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ExxonMobil’s $59.5bn Acquisition of Pioneer

Acquisition Overview


Oil and gas titan ExxonMobil has consolidated its market position in the US shale oil industry by acquiring Pioneer Natural Resources in an all-stock transaction valued at $59.5bn, or $253 per share. Exxon, already the largest publicly traded oil company in the world, has cemented its dominance in the lucrative Permian Basin, where it draws over 17 billion barrels of oil-equivalent reserves. By drawing upon Pioneer’s 525 drilling wells in the basin, where it is the largest acreage holder, Exxon hopes to double their production in the zone to 1.3mn oil-equivalent barrels. The acquisition marks both a risky bet against renewables in the long-run, as well as a milestone for Exxon by being its largest acquisition since its 1999 formation. Major deals in this industry are never met without controversy, with Exxon’s rapid capitalisation of the last two years occurring under the backdrop of Russia’s invasion of Ukraine and pressure for O&G companies to scale back on fossil fuels. Subject to regulatory approval, the acquisition is set to close before Q3 2024.

 

Deal Structure


The $59.5bn all-paper acquisition will involve Pioneer shareholders receiving 2.3234 shares of ExxonMobil, reflecting an approximate 18% premium on Pioneer’s October 5th closing price. This is despite Exxon having the ability to complete the acquisition all-cash; the alternative all-stock arrangement enabled the two companies to reconcile disagreements on price. In this way, Exxon pays a small premium (usually higher around 30%), and Pioneer’s shareholders gain over 10% of the rapidly growing ExxonMobil. The enterprise value of the deal rises to $64.5bn once debt is accounted for.


The deal was closed quickly and with little disagreement. The Board of Directors of both companies unanimously approved the transaction, although it is still subject to customary approval by regulatory bodies as well as by Pioneer’s shareholders.

Severance payouts to the top 5 executives at Pioneer amount to $71 million, with CEO Scott Sheffield receiving both $29 million and a spot on Exxon’s Board of Directors.

Citi acted as lead buy-side financial advisor, with Centerview Partners also acting as a financial advisor, and Davis Polk & Wardwell as legal advisor. On the sell-side, Goldman Sachs, Morgan Stanley, Petrie Partners and Bank of America all acted as financial advisors, with Gibson, Dunn & Crutcher acting as legal advisor.

 

ExxonMobil Overview


Created following the $75.3bn megamerger of Exxon and Mobil in 1999, ExxonMobil Corporation has come to be the largest descendant of Rockefeller’s Standard Oil. Since 2017, it has been headed by CEO Darren Woods, whose growth plan heavily relied on North Dakota’s Bakken shale formation, Texas’s Permian Basin, and the Sakhalin Project on Russia’s east coast. The latter of these now defunct following Russia freezing Exxon’s involvement in August 2022, and with the Bakken formation being well past its 2006-15 boom days, Woods’ focus is now on the Permian Basin. This has all been occurring with heavy scrutiny on Exxon’s climate-related commitments, evidenced by shareholders, headed by BlackRock, recently voting to oust a quarter of Exxon’s Board of Directors over environmental concerns. Despite this, Exxon remains confident that transitions to renewable energy will not undercut future demand in the shale industry. While this may be true of the short-run given the events of the last two years, whether this logic will hold for long-term projects as this one is yet to be seen.


Founded: 1999

Number of Employees: 62,300

EV: $426.59bn

LTM Revenue: $349.84bn

LTM EBITDA: $73.92bn

Market Cap: $418.29bn


Pioneer Natural Resources Overview


Pioneer Natural Resources was created in 1997 following the merger of Parker & Parsley Petroleum Company and MESA Inc. It operates primarily in the Cline Shale of the Permian Basin, where it is the largest acreage holder. Headed by current CEO Scott Sheffield since its genesis for the most part, the company has steadily been growing its asset base through a series of notable transactions, including the 2021 acquisitions of Parsley Energy for $4.5 billion and DoublePoint Energy for $6.4 billion. Pioneer enjoys a competitive advantage in the region, with its expansive capital program for this year bringing around 500 wells on production.


