersed placement of many wells across the region. If this approach does not come to fruition, Exxon may have to spend even more capital and investment to reach their net zero goals, including paying for extra carbon credits or investing more into carbon capture technology. This runs the risk that the transaction has more downsides than originally anticipated which hurts shareholder value and taints Exxon’s corporate strategy.
"We're not looking at cutting either rig operations, or people or headcount. We're looking at how do we take the best of both operations, and grow volumes and shareholder returns", - Exxon's Woods said separately on a conference call.
Sources:
https://www.sec.gov/ix?doc=/Archives/edgar/data/0001038357/000103835723000039/pxd-20221231.htm (7) pg.42
SEC Form 10-K 2022(9) pg.9