Exxon Mobil Corporation is witnessing a shift in investor sentiment, with shareholders increasingly favoring the acquisition of existing oil and gas production assets over investing in new drilling ventures that entail extended payback periods.
Over the past four years, energy investors have displayed a preference for oil companies emphasizing higher returns over those heavily investing in costly, long-term drilling projects. Despite this trend, Exxon shares recently reached a record high of $120, largely bolstered by robust returns from its oil, gas, and refining operations.
In line with this shift, Exxon is in discussions to acquire Pioneer Natural Resources (NYSE:PXD), the second-largest producer of Permian shale oil, for a substantial $60 billion. This potential acquisition signals Exxon’s readiness to invest in production assets after falling short of its production targets in the Permian basin.
If completed, this deal would position Exxon as the largest producer in the oilfield, with a daily output of approximately 1.33 million barrels of oil and gas. In 2019, Exxon set a goal of reaching 1 million barrels per day by 2025, a target it recently pushed back to 2027.
Bill Smead, Chief Investment Officer at Smead Capital Management, which oversees $5.2 billion in assets, 25% of which are allocated to oil and gas investments, noted the growing political pressure against drilling new wells for fossil fuels. Smead highlighted the rationale behind Exxon’s potential acquisition of Pioneer, citing the latter’s substantial reserves.
Pioneer’s strong financial standing and prudent capital management make it an attractive acquisition target, according to Vince Lorusso, President of hedge fund Clough Capital Partners, which manages $1.3 billion in client assets. The company boasts solid reserves, increasing production, controlled spending, and healthy debt levels.
While some investors have expressed concerns regarding Exxon’s previous large-scale acquisitions in the shale sector, experts point out that the oil industry has shifted away from exploration-driven investments in favor of acquiring existing production assets. This trend reflects a preference for acquisitions that can generate substantial cash flow for the acquiring company.
The recent surge in oil and gas prices, prompted by Russia’s invasion of Ukraine, has underscored the ongoing demand for fossil fuels, despite advancements in renewable energy sources such as solar and wind power. Reduced spending by U.S. oil producers has contributed to increased global oil prices this year, as OPEC members curtailed their production.
Exxon had been conserving cash in the wake of the COVID-19-induced oil price collapse in 2020. The company maintained approximately $30 billion in cash reserves over the past year, providing it with financial flexibility to capitalize on opportunities as oil market conditions evolve.
Should the Pioneer acquisition materialize, it would not be Exxon’s first foray into the shale sector. In 2010, Exxon acquired XTO Energy for $36 billion, following its initial phase of the U.S. shale boom. In 2017, the company further bolstered its Permian assets with a $6.6 billion purchase from the Bass family.
Matthew Bernstein, a senior shale analyst at consultancy Rystad Energy, suggests that an Exxon acquisition of Pioneer would significantly expand its Permian acreage by approximately 84%, totaling around 2 million acres. Furthermore, it would solidify Exxon’s presence in two major oil-producing regions in the Americas: U.S. shale and Guyana.
Exxon currently holds a 45% stake in a Guyana consortium with aspirations to produce 1.2 million barrels by 2027, with a significant portion of the required capital expenditure already allocated.
In summary, Exxon’s pivot towards acquiring existing oil and gas assets aligns with the evolving landscape of the energy sector, which places a premium on generating cash flow from production rather than drilling endeavors.