Founded: 1997

Number of Employees: 2,076

EV: $61.15bn

LTM Revenue: $20.39bn

LTM EBITDA: $10.11bn

Market Cap: $55.67bn


Industry Insight


Firms in the oil and gas industry have been enjoying a controversial market rally following Russia’s invasion of Ukraine, culminating in record dividend increases, share buybacks and M&A activity. On the prior, a series of large-scale buyback programs were announced by virtually every major firm, with Chevron announcing a $75bn share buyback in January alongside a rise in dividends to 3.4%. This was met with harsh political backlash, with President Biden remarking to American energy companies in October, “You should not be using your profits to buy back stock or for dividends”, but rather “should be using these record-breaking profits to increase production and refining”. Following these buyback acceleration announcements in Q4 2022, it seems as though firms are now turning to acquire smaller competitors as their next business objective focus. Evidencing this is Chevron recently announcing its $53bn purchasing of Hess Corporation, based off Guyana’s coast.


This increase in M&A activity, as opposed to organic growth through capital investment, is no surprise. A recent report by the Center for Economic Policy Research found that both effectual and anticipated climate-related policies have caused a 6.5% decrease in investment by publicly traded O&G companies. This is because firms are unwilling to invest in long-term projects, whose returns will not be realised until several years in the future, when the demand for fossil fuels may have structurally declined as a result of these climate policies. Therefore, acquiring companies with an established presence in fracking areas poses an attractive alternative for firms looking to capitalise on the current market rally.


Finally, on the topic of renewable energy, the industry standard has been to focus on decarbonisation solutions in long-term objectives. This can be seen with the likes of BP aiming for a 25% reduction in oil and gas production by 2030. However, Exxon’s acquisition has seen the emergence of a contrarian view in this regard. Whether such large purchases with the explicit intention of increasing production will be conducive to firms meeting their 2030 targets, now under 7 years away, is highly questionable. This is especially important for publicly traded companies, as shareholders have made it clear that they will not hesitate to take action against the industry if targets are not met (see the aforementioned BlackRock case).


Strategic Rationale


The acceleration of shareholder buybacks and dividend increases already announced in December of last year, and intensified capital investment too risky a commitment, it seemed inevitable that Exxon would go fishing for a large acquisition next. The Permian Basin is known for having low costs of extraction compared to alternative sites, making it an ideal area to expand into for a firm looking to maximise economies of scale. Pioneer controlling over 850,000 net acres in the basin, its largest acreage holder, makes it a prime contender for Exxon. As for Pioneer, shareholders are keen to benefit from the revenue synergies of the megacorporation after the deal was agreed to be all-stock. This eagerness can be seen with the deal being closed in less than 4 weeks according to Pioneer CEO Scott Sheffield.

 

Long-term Prospects


Not many would doubt that this transaction serves both companies well for the near future. Overtaking Chevron, which is now looking to respond with an acquisition of its own, and catching up with Occidental Petroleum – Exxon is set to cement its position in the American shale industry. Benefitting not only from the external economies of scale that the Permian Basin grants it, but also internal economies of scale from Pioneer’s highly efficient wells – this transaction will undoubtedly prove beneficial in the short-run. This success will spillover to Pioneer’s shareholders too as they gain equity in the rapidly growing Exxon, despite receiving a small premium.


Yet still, there lingers an uneasy tension surrounding the long-term prospects of this deal. The International Energy Agency states that global demand for fossil fuels will peak before 2030, rendering the long-term effectiveness of such an acquisition uncertain. Exxon clearly has a pessimistic view of the energy transition, implying in a recent report that it believes fossil fuels will constitute a half of global energy demand even by 2050. However, with its own shareholders rebelling against the board, it is becoming evident that this view will not hold. This tension will only continue to grow, and will inevitably accumulate in Exxon having to cut back on productive capacity. Exxon is playing a losing game here. Additionally, a few other minor environment-related concerns exist, such as surrounding reporting on Methane emissions, which Pioneer was known to be an industry leader in. They expressed concerns that this would be compromised under Exxon’s climate-lax leadership. However whether these concerns will manifest itself is yet to be seen. All in all, whilst a textbook mutually beneficial acquisition in the short-run, the long-term prospects of this deal reflect a greater trend in the oil and gas industry that corporations are in for a rude awakening.


Written by Prajwal Pandey (New College)

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