Permian Upside Would Drive Mooted Exxon-Pioneer Deal

A potential tie-up of Exxon Mobil and Permian giant Pioneer Natural Resources, as reported over the Easter holiday weekend, may never reach the finish line. But a formalized deal would also not surprise many US shale M&A watchers, with Exxon seen as an inevitable leading consolidator in the tight oil and gas play.

The Wall Street Journal reported Friday that Exxon is in “informal, early-stage talks” with Pioneer over a potential acquisition. If realized, the deal would rival Occidental Petroleum’s 2019 acquisition of Anadarko as the largest US upstream transaction of the past two decades, based on Pioneer’s $52.5 billion enterprise value prior to the reports.

A long road stands between exploratory talks and a concrete deal. But Exxon has been open about its appetite for upstream M&A despite long-term pressures on oil and gas companies to reduce production, and believes it is still in the early innings applying technological and operational learnings in the Permian.

For Pioneer’s part, the company boasts a considerable inventory of economically attractive drilling locations, with corporate presentations citing more than 20 years’ worth of sites that can deliver compelling cash flows at West Texas Intermediate prices below $50 per barrel.

But management also has the view that resource exhaustion is broadly taking hold in the play, and has flagged the rising spending and logistics required to decarbonize operations — considerations that could justify placing Pioneer’s portfolio in the hands of an even stronger-capitalized, technology-driven operator.

One US M&A veteran told Energy Intelligence that they have long viewed an Exxon takeover of Pioneer as a matter of “when, not if,” given the natural synergies of the pair’s Midland Basin portfolios. They added, though, that industrial logic does not always mean such deals happen; targeted companies could prefer independence, and differences in valuation expectations can sink even the best-laid plans.

Others have seen more Permian M&A from Exxon as inevitable, even if it doesn't involve Pioneer specifically, and agree that future industry consolidation in the play is likely to include deals marrying leading players.

Expanding the Runway

Exxon says it has line of sight on how to grow its Permian production from around 600,000 barrels of oil equivalent per day this year to 1 million boe/d by 2027 with its existing portfolio. But the US major also says it would consider expanding its portfolio to carry growth beyond 2030 due to what it sees as significant remaining upside.

“The work we've been doing in the Permian will provide a value opportunity that we can leverage when the [M&A] market is right,” CEO Darren Woods said in January.

The “work” Woods is referring to is Exxon’s efforts to take a methodical, scientific approach to boost efficiencies and recovery rates in the Permian while also cutting emissions — a blueprint it sees as applicable to other prime acreage.

“Many of the technologies that unlocked [shale] in the first place, like horizontal drilling and fracking, are now having significant science applied to them,” Exxon upstream boss Liam Mallon told the Energy Intelligence Forum last fall. “If you think about it, [if] you could unlock another 5% to 10% recovery, and do it at a reasonable cost, and do it with net-zero [emissions], which is what we're proposing to do by 2030, then you have a winning formula."

An acquisition of Pioneer would connect large sections of Exxon’s existing Midland footprint in Texas with vast swaths of contiguous acreage.

“Even assuming some meaningful synergies, the deal does not look compelling in terms of [free cash flow] or multiple accretion, but we suspect the primary motivation for a deal from [Exxon’s] perspective would be the strong acreage overlap … and sizeable undrilled inventory position,” analysts at JP Morgan said in note responding to the reports.

“We believe [Pioneer] and/or several other E&Ps could be acquired in the coming quarters given the desire for several companies like [Exxon] to boost inventory,” added Neal Dingmann of Truist Securities.

Woods has said valuations need to reflect “longer-term price cycles” if Exxon were to advance any deal. Its corporate planning materials are premised off $60/bbl Brent, nearly 20% below current levels around $85/bbl.

Long-Term Resiliency

Exxon’s appetite for additional Permian exposure is striking given that development would carry well into the 2030s and beyond.

Exxon’s comfort with that timeline in part reflects its view that oil and gas demand will remain robust despite energy transition pressures. But it also arguably reflects the major’s confidence in its ability to make the Permian one of the lowest-emission upstream assets in its portfolio — and thus a less risky place to grow.

Exxon intends to achieve net-zero operations in the Permian by 2030 — two decades ahead of its corporate-wide targets — while building out a net-zero "cradle-to-grave" gas value chain for its Permian gas.

The shale play is indeed expected to move toward a more gas-weighted production mix over time as older “oil” wells produce more gas than liquids and as operators potentially shift drilling toward gassier targets — efforts that could add resiliency should gas demand remain stronger than oil as the transition advances.

Notably, Pioneer is spending up to $200 million this year on exploration in the Permian, in part to test the gassy Woodford and Barnett zones.