By Rui Ren Lee, Ardia Daniswara, Varun Vinay Iyengar, Wei Kai Lim (KCL) & Mikolaj Borowiak, Argyro Charizona, Angelo Passaro, Rares Ionescu, Ruben van der Lubbe, Muhammad Adnan (Bocconi)
Photo: delbarboza (Unsplash)
Overview of the deal
Acquirer: ExxonMobil
Target: Pioneer Natural Resources
Implied Enterprise Value: $64.5Bn
Total Transaction Size: $59.6Bn
Closed date: May 3rd 2024
Target advisor: Goldman Sachs, Morgan Stanley, Petrie Partners and Bank of America Securities (financial), Gibson, Dunn & Crutcher LLP (legal)
Acquirer advisor: Citi, Centerview Partners (financial), Davis Polk & Wardwell (legal)
The acquisition of Pioneer lends Exxon access to Pioneer’s Permian inventory and knowledge, together with Exxon’s technology, resources the acquisition is expected to generate double-digit returns according to Exxon. The deal is 100% stock based at a value of $253 per share. With new drilling sites proving to be a costly venture, this acquisition proves to be the most cost effective way of gaining new drill locations for Exxon. The merger makes the combined company the largest oil producer in the Permian Basin.
The combined company has access to more than 1.4m acres in the Delaware and Midland basins that according to Exxon have an estimated potential of 16Bn barrels of oil that remains unrefined.
The transaction results in significant synergies that the companies claim will be shared by the shareholders of both companies. They expect to transform Exxon’s upstream portfolio by increasing low-cost supply production and introduce a short-cycle capital flexibility, expecting a cost of supply of less than $35 per barrel from Pioneer’s assets.
The Permian Basin supplies nearly 6mn barrels of oil a day (13mn b/d in the Total US market). The merger cements the US as one of the largest players in the global oil & gas refining industry and helps consolidate the industry despite a looming idea that the world is moving away from fossil fuels.
“The combination of ExxonMobil and Pioneer creates a diversified energy company with the largest footprint of high-return wells in the Permian Basin. ” - Scott Scheffield, Pioneer - Chief Executive Officer
Company Details (Acquirer - ExxonMobil)
ExxonMobil Corporation is an American multinational oil and gas corporation that manages an industry-leading portfolio of resources, and is one of the largest integrated fuels, lubricants and chemical companies in the world. The company’s operations include revenue streams from the production, trade, and sale of crude oil, natural gas and other energy-related specialty products. ExxonMobil’s diversified portfolio spans four key business segments: Upstream, Energy Products, Chemical Products, and Specialty Products. The Energy Products segment contributes the largest share of revenue, while the Upstream segment, responsible for the exploration and production of crude oil and natural gas, accounts for most of the company’s earnings.
Founded in 1882, headquartered in Spring,Texas
CEO:Darren W.Woods
Number of employees:62,000
Market Cap: $508.79bn (as of 26/05/2024)
EV: $464.99bn
LTM Revenue: $341.10bn
LTM EBITDA: $74.27bn
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 Co.)
Pioneer Natural Resources Co. operates as an independent oil and natural gas exploration and production company. The company is headquartered in Dallas, Texas, and currently employs 2,213 employees. The firm conducts exploration and exploitation activities in the Cline Shale, part of the Spraberry oil field located in the Permian Basin, in West Texas. The firm holds approximately 964 thousand gross acres, of which 948 thousand gross acres are located in the Spraberry/Wolfcamp field in the Midland Basin of West Texas. As of December 31, 2023, the Company's total proved reserves were estimated at 2,471 MMBOE, of which 90% are proved developed.
Founded in 1962, headquartered in Dallas, Texas
CEO: Scott Sheffield
Number of employees: 2,213
Market Cap: $63,003B (as of 27/05/2024)
EV: $67,882M (as of 27/05/2024)
LTM Revenue: $19,362M
LTM EBITDA: $9,618M
LTM EV/Revenue: 3.5x
LTM EV/EBITDA: 7.05x
Projections and Assumptions
Short-term consequences
The all-stock acquisition of Pioneer Natural Resources by Exxon Mobil has immediate and significant short-term effects on the company. In terms of product offerings, this acquisition markedly expands Exxon's shale oil portfolio. Pioneer’s extensive assets in the Permian Basin, including over 900,000 net acres, add substantial high-quality shale reserves to Exxon's portfolio. This enhancement is expected to increase Exxon's production capabilities significantly in the short-term, aligning with market demands and bolstering Exxon's competitive position in unconventional oil production.
