Exxon’s acquisition of Pioneer signals U-turn for oil patch deals

Data InsightDealspeak 25 October

Exxon’s acquisition of Pioneer signals U-turn for oil patch deals

What a difference two and a half years make.

In May 2021, Exxon Mobil [NYSE:XOM] lost three board seats to activist investor Engine No. 1, partly amid criticism over its climate change strategy. Earlier this month, the oil major placed a massive bet that fossil fuels will remain the world’s main energy source for years to come by agreeing to pay USD 59.5bn for Pioneer Natural Resources [NYSE:PXD], a big driller in the Permian basin.

Chevron [NYSE:CVX] then followed suit, announcing on 23 October it would pay USD 53bn for Hess [NYSE:HES], which owns assets in North Dakota’s Bakken shale basin and in offshore Guyana.

Both all-stock deals could signal the start of a consolidation trend, especially in US shale formations, where remaining resources are becoming scarce.

Bigger is better

Merger and acquisition volume for North American upstream oil and gas companies has reached an all-time high of USD 165bn in the year to date (25 October), even as the number of deals (42) has dropped to its lowest level, according to Mergermarket. Average deal size in 2023 is USD 3.9bn – five times the average of USD 793m between 2018 and 2022. Exclude the outlying mega deals, and 2023’s average is still USD 1bn -- about 25% larger than the prior five-year average.

Who’s next?

Devon Energy [NYSE:DVN], another Permian oil producer, is reportedly considering acquiring Marathon Oil [NYSE:MRO] or CrownRock. Chesapeake Energy [NASDAQ:CHK] is said to be eyeing Southwestern Energy [NYSE:SWN], which operates in the Appalachia shale formation. 

EOG Resources [NYSE:EOG] and Diamondback Energy [NASDAQ:FANG] – both well-run, technically sound companies with strong assets in the Permian basin – could either combine or attract a bid from a big oil company such as ConocoPhillips [NYSE:COP], according to an industry executive. Matador Resources [NYSE:MTDR], which owns assets in the Delaware Basin and Eagle Ford shale play, could also be targeted, he noted.

Others that are likelier to acquire – but could be targeted instead – are Occidental Petroleum [NYSE:OXY], Murphy Oil [NYSE:MUR], and Marathon Oil [NYSE:MRO], the industry executive said.

Among private equity-backed upstream companies, Mergermarket’s Likely to Exit (LTE) algorithm* predicts Permian Basin driller UpCurve Energy is among the most likely to exit over the next 12-to-24 months. Another is Austin, Texas-based Ameredev.

Why now?

The race to secure shale assets coincides with the decline of large international oil field discoveries, the executive noted. “If the big guys can’t replenish their reserves with discoveries, they have to buy instead,” the executive said. Hess’s Guyana oilfield interest gives Chevron a position in one of the largest oilfield discoveries in years.

Dealmaking could also be guided by companies’ shift to operate “closer to home” amid rising geopolitical tensions, said Rose Sorensen, a partner at Snell & Wilmer.

The invasion of Ukraine prompted Exxon to exit Russia entirely after President Vladimir Putin expropriated its properties. The Russian government is now selling Exxon’s 30% stake in the Sakhalin-1 oil and gas project.

“The stability and the certainty of the regulatory regime is really important,” Zach Fenton, president and co-founder of UpCurve, told this news service. “The war in Ukraine has made people realize… that cheap and reliable natural gas and oil is a luxury.”

Cheaper oil

Companies also are now trading at lower valuations than historically. According to Mergermarket data, North American oil and gas deals completed between 2018 and 2022 sold for an average enterprise value-to-EBITDA multiple of 7.8x. Exxon’s offer for Pioneer is 5.6x, while 2023's average is 4x.

Smaller exploration companies trade at lower valuation multiples than the majors because their cash flows are more sensitive to oil price volatility, while gas station and refining revenue provide more stability for the majors, the industry executive said.

Fenton said he expects more M&A activity among smaller companies as they seek to gain size to command higher valuations. “Everyone else is trying to get bigger for someone else to buy them,” he said.

Companies with shale inventory, such as UpCurve, which holds about 20,000 acres in the western section of the Permian basin, will trade at a “scarcity value,” Fenton noted. “There is only so much real estate remaining, certainly in the Permian basin.”

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