By: Reuters – Exxon Mobil (XOM.N) is poking around in the wrong area. Buying Pioneer Natural Resources (PXD.N) would cost a chunky $64 billion. The implied return on investment looks healthy enough under conventional parameters, according to Breakingivews calculations. These days, however, the bar is higher.
Pioneer makes an understandable takeover target, and the Wall Street Journal reports there have been talks about a deal. It’s one of the largest U.S. shale companies, expecting to produce up to 700,000 barrels of oil equivalent per day in the Permian Basin, located in Texas and New Mexico, this year. Those would fold nicely into Exxon’s operations in the region. And boss Darren Woods is on track to deliver nearly $10 billion of quarterly net profit with only $11 billion of net debt.
All told, Pioneer is expected by analysts to generate about $7.4 billion of operating profit this year. When Pioneer bought rival Parsley Energy in 2021, it said it could cut about 20% of its quarry’s operating costs. Assume tight-fisted Exxon could manage the same proportion at Pioneer, and it would lead to some $1.8 billion of savings.
If Exxon were to pay a 30% premium to Pioneer’s undisturbed share price, the enterprise would cost $68 billion, including net debt. Tax Pioneer’s expected operating profit and the projected synergies at the statutory corporate rate of 21%, and it leads to around $7.2 billion of net operating profit after tax. On those numbers, Exxon’s return would be about 11%, comfortably above Pioneer’s roughly 8% weighted average cost of capital as calculated by Morningstar analysts.
Even so, it’s not good enough considering the risks involved. Worldwide oil demand is close to peaking or may have done so already. High recent prices aren’t helping, and electric vehicles are rapidly growing in popularity and development. The writing is on the wall for oil producers, which helps explain why Exxon trades at less than 12 times estimated earnings over the next 12 months, a 25% discount to its 20-year average multiple, according to Refinitiv Datastream. Low-emissions energy is a more important area for investment.
Pioneer says it has more than 20 years of high-return inventory, but shale wells also have a way of depleting more quickly than anticipated. Ramping up production would mean supply, and returns, tail off much sooner. Exxon would be better off exploring elsewhere.
CONTEXT NEWS
Exxon Mobil has held preliminary talks to buy Pioneer Natural Resources, according to a Wall Street Journal story published on April 7. Pioneer’s market capitalization was $49 billion on April 6.
Pioneer is one of the largest producers of oil in the Permian Basin, located in Texas and New Mexico. Pioneer produced about 650,000 barrels of oil equivalent per day in 2022. The company expects total production to rise to 670,000 to 700,000 barrels of oil equivalent in 2023.
