On October 23, 2023 ExxonMobil announced the acquisition of Pioneer Natural Resources in an all-stock transaction valued at approximately $64.5 billion. The acquisition would combine Pioneer’s more than 856,000 acres in the Midland Basin with ExxonMobil’s 570,000 net acres in the adjacent Delaware and Midland Basins resulting in an estimated 16 billion barrels of oil equivalent resources in the Permian Basin. In its announcement ExxonMobil explained the rationale for the acquisition:
· “Transforms ExxonMobil’s upstream portfolio, more than doubling the company’s Permian footprint and creating an industry-leading, high-quality, high-return undeveloped U.S. unconventional inventory position.”
· “Expect to generate double-digit returns by recovering more resource, more efficiently and with lower environmental impact.”
· “Combines Pioneer’s sizeable acreage, entrepreneurial culture and deep industry expertise with ExxonMobil’s balance-sheet strength, advanced technologies and industry-leading project development capabilities.”
· Plans to accelerate Pioneer’s net zero Permian ambition from 2050 to 2035.”
The market had a negative reaction to the deal, sending ExxonMobil’s stock price down four percent from $119.45 to $106.45 due to the price and structure of the deal. Reflecting how short term the market can be, exactly one week later the price was $112.95.
Analysts’ reactions were mixed. On the positive side, Jeff LeBlanc, Equity Analyst, Tudor, Pickering, Holt & Co said, "While we believe XOM already held the most attractive global upstream portfolio in the space longer-term, we believe this deal further cements that characterization given our highly favorable view of the PXD assets that we believe will provide XOM with best-in-class short-cycle investment flexibility." On the negative side, Tom Ellacott, Senior Vice President, Corporate Research, Wood Mackenzie noted that "The acquisition of an elite oil-tilted opportunity will increase what is already easily the most oil-weighted portfolio in the peer group – at a time when some peers are shifting their portfolios to gas. Bulking up materially in oil and gas also adds to the challenges of pivoting to low-carbon, especially if the energy transition accelerates."
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The Economist had a positive view, justifying the price paid since “Consolidation will transform America’s fragmented shale industry” and “Shale looks a much more profitable bet than it did a few years ago.” Charlie Penner, who led the Engine No. 1 campaign which placed three new directors on the board of ExxonMobil, noted another advantage of shale production which is that it “has the ability to flex production up and down in response to changes in demand” in contrast to conventional oil and gas projects that require massive investments that require decades of production to pay off.
A big disadvantage of shale is that it produces a lot of methane and so is, as The Economist put it, the “bête noire” of environmentalists. However, with better management of methane emissions “it may become one of the best—and cleanest—ways to meet stubbornly rising global oil demand.” It concludes by stating that “Even the International Energy Agency, an official forecaster committed to net-zero emissions by 2050, favours short-cycle investments like shale over long-term projects, into which producers get locked for decades.” So even a hedge fund guy and the IEA agree on the merits of shale oil production and the economic benefits of consolidation 🐥.
That’s not true for everyone. One week after the deal was announced, writing in The New York Times, Dr. Jeff D. Colgan, a professor of political science and the director of the Climate Solutions Lab at Brown University, worried that “If the deal goes through, other companies like Chevron could soon follow suit, buying up smaller companies as they come under pressure from investors to match Exxon’s size.” Should this happen he sees the consequences to be dire: “That consolidation would undermine democracy in the United States, mislead investors and weaken market competition. It should be stopped for all our sakes.”
For better or worse, the consolidation is happening. One week after the ExxonMobil/Pioneer deal was announced Chevron announced that it was acquiring Hess. On December 11, 2023 Occidental announced it was acquiring CrownRock and on January 11, 2024 Chesapeake Energy Corporation and Southwestern Energy Company announced their merger.
So what to make of this consolidation and the ExxonMobil/Pioneer deal in particular? I am not an expert on climate change, the energy industry, or ExxonMobil (although I have written about their view of climate change what they regard as material risk factors). What I found very helpful was the report “Chevron, ExxonMobil and Oxy: M&A and the Energy Transition” by Neil Quach, Senior Corporate Research Analyst – North American Oil & Gas, at Carbon Tracker.
