Two mega-deals mark major step in US oil and gas consolidation [Gas in Transition]

Two oil and gas mega-deals announced this month will reshape the US oil and gas industry. Over the course of two weeks in October, ExxonMobil announced that it was acquiring Pioneer Natural Resources while Chevron said it had agreed to buy Hess.

ExxonMobil’s deal is valued at $59.5bn, while Chevron’s is worth $53bn, with both deals consisting entirely of stock. In ExxonMobil’s case, it is the largest transaction since the supermajor was formed via the merger of Exxon and Mobil in 1999. In Chevron’s case, it is the company’s largest ever.

This comes after Pioneer’s CEO, Scott Sheffield, predicted in his company’s second-quarter earnings call for 2023 that shale producers would be running out of inventory over the coming years except for the largest producers, of which Pioneer is one. This, Sheffield said in the August earnings call, was expected to lead to an era of “extreme consolidation”. And that era now appears to have arrived.

ExxonMobil

ExxonMobil’s deal values Pioneer at $253/share. Including the assumption of debt, the implied total enterprise value of the transaction is roughly $64.5bn. This also makes it the third-largest upstream merger ever, after Exxon’s merger with Mobil and Chevron’s purchase of BG Group in 2016.

The acquisition will more than double ExxonMobil’s footprint in the prolific Permian Basin, which is Pioneer’s sole area of focus and will also make the supermajor by far the dominant player in the region. It comes after ExxonMobil has increasingly been narrowing its focus on the Permian and Guyana. The supermajor had also been prioritising Brazil until recently, but while it said in May that it was continuing to explore there, there have been reports that it is pulling back following a series of exploration setbacks. On its website, the Permian and Guyana are now the two focus areas highlighted and represent two significantly different assets, given that one is onshore shale and the other is deepwater.

The ExxonMobil-Pioneer deal also breaks several other records, and illustrates how attractive major acquisitions can be under current market conditions, for those that can afford them.

“At an 18% premium, the offer is the highest paid in an upstream corporate merger since 2019 but in line with what would be expected to tempt a company with asset quality of [Pioneer] to sell,” says Enverus Intelligence Research’s senior vice president, Andrew Dittmar, in comments shared with NGW. “At that enterprise value, the deal implies a little over $4mn for each of Pioneer’s drilling locations. That is a premium to where the market has priced inventory in prior deals, but Pioneer represents a nearly unique and high-quality asset and Exxon is justified in paying a premium to secure the Permian as a foundation of its production portfolio.”

Dittmar notes that ExxonMobil was able to pay the premium because the supermajor trades at a higher valuation than independent exploration and production (E&P) firms. This allows ExxonMobil to keep the deal neutral or accretive on key financial metrics while still picking up the inventory, he says.

Once the deal closes, which is anticipated in the first half of 2024, this will leave few significant acquisition targets in the Permian that can compete. However, a handful of privately owned companies that could be potential targets still remain, even though many have already been acquired in the wave of consolidation playing out over the last few years.

“Consolidators could also turn to one the Permian’s last big legacy family companies and pursue a deal with Endeavor Natural Resources, which has over 2,000 high-quality locations in the Midland Basin,” notes Dittmar, referring to one of the two sub-basins that makes up the Permian, together with the Delaware sub-basin.

The deal is illustrative of various trends playing out in the Permian – and sometimes across other shale regions, though shale consolidation has been fairly focused on the Permian over recent years.

“While scale-based efficiency gains are a benefit, expanding shale inventories is likely the larger incentive driving any further industry consolidation,” a Morningstar Research Services equity analyst, Katherine Olexa, tells NGW. “Exploration and production companies must balance a long-term decline in acreage quality while ensuring volumes production is sufficient to meet oil and gas demand,” she continues. “Acquiring already-proven inventories reduces the risk of sinking investment dollars in assets that ultimately prove unviable. Inorganic inventory expansion aligns with the industry-wide capital discipline, which will likely remain a key tenet for operators moving forward.”

ExxonMobil and Pioneer still appear to be pursuing scale-based efficiency gains, though.

“XOM and PXD have each touted the generally positive correlation between lateral length and well productivity,” Olexa says. “We expect the combined entity will prioritise production from longer-lateral wells moving forward. This, coupled with efficiency gains from the firms’ combined expertise should reduce the requisite operating capacity required to meet a given level of production over time.”

And while the Permian Basin is largely known for its oil production, its associated natural gas output cannot be overlooked. This is especially the case given that the region is increasingly a source of feedstock gas for LNG export terminals on the US Gulf Coast and that ExxonMobil is currently building the Golden Pass LNG plant there in partnership with QatarEnergy. The basin is the second-largest shale gas production region in the US, after Appalachia.

“Almost a quarter of the product mix is natural gas, so it's not immaterial,” a Morningstar equity strategist, Stephen Ellis, tells NGW. “To the extent that XOM can supply the gas to LNG terminals for export, that's a great growth opportunity. Given its associated gas, the economics tend to be a bit of an afterthought compared to oil, but there's certainly ongoing opportunity to monetise the gas and use it potentially with other parts of the XOM portfolio (natural gas liquids and petrochemicals) to extract value.”

Chevron

After ExxonMobil’s acquisition announcement, speculation quickly mounted that Chevron would soon follow with a major purchase of its own, and these expectations were quickly met. Chevron is paying $171 per share for Hess. Including the assumption of debt, the total enterprise value of the transaction is $60bn.

Notably, Hess’ primary focus areas are also offshore Guyana, where it partners with ExxonMobil, and in the Bakken tight oil play in the US. The Bakken is the US’ second-largest shale production region after the Permian for oil and the seventh-largest for natural gas.

Indeed, the shale assets are thought to be less of a driver in the Chevron-Hess deal.

“With Hess, Chevron gains meaningful positions in Guyana and the Bakken, including Hess’ midstream assets, as well as smaller positions in the Gulf of Mexico and natural gas assets in Southeast Asia,” says Morningstar analyst Allen Good in a note that was shared with NGW. “Given its size and economics, Guyana is the most attractive of the group and likely the key driver of the deal, as it adds a source of long-term growth Chevron had been lacking.”

Good believes it is unlikely that Chevron will retain all of the assets it is acquiring over the long term, though, as the super-major expects to high-grade its portfolio and generate $10-15bn in asset sales by 2028.

The Chevron-Hess deal is the fourth-largest upstream deal ever by enterprise value, just behind ExxonMobil-Pioneer and ahead of Occidental’s purchase of Anadarko Petroleum in 2019, notes Dittmar in a commentary shared with NGW.

“The common thread connecting these deals is majors looking to refill their pipelines to maintain production against a declining asset base as they anticipate their legacy businesses staying profitable into the 2030s,” he says. “In addition, both Exxon and Chevron are using all-stock consideration, which cuts across the idea that majors’ vast cash hordes would incite another round of M&A.”

Dittmar notes that a further similarity between the two deals is that the newly acquired assets will provide significant growth for the buyers in both cases.

“While Pioneer was following the model of other shale companies and targeting flat or minimally growing volumes, Exxon plans to ramp production in the Permian,” he says. “Hess was already on a growthier trajectory than Chevron, so incorporating those assets into the Chevron portfolio will weigh the company further towards growth even without a change in Hess’ standalone plans. However, the underlying asset basis purchased by Exxon and Hess are quite different.”