Exxon/Pioneer: scaling up in the shale patch

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Oil and gas companies are making barrels of cash. They have limited options to deploy it. So how best to spend it? Snapping up a rival, even at the top of the commodity cycle, must be a tempting solution.

That is one way to read reports that Exxon is in talks to buy Pioneer Natural Resources, a US-listed shale giant worth $55.6bn including debt. The terms of the potential deal are as yet unclear, as is whether any offer would be in cash or stock. Yet there are good reasons for Exxon to explore this prospect.

For one thing, it has the money to do so. Buoyant oil prices last year mean it is gushing cash — $77bn of it in 2022. Investing in new fossil resources is unpopular in a carbon-constrained world. Exxon’s capital expenditure hovers at around $20bn, down from over $30bn a decade ago.

Diverting a sizeable amount of money into renewable energy, while worthy, means contending with lower returns. That leaves Exxon returning oodles of cash to shareholders. With net debt at $12bn, this old tiger has a lot of gas in its tank.

Cash is not Exxon’s only acquisition currency, either. At 12 times next year’s earnings, on S&P Capital IQ estimates, its stock trades at a nice premium of 33 per cent to Pioneer’s.

Most importantly, swallowing Pioneer would bolster Exxon’s position in the prolific Permian Basin, a shale patch beneath Texas and New Mexico.

Contiguous acreage would allow the companies to take an axe to costs. By way of reference, Citigroup reckons that ConocoPhillips cut about a quarter of Concho’s capital expenditure and overheads when it bought its smaller rival in 2020. Applying that to Pioneer would yield $1.25bn which, taxed and capitalised, should cover the rumoured 20 per cent premium, worth about $10bn.

A deal has not yet been agreed. However, news of Exxon’s interest is a useful reminder that — amid high oil prices — the sector’s animal spirits are due a revival.