Pioneer-Exxon Merger Rumors Heat Up as Shale Oil Looks to Consolidate
Since Friday, Pioneer Natural Resources (PXD) shares jumped by 11.67%, from $214 to $238. Pioneer has one of the largest acreage stakes in Texas’ Permian Basin, the world’s most prolific shale oil basin. By April 2021, Irving-based Pioneer increased its net acreage to over 1 million as the beneficiary of 6,300 extraction sites.
“Net acres” is a jargon specific to the oil and gas industry, inferring the amount of land from which the company has legal rights to explore and extract oil. Following the latest geopolitical turmoil, oil prices will come to the forefront once again.
Exxon-Pioneer $60B Deal
Late Thursday, news leaked that Exxon Mobil (XOM) is in the process of acquiring Pioneer. Valued at $60 billion, if it goes through, the deal would be the largest since Exxon’s acquisition of Mobil in 1998 at $81 billion.
Such valuation implies that Exxon is willing to pay a premium price for Pioneer’s extraction sites, at $3.7 million vs ~$3 million average per site. Moreover, high-quality sites with extra shale oil yields would cost Exxon $4.5 million per site, according to Andrew Dittmar, analyst at oil and gas specialized Enverus.
Relative to its US competitors, Exxon has a dominant market share of 20.15%. Regarding shale oil producers, Pioneer Natural Resources (PXD) is among the top 10 shale oil producers, per Enverus. Therefore, the Exxon-Pioneer deal would significantly consolidate shale oil production.
Why is Shale Oil Important?
This September, the Biden administration plans to offer only three licenses for offshore oil drilling during 2024 – 2029. This would be the most restrictive oil and gas leasing since Congress passed the Outer Continental Shelf Lands Act Amendments in September 1978.
Originally enacted in 1953, OCSLA is the framework within which oil and gas companies operate. When the new restrictions were revealed, industry representatives were not pleased.
“The release of this U.S. offshore leasing program, mandated by law and long overdue, is an utter failure for the country. President Biden’s approach to severely limit leasing significantly curtails access to a critical national asset at a time when energy inflation is rampant,”Erik Milito, president of National Ocean Industries Association (NOIA)
Milito also noted looming recession concerns. The restriction would align with President Biden’s campaign promise to end new federal leasing, having since been blocked by courts and rising gasoline prices. The three new leases, as historically restrictive as they are, appear to be the minimum political compromise.
Accounting for 10% of global oil production, shale oil represents an avenue against such trends. This type of crude oil is trapped in shale rock formations. The most oil-yielding are the Bakken Formation in the Gulf of Mexico and the Permian Basin, which spans Texas and New Mexico.
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How Much Does the Permian Basin Produce?
The Permian Basin alone produced an average of 5.3 million barrels daily in 2022. For comparison, EIA estimated the total crude oil production in the US in the same year at an average of 11.9 million barrels per day (b/d).
Unlike conventional oil produced by Saudi Arabia or Russia, shale oil is extracted via hydraulic fracturing by pulverizing the porous rocks. Otherwise known as “fracking,” this process is controversial because it includes chemicals alongside high-pressure water to crack the rocks.
Nonetheless, fracking has made previously inaccessible energy reserves accessible. In addition to oil, fracking can also release captured natural gas. The Energy Information Administration (EIA) placed a 32% figure in 2013 for the world’s technically recoverable natural gas.
As of 2022, EIA estimated that shale oil production is 66% of US total crude oil production. This includes “tight oil” as the broader rock-extracted oil. While all tight oil is extracted via hydraulic fracturing, tight oil includes sandstone and carbonate, besides shale.
Shale Consolidation Milestone with ExxonMobilPioneer
Having merged with Virginia-based Mobil in December 1998, ExxonMobil was valued at $80 billion. In July 2023, ExxonMobil announced the acquisition of Denbury (DEN) in an all-stock transaction worth $4.9 billion at $89.45 per DEN share.
Since then, DEN shares have risen 12% to $93. Similarly, since Thursday’s advanced negotiations with ExxonMobil were disclosed, Pioneer Natural Resources (PXD) increased by 11.67. ExxonMobil (XOM) stock took a brief plunge before recovering.
The new shale oil teamup would account for 15% of Permian Basin’s total output. Matthew Bernstein of Rystad Energy consultancy called the move a new era of consolidation.
“It’s hard to overstate the importance that this deal will have in terms of the Permian becoming consolidated.”
As energy needs increase, similar mergers and acquisitions (M&As) will likely be in play. After all, it would be more cost-effective than funding exploratory ventures. In the meantime, highly unreliable, low-energy-density renewables seem less sustainable by the day.
As more electric vehicles (EVs) are rolled out, do you think countries will have to resort to the ultimate energy density – nuclear power? Let us know in the comments below.