Pioneer Natural Resources (NYSE:PXD) has agreed to acquire privately held DoublePoint Energy for $6.4 billion. The DoublePoint deal is the company's second significant transaction over the last five months as it further consolidates acreage across the oil-rich Permian Basin. It will enhance the oil company's capability to generate cash flow, bolstering its ability to pay a gusher of dividends in the coming years via its variable dividend program

Drilling down into the deal

Pioneer Natural Resources has agreed to pay 27.2 million shares of stock, $1 billion in cash, and assume roughly $900 million of debt and liabilities to acquire DoublePoint from a group of private equity funds.

DoublePoint currently holds a contiguous land position consisting of about 97,000 high-quality net acres in the Permian Basin, directly offsetting and overlapping Pioneer's existing footprint. That makes it highly complementary and an excellent strategic fit. The primarily undrilled acreage will increase Pioneer's land position to more than 1 million net acres. And DoublePoint's assets will add about 100,000 barrels of oil equivalent per day to Pioneer's output.

A row of oil pumps with cash in the background.

Image source: Getty Images.

On top of being an excellent strategic fit, DoublePoint will enhance all of Pioneer's financial metrics from day one. It will be accretive to the company's cash flow and free cash flow per share, earnings per share, and corporate returns this year and beyond. Furthermore, Pioneer expects that the combination will yield about $175 million in annual cost savings. As a result, the company anticipates that the combination's accretive nature should increase the per-share variable dividend that Pioneer intends to start paying next year.

Transitioning from growth to income

Pioneer plans to convert DoublePoint Energy's assets from a growth driver to an income producer. DoublePoint currently operates seven drilling rigs across its acreage, and that's fueling growth in oil and gas production at a 30% clip. But Pioneer plans to reduce the activity on DoublePoint's acreage by 30% once it takes control by dropping down to five drilling rigs. That will decrease the capital spending on this acreage so that it should generate significant free cash flow at current oil prices.

Producing excess cash is the key to Pioneer's variable dividend program. The framework would see the company pay out up to 75% of its annual free cash flow after its base dividend. Thus, the more excess cash it produces, the higher the potential variable dividend payments. The company plans to make these payments in arrears, with variable dividends earned based on 2021's free cash flow (which the company will cap at 50% this year) paid out quarterly beginning in 2022. With DoublePoint on track to boost the combined company's free cash flow per share this year, that variable payout will be higher than it would have been without the deal. Furthermore, it will provide an additional boost to 2022's free cash given the timing of the expected $175 million in cost savings.

A potentially monster dividend stock in the making

Pioneer Natural Resources was already on track to be a big-time dividend stock before agreeing to acquire DoublePoint. At $55 a barrel for oil, the company was on pace to produce more than $2 billion in free cash flow this year. With crude oil currently in the $60s and the accretive DoublePoint deal secured, that number appears poised to head even higher.

That should give Pioneer the fuel to pay a potentially monster variable dividend that should dwarf its quarterly base payout of $0.56 per share, which already offers investors a competitive 1.4% yield. That upside potential makes Pioneer Natural Resources a stock that dividend investors won't want to overlook.

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