ExxonMobil takes over Pioneer: How the merger could affect the US oil market

• ExxonMobil announces billion-dollar deal with Pioneer
• Permian production is expected to increase to approximately two million barrels by 2027
• Greater influence in negotiations with service providers

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Billion dollar deal

As ExxonMobil announced via press release on October 11, the merger with Pioneer Natural Resources was completed in an all-stock transaction valued at $59.5 billion. The total implied enterprise value of the transaction, taking net debt into account, is approximately $64.5 billion, according to the press release. The merger will combine Pioneer’s more than 850,000 net acres in the Midland Basin with ExxonMobil’s 570,000 net acres in the Delaware and Midland Basins. This promises Exxon a leading position in the industry with high-quality, undeveloped, unconventional resources in the USA. Together, the companies have an estimated 16 billion barrels of oil equivalent resources in the Permian Basin.

Importance for US oil market

However, as the Reuters news agency reported ahead of the takeover, experts say the merger of the two companies could further slow production growth in the largest US oil field and put pipeline companies and suppliers under pressure. Consolidation, high cost inflation and investor return demands have curbed production growth in the Permian shale formation in West Texas and eastern New Mexico this year. Permian crude oil production is expected to rise by about 430,000 barrels per day (bpd) this year, well below the 1 million bpd increase in 2019, government data said. Exxon, previously the fifth-largest producer in the Permian region, had set a target of up to one million bpd for its operations there by 2025, which was recently pushed back to 2027. The Pioneer acquisition brings Exxon’s production to about 1.33 million barrels of oil equivalent per day, well above target. Ajay Bakshani, director of analytics at research firm East Daley Analytics, noted: “With the Pioneer deal, there is a possibility that Exxon can claim to have met its Permian production growth target and therefore stop growing as quickly must, as it was originally planned”.

However, an increase to around two million barrels is expected by 2027, according to the merger press release. This is intended to help strengthen U.S. energy security by providing the best technologies, operational excellence and financial performance for a significant domestic source of supply, benefiting the American economy and its consumers, the company said, according to the release.

Growth rate slowed due to low drilling activity

Recently, the pace of growth has slowed due to lower drilling activity, although US oil producers are pumping more oil, explains Reuters. Experts say mergers have cut drilling budgets. In total, oil companies shut down 36 active drilling rigs last year, which corresponds to a decline of around ten percent. Rig inactivity has far-reaching implications for oilfield services and pipeline business. This is because shutdowns lead to a reduction in equipment usage, a decrease in work orders and increased competition among customers. In previous mergers, this often resulted in staff cuts at the acquired companies.

Pioneer CEO Sheffield, who will join Exxon’s board after the deal closes, recently announced his intention to retire from Pioneer at the end of the year, according to Reuters. After the sale closes, he will receive an exit package of $29 million. Four other top Pioneer executives will receive a combined severance payment of around $42 million. “Today is a bittersweet day for me,” Sheffield told his employees in a letter, promising that his oilfield workers and most office staff would be offered jobs at Exxon or severance if they declined the offer. Exxon CEO Woods also said in a conference call: “We’re not looking to cut rig operations or headcount. We’re looking at how we can leverage the best of both operations and increase volume and shareholder returns.”

“There’s no question that they [Exxon] “A position of this size would give us significant influence in negotiations or contracts with service providers,” explains Ben Crook, portfolio manager at Hennessy Energy Transition Fund. While Pioneer transports a large part of its produced oil to the market via pipelines from Targa Resources, Exxon is betting primarily on Energy Transfer and only to a lesser extent on Targa, East Daley’s Bakshani explained. In the event of a merger between Pioneer and Exxon, it could likely result in Exxon diverting increased volumes to pipelines in which it has an interest, such as the Wink-to-Webster pipeline, in which Exxon has a stake as part of a joint venture that also includes companies such as Plains All American and MPLX. Robert Webster, CEO of oil, gas and coal storage consulting firm Intermontane Oil LLC, explains: “The combined company could potentially negotiate better contractual terms based on the sheer scale of expected business activity. Volume always plays a crucial role in contract negotiations.

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