ExxonMobil (XOM +0.72%) has agreed to buy Pioneer Natural Resources (PXD +0.00%) in an all-stock deal valued at $64.5 billion, including Pioneer's debt. The transaction will vault Exxon up the leader board to become the largest producer in the Permian Basin. The combination will also enhance Exxon's growth runway in the leading oil basin.
Here's a closer look at the deal and whether it makes the oil giant a buy.
NYSE: XOM
Key Data Points
Drilling down into the deal
Rumors have been swirling around Exxon and Pioneer since April. The oil giant finally sealed that deal, agreeing to buy Pioneer Natural Resources in an all-stock merger at $253 per share. That's a 9% premium to its 30-day volume-weighted average price as of Oct. 5, right before the latest rumors caused Pioneer's stock price to pop. The oil behemoth will exchange 2.3234 of its shares for each share of Pioneer Natural Resources.
Exxon's patience in pursuing Pioneer paid off. The company was able to capitalize on the rise in its share price this year to use its stock as a valuable currency to purchase Pioneer. Exxon stock closed at its all-time high of $120.20 per share on Sept. 27, 2023 and was recently slightly below that level. While Exxon's shares have risen more than 10% over the past year, Pioneer Natural Resources' stock had slumped before renewed rumors that Exxon was close to buying the oil company.
While valuation is an important aspect of this deal, it's more about Exxon increasing its scale in the Permian Basin:
Image source: ExxonMobil.
As the above map shows, Exxon is adding a massive acreage position in the heart of the Midland Basin. The deal will add over 850,000 net acres to Exxon's 570,000 net acres across both sides of the Permian.
The company will hold 16 billion barrels of oil equivalent resources in the low-cost oil basin. Meanwhile, the merger will double Exxon's production to 1.3 million barrels of oil equivalent per day (BOE/D) and position the oil giant to produce 2 million BOE/D by 2027.
NYSE: PXD
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Maximizing the value of every barrel
Exxon sees a few notable benefits of the transaction. It will enable the energy behemoth to produce more low-cost oil. Despite the more than $60 billion price tag, Exxon is acquiring Pioneer's resources at a cost of supply below $35 per barrel. Because of that, it expects the deal will be immediately accretive to its earnings per share and free cash flow.
Meanwhile, Exxon's larger regional scale should save it money over the long term. Exxon can drill longer wells and use its technological advantage to reduce costs and maximize production on Pioneer's acreage. The company can potentially capture about $2 billion in merger synergies. That fuels its belief that the transaction will be even more accretive to its earnings and free cash flow over the longer term.
On top of that, the deal will supply Exxon with more low-cost oil, natural gas, and natural gas liquids (NGLs) to funnel through its integrated network of midstream (pipelines) and downstream (refinery and chemicals) operations:
Image source: ExxonMobil.
Exxon owns interests in pipelines that can eventually move Pioneer's production to the Gulf Coast, saving it money over the long run. Meanwhile, it can feed the low-cost oil into its refineries while using the low-cost gas and NGLs to make chemicals and other products.
The enhanced returns and growing free cash flow from the merger should enable Exxon to return more cash to shareholders over the long term. The oil giant has the best dividend growth track record in the sector, delivering its 40th consecutive annual dividend increase late last year. Meanwhile, Exxon launched a massive $50 billion share-repurchase program last year, which it expects to complete by the end of 2024.
The enhanced free cash flow from Pioneer will likely give Exxon the fuel to buy back even more shares in the future. It could quickly repurchase most of the shares issued to acquire Pioneer. As a stand-alone entity, Pioneer estimated it could produce a cumulative $27 billion to $40 billion in free cash flow over the next five years if oil averaged between $80 and $100 per barrel.
The right deal at the right time
Exxon is using its attractively valued stock to buy Pioneer Natural Resources. The deal will enhance its position in the Permian Basin while significantly increasing its earnings and free cash flow. That will give the oil giant more money to return to shareholders, including buying back the shares it will issue to acquire Pioneer.
It looks like a well-timed deal that could pay off in the long term. That makes Exxon a much more attractive stock to buy since it could generate significant earnings and cash-flow growth, even if oil prices cool off.