Geographically, the acquisition more than doubles Exxon's footprint in the Permian Basin, one of the most prolific and cost-efficient oil-producing regions in the United States. This strategic move is expected to increase Exxon's Permian production volume to 1.3 million barrels of oil equivalent per day, with projections to reach approximately 2 million barrels of oil equivalent per day by 2027.
Regarding leadership and management, the integration of Pioneer's team with Exxon's operations brings together extensive industry expertise and advanced technologies. However, to comply with the Federal Trade Commission's (FTC) conditions, Scott Sheffield, Pioneer’s co-founder and former CEO, will not join Exxon's board. This decision comes amidst scrutiny over Sheffield's alleged attempts to discuss oil pricing and output with OPEC. The merger is likely to result in organisational restructuring, leading to potential reassignments and layoffs, but it also offers an opportunity to blend best practices from both entities.
Long-term Upsides
With the acquisition of Pioneers Natural Resources, Exxon is essentially betting long term in the sustenance of the traditional fossil fuels industry. However, there exists a few differences in how Exxon decides to traverse the changing landscape.
Primarily because of the differences in fracking to the conventional drilling of oil. Fracking involves horizontal drilling to capture oil stored in rocks and its biggest advantage is the ability to stop and start its production as and when required unlike traditional drilling.
Due to this characteristic, numerous environment organisations like the International Energy Agency, are in support of such measures of fracking because they believe it enables them the prospect of turning off that tap when they decide it's time to abandon it and switch to cleaner fuel sources.
Moreover, “American shale is less carbon-intensive than conventional fields, as well as quicker and cheaper to develop”, says Tom Ellacott of Wood Mackenzie, an energy-advisory firm. Mainly because big operators have begun, due to the pressure of regulators, to sequester the carbon, specifically the methane that it is produced along with shale oil. Which prevents it from escaping into the air. Something that has been applauded by governments and environment agencies alike.
So these two factors set up Exxon to capture the sustained global demand for natural gases for energy needs along with moving their net zero emissions plan ahead to 2035 from 2050.
Risks and Uncertainties
Market volatility: The oil market is inherently volatile, influenced by geopolitical tensions, fluctuating demand, and varying production levels. Recent global events, such as the conflict in Ukraine and unrest in the Middle East, can significantly affect oil prices. These fluctuations could undermine the expected financial synergies from the merger and impact ExxonMobil’s ability to achieve projected cost efficiencies and revenue gains.
Integration risks: Integrating Pioneer’s operations into ExxonMobil’s framework presents substantial challenges. While the merger promises operational synergies and cost savings, the actual integration process may encounter cultural clashes, management disagreements, and logistical hurdles. Effective integration is critical to realizing the forecasted $2 billion in merger synergies, and any missteps could erode anticipated benefits.
ESG concerns: Despite pledges to accelerate Pioneer’s net-zero emissions goals by 15 years, the merger draws criticism for expanding fossil fuel operations at a time when there is mounting pressure to transition to renewable energy sources. Environmental activists and investors focused on Environmental, Social, and Governance (ESG) criteria may view this merger unfavorably, potentially leading to reputational risks and divestments. Implementing robust ESG strategies will be essential to mitigate these concerns and align with broader societal expectations.
Financial risks: The all-stock nature of the $59.5 billion transaction could lead to dilution of ExxonMobil’s shares. While the merger is expected to be financially accretive, any delays or issues in realizing the projected cash flow improvements and cost savings could impact the company’s earnings per share (EPS) and overall financial health. Additionally, should oil prices fall significantly, the valuation of the acquired assets could suffer, affecting ExxonMobil’s return on investment.
Credit risk and leverage: The merger will result in an increased financial burden on ExxonMobil’s balance sheet, even though it is an all-stock transaction. ExxonMobil’s leverage ratios are expected to rise incrementally, which might concern investors and credit rating agencies. While the company aims to use its robust cash flow to manage this risk, any downturn in oil prices could exacerbate financial stress.