Written by Louis Leonardi
ExxonMobil’s acquisition of Pioneer Natural Resources marks the biggest corporate transaction yet this year. With interest rates marked at 5.25%, debt financing for this deal was very expensive for firms to borrow. Higher costs caution firms like Exxon more debt to fund acquisitions to see if they can afford to borrow more money to finance a deal. With the market for mergers and acquisitions dealing at $2.1 trillion for the year, this represents the lowest level 9 months into the year in a decade (Eaton and Morenne 1). Rising inflation and interest rates, geopolitical tensions, and increased regulatory scrutiny have all played their part in compressing the market. Until this recent deal, large corporations and investors have and may continue to stay away from M&A deals.
On October 11th, ExxonMobil (NYSE: XOM) and Pioneer Natural Resources (NYSE: PXD) announced a definitive agreement for Exxon to acquire Pioneer, a shale rival of Exxon. This marks ExxonMobil’s biggest deal since the merger of Mobil back in 1998. Looking at the specifics within the deal, Exxon bought out Pioneer for $59.3 billion, or $253 per share, based on Exxon’s closing costs back on October 5th, 2023 (Eaton and Morenne 1). When the deal is expected to close in early 2024, Pioneer Natural Resources will be the recipient of 2.3234 shares of Exxon for every Pioneer share they own (Eaton and Morenne 2). More importantly, this move will help Exxon cement its status as the dominant force in the U.S. fracking industry, where Exxon will have more places to drill than all of its rivals. Ultimately, it demonstrates CEO Darren Woods’ vision to tie ExxonMobil’s future to fossil fuels.
Given such high interest rates, it is interesting to see Exxon want to make this acquisition now rather than later. One reason that may have propelled their thought process is the recent rise in oil prices over the past few months. With crude oil sitting at about $86 per barrel, Exxon is counting on oil prices remaining relatively high in the next few years (Krauss 3). A number of international factors have caused this continual growth in price. Back in June, Saudi Arabia announced the country was reducing its exports of oil into the global economy and has continued to do so. Producing roughly 13% of the world’s oil, Saudi Arabia’s decision to do this has sparked the price of oil to rise (Hernandez 1). In addition to Saudi Arabia’s impact, with violence arising in the Middle East between Israel and Hamas, conflict between these two could affect neighboring countries heavily rooted in oil production. If Iran is drawn into the war, this could create major global risks, disrupting energy supplies and pushing oil prices even higher. Though large oil corporations by no means encourage this type of behavior, companies like ExxonMobil do benefit from rising oil prices. These events among others provide some insight on their thought process.
While large oil and gas companies are being encouraged to work towards producing energy with less environmental impact, most companies in the industry claim that investors are pressuring their companies to focus more on financial returns for their investors instead of the growth of renewable energies. Having this belief and commitment to their investors, Exxon believes the U.S. will remain one of the world’s largest fossil fuel producers for the foreseeable future, reasoning their hefty investment drilling in Texas. Exxon expects its production in the Permian Basin to more than double to 1.3 million barrels per day once the transaction closes (Eaton and Morrene 3). In a message to investors, CEO Darren Woods explained that “We’re doubling down on our organizations and capabilities” (Krauss 2). Hinted at in Woods’ statement, ExxonMobil understandably looks to consolidate itself within the oil and gas industry. Woods also added that “As importantly, as we look to combine our companies, we bring together environmental best-practices that will lower our environmental footprint and plan to accelerate Pioneer’s net-zero plan from 2050 to 2035” (Eaton and Morrene 3). The company expects to please investors with impressive returns while keeping up research efforts to lessen its carbon footprint.
Expanding large oil and gas companies trying to lessen their carbon footprints in the future brings up the question of what the future of oil and gas looks like as an energy source. According to the head of the International Energy Agency, “the demand for all three major fossil fuels–oil, coal, and natural gas–will peak this decade, marking the beginning of the end of fossil fuels and a historic turning point in the world’s translation toward renewable energy” (Horner 1). Demonstrating where governmental agencies stand on the debate, many oil producers, like Exxon, believe moving too quickly away from pumping crude and other fossil fuels could add to a future energy-supply crisis.
Moreover, Exxon believes that oil consumption will remain strong for decades, with growing demand inspired from commercial transportation and feedstocks within the chemical field. Some other factors that went into ExxonMobil making this deal include the following: improved earnings stability, capital productivity, and competitive advantage in technology. Improved earnings stability will support the confidence and loyalty of investors within the company. Long-term capital productivity is essential in order to keep returns of financial statements positive. Lastly, by making this move, Exxon will be able to implement its technology to better meet global demand and minimize environmental impacts while handling climate change risks at the same time. By moving its operations close to home, Exxon is inherently betting that U.S. energy policy will not contradict fossil fuels in a major way.
With ExxonMobile deciding to play its hand in the oil and gas industry by acquiring Pioneer, the oil and gas giant has put pressure on its competitors to either commit to oil and gas or place its investments in other sources of energy. In response to ExxonMobil, Chevron Corporation and Hess Corporation, a major producer in oil and gas, agreed that Chevron will acquire Hess for $53 Billion (Eaton and Stiff 1). Though Exxon has taken an early leap to consolidate the oil and gas industry, as more companies begin to strengthen their stake in the industry, it will put more pressure on other companies within oil and gas to make monumental moves in the future of themselves.
Given that drilling locations are too scarce to locate around the globe, it will be especially exciting to see how this unravels because most large oil and gas corporations are no longer searching for places to drill. Instead, these large corporations, as Exxon has, will begin to acquire large producers of energy that they can add to their business structure. Consequently, it might increase activity in the M&A market, boosting results for what has been a down year for investment banking.
All in all, ExxonMobil sees the importance of oil and gas in the United States for the foreseeable future. With the acquisition of Pioneer Natural Resources, Exxon has effectively doubled its investment within the future of the oil and gas industry. As Exxon begins to make future investments, it puts pressure on rivals within the industry to do the same. No matter how much politicians subsidize green energy, the world will need oil and gas as an energy source. In fact, Exxon may think that the real threat to a more prosperous future may be a world with too little oil and gas, not too much. Ultimately, this move may be the start of large oil and gas corporations doubling down on the industry, almost ignoring the government’s call to move towards renewable energy.
Sources
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Eaton, C., & Stiff, P. (2023, October 23). Chevron to Buy Hess for $53 Billion. WSJ.
https://www.wsj.com/business/energy-oil/chevron-to-buy-hess-for-53-billion-f1373362
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Hernandez, J. (2023, June 4). Saudi Arabia cuts oil prices again to shore up prices —
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https://www.npr.org/2023/06/04/1180056198/saudi-arabia-oil-opec
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Horner, W. (2023, September 12). Demand for Oil, Coal, and Gas to Peak This Decade,
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Imbert, F. (2023, January 11). Exxon Mobil agrees to buy Pioneer Natural Resources
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