The world is in the midst of a major transition, with rapid growth in the demand for clean energy sources. ExxonMobil (XOM +0.08%) is firmly entrenched in the older, dirtier world of carbon fuels. Although it has dipped its toes into clean energy, the recent merger agreement with Pioneer Natural Resources (PXD +0.00%) should cement in investors' minds that Exxon is an oil company. Here's how to think about Exxon as an investment today.
Exxon's big deal
Exxon will give Pioneer shareholders 2.3234 shares of ExxonMobil for each Pioneer share they own, valuing the deal, including assumed debt, at roughly $64.5 billion. That's the largest transaction that Exxon has undertaken since it merged with Mobil. So this is a very big transaction.
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There are notable benefits. For example, it will dramatically increase Exxon's scale in the U.S. onshore oil production space. This area is characterized by "short cycle" activity, which means production growth can be ramped up and down more easily than with more traditional energy assets (like offshore production). That increases Exxon's flexibility to adjust production along with supply and demand in the volatile energy sector. The current goal is to use Pioneer's assets to ramp up daily production in the region to around 2 million oil equivalent barrels per day by 2027.
Exxon's execution in the onshore U.S. space has improved materially in recent years. So adding the extra acreage will allow it to put its strong operational performance to work across a larger portfolio. Exxon also believes that the two companies will be able to improve the environmental performance of their assets as they begin to work as one. From a business perspective, this seems like a good combination for the giant oil and natural gas driller.
NYSE: XOM
Key Data Points
Exxon is doubling down on carbon
It wasn't too long ago that Exxon agreed to buy a company called Denbury for around $5 billion. It was a much smaller deal, obviously, but it played into the clean energy trend. CEO Darren Woods explained in a statement, "Acquiring Denbury reflects our determination to profitably grow our Low Carbon Solutions business by serving a range of hard-to-decarbonize industries with a comprehensive carbon capture and sequestration offering." That's well and good and burnishes the company's clean energy bonafides.
But Exxon is not a clean energy stock, with the Pioneer merger putting an exclamation mark on that statement. It clearly believes that oil and natural gas will remain vital fuels for years to come. While Exxon is hedging its bets a little on the clean energy front (Denbury), basically dipping its toes into the water, it is not even close to making a large-scale shift in its business approach. Investors who thought Exxon might be moving in a new, cleaner direction, would be better off with an energy giant like TotalEnergies that has a stated goal, and history, of doing just that.
The other option is to simply dump the oil and natural gas sector altogether and buy a company that is entirely focused on renewable power. Brookfield Renewable would be a good option that also comes with a generous dividend yield and strong dividend history. In that way you could replace the income you generate from Exxon while getting rid of the carbon fuel exposure.
That said, you might like the idea of Exxon doubling down on an out-of-favor sector. It is worth noting that Warren Buffett has significant investments in Chevron and Occidental Petroleum. Although the Oracle of Omaha isn't always right, he is making a very serious bet that oil and natural gas are still important to the world. That's a huge vote of support for Exxon's stance and a potential reason to own the shares.
Exxon is an option, but not the only one
At the end of the day, Exxon is a well-run energy company that is still heavily focused on the carbon economy. If that is a problem for you, then you might want to consider other investment choices. If you think doubling down on oil is a good business decision, then you might want to stick with the stock if you own it or buy it if you don't.
However, there are other well-run oil companies you could buy as well, noting that Exxon's dividend yield of 3.4% is below the 3.7% of peer Chevron despite the similarity between the two companies. In other words, if you are looking at Exxon today, this merger may not be enough to give it the edge over other energy options even if you have a positive view of the transaction.