Carbon Tracker’s Mission is based on the premise “that there is a limited global ‘carbon budget’ of cumulative emissions that must be respected to avoid overshooting 2˚C and destabilising the global climate.” They are concerned “that capital markets are failing to align the capital allocation process, exposing the owners of fossil fuel companies – their shareholders – to potential lost value.” Furthermore, they “believe that companies have not sufficiently factored in the possibility that future demand could be significantly reduced by technological advances and changing policy.” Carbon Tracker is clearly not a “DRILL, BABY, DRILL!” kind of place.
Here is Mr. Quach’s analysis of the transaction. Citing S&P Global, he notes that the combination of ExxonMobil and Pioneer creates the largest shale producer in the Permian Basin and that 40% of ExxonMobil’s total hydrocarbon production will come from short cycle barrels which have less of a risk of becoming stranded assets. (For more detail see “ExxonMobil—The Existential Crisis” and “Navigating Peak Demand.”) This is because “80% of the recoverable reserves from a shale well can be produced within ~4 years from initial production versus the ~20 years for a conventional well.”
Quach also cites some clear financial benefits of the acquisition:
· $1 billion in cost synergies in two years, rising to $2 billion over the next decade
· Two-thirds of this will comes from improved resource recovery and one-third from savings in capital and operating expenditures
· Being a low-cost producer better positions the company for the energy transition
And some clear climate benefits as well. Although there could be a short-term increase in production, “from a longer term perspective, the majors historically have taken a more disciplined approach to capacity expansion vis-à-vis their E&P peers, so the inevitable industry consolidation is likely to lead to a more rational (i.e., limited) pace of oil & gas production growth in North America.” Mr. Penner agrees, saying he believes that “long-term investors continue to prefer Exxon to eschew a strategy of chasing market share without sufficient regard to returns, instead focusing on lower cost projects offering greater flexibility if the pace of the energy transition continues.” In other words, this acquisition lowers the company’s financial risk to the energy transition, a point on which Mr. Quach agrees as well.
In terms of carbon emissions, ExxonMobil has committed to net zero for Scope 1 and 2 in the Permian Basin by 2030. Pioneer had a similar commitment for 2050 and this has been moved to 2035.
Of course, this begs the question of whether ExxonMobil should be continuing to drill for oil at all. At one extreme, there are those who argue that the company and all its peers should do no new drilling at all and move away from their core business as rapidly as possible, such as into renewable energy. At the other extreme there are those who don’t believe that climate change is an issue at all, and oil companies should continue to explore and drill for oil as long as its economically feasible.
I think the truth is somewhere in between and there are a lot of nuances that complicate this answer such as the rate at which new production technologies (e.g., hydrogen, small modular reactors, and fusion) and new carbon capture technologies (e.g., carbon capture and storage and carbon direct air capture develop), the continuing decline in costs of renewable energy, transmission lines for getting renewable energy into the grid, getting the rare earths necessary for these products from places other than China, battery storage technology, and getting needed access to cobalt for these batteries from places other than the Democratic Republic of Congo.
Like I said, I’m no expert but Mr. Quach is so I posed him this question: “Recognizing the complexity of the issues and how big investment decisions like an acquisition have to be made in a world of great uncertainty, what is your bottom line on ExxonMobil’s acquisition of Pioneer? Is it a good thing or a bad thing for climate change?”
Here’s his response:
“Ultimately, I think a policy of increasing distributions to shareholders via larger dividends and/or share repurchases is the best strategy in the energy transition. But when I think about M&A there is a choice between investing in new reserves versus buying other companies’ reserves. From a climate perspective, thinking about it rationally, I think buying other companies reserves is marginally better. You are not adding to new supply. Concentrated industries tend show less supply growth.
Also, for better or worse, it’s easier to manage supply when production is concentrated in fewer entities. It’s worth noting that large bellwether companies are under far greater scrutiny than their smaller brethren. In the specific case of ExxonMobil’s acquisition of Pioneer, XOM will be speeding up Pioneer’s net zero Scope 1 & 2 emission objective from 2050 to 2035, which is a beneficial emissions outcome from the merger.”
It is a thoughtful and nuanced answer. It contains points that people on both sides of the debate will agree with and some they won’t. It’s a good example of the main point from my previous piece on conservatives who are very concerned about climate change. If we are to solve this problem, we need the best thinking from everyone. People need to start focusing more on areas where they can agree than on those where they disagree.
This doesn’t mean disagreements aren’t useful. They are and both sides can learn from them. This only happens if people can find in their hearts that just because they disagree with someone on some things doesn’t mean they can’t talk to them about anything.
