A Match Made In Las Colinas

Rumors of a potential buyout of big Permian Basin producer Pioneer Natural Resources
PXD
by ExxonMobil
XOM
have circulated periodically for years now, long before Pioneer made the decision to become a so-called “pure play” company focused solely on the most prolific oil and gas region in the U.S. Some of that might have to do with the fact that the headquarters operations for both companies have long been housed in the Dallas suburb of Las Colinas, a compact enclave in which executives from the companies no doubt regularly stumble over one another at coffee shops and restaurants.

A Potential Permian Powerhouse

It is, after all, always best to discuss big potential ideas and major transactions face to face, and few bigger potential transactions exist in the oil patch today than one which would result from a combination of these two companies. Thus, it is not really surprising that the Wall Street Journal published a story late Friday detailing rumors of merger talks being underway.

Pioneer is the largest leaseholder in the Midland Basin portion of the greater Permian Region, while ExxonMobil has long held sway as the biggest fully-integrated U.S. domestic oil and gas company. Upon becoming a Permian Basin pure play when it divested the last of its non-core assets in mid-2019, it appeared to many observers that Pioneer’s management could be setting itself up as a prime takeover target, and that the long-standing rumors of an eventual merger with ExxonMobil could be about to happen. But, more than three years down the road, Pioneer still stands as a figurative oil and gas king pin of Midland, Texas.

ExxonMobil management has long made no secret of harboring aggressive growth plans in the Permian, and recently unveiled a beefed-up capital budget targeting the region for 2023 and beyond in the wake of recording record profits in 2022. A combination of these two oil giants would sport a Permian-centric asset base and slate of potential drilling locations that would dwarf any other player in the basin. The respective leasehold acreage held by the companies has a high degree of connectivity, always a prize feature desired by any acquirer that is looking to maximize efficiency gains and economies of scale.

The connectivity aspect of a possible ExxonMobil/Pioneer merger was enhanced when Pioneer, led by CEO Scott Sheffield, executed a $4.5 billion buyout of Parsley Energy, a company that had been built by his son, Bryan Sheffield in January, 2021. Pioneer also executed a second major acquisition, of DoublePoint Energy, later that same year.

Not ExxonMobil’s First Time At The Dance

A merger with Pioneer would not be the first time ExxonMobil has targeted the Permian in such a deal. It gained its first major foothold in the early-stage Permian shale development in 2010 with a $30 billion deal to acquire Fort Worth-based XTO Energy, one of the big early players in Midland.

ExxonMobil management at the time was careful to couch that transaction as a merger in which it would retain the XTO brand as a separate, semi-independent business unit. It also kept most of the XTO team in place, in a strategy designed to enable it to retain the nimble decision-making ability needed to succeed in the early stages of the big shale play’s growth.

It seems doubtful ExxonMobil management would want to employ a similar strategy should a deal with Pioneer really be in the works. The initial leasing and drilling boom that was just beginning in the region in 2010 has now given way to a more mature and stable period typical of any big oil play’s natural life pattern, one in which the focus turns more to driving efficiencies, improving processes, technology deployment, and maximizing cash flow and returns to investors.

On those latter points, the Wall Street Journal story notes Pioneer generated $8.4 billion in free cash flow during 2022 and paid out almost $8 billion in dividends. Those are big numbers that would be attractive additions to any company’s financials.

Bottom Line

It must be pointed out here that the Journal’s story, while meticulously reported, is speculative in nature, based on input from an apparent variety of unnamed sources. The writers are careful to point out that talks between the companies have not moved into a formal discussion process.

But it is also fair to point out that conditions in the Permian Basin, and in U.S. shale in general, have evolved immensely since rumors of a possible merger of these two companies first percolated up a decade ago. Conditions that prevailed during the early, leasing and drilling boom phase of development gave a decided advantage to nimble independent producers and their ability to make quick decisions on the fly. But prevailing conditions today, with their focus more on process, technology and economies of scale, seem more advantageous to a big integrated company like ExxonMobil.

These and other conditions could mean this long-rumored match whose seeds were planted in Las Colinas might finally come about. Stay tuned.