On Oct. 11, ExxonMobil (XOM -2.78%) made waves by announcing an all-stock merger with Pioneer Natural Resources (PXD -2.28%), valuing Pioneer at $59.5 billion. Just 12 days later, Chevron (CVX 0.37%) followed suit with its $53 billion all-stock merger with Hess (HES 0.67%).
Exxon's announcement marked its largest deal since Exxon and Mobil merged in 1999. Similarly, Chevron's merger is its largest since it merged with Texaco in 2001. The decision by Exxon and Chevron to make simultaneous mega moves is eerily familiar to the late 1990s/early 2000s oil market. But this time around, the energy transition has some serious runway.
Let's discuss why ExxonMobil and Chevron are betting big on fossil fuels just a few years after announcing aggressive environmental, social, and governance (ESG) targets, and whether either dividend stock is worth buying now near its all-time high.
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A primer on the two deals
ExxonMobil's decision to buy Pioneer is a bet on the Permian Basin. On March 5, 2019, ExxonMobil revised its growth plans to produce more than 1 million barrels of oil equivalent per day (boe/d) from the Permian as early as 2024. ExxonMobil was on pace to miss that goal.
But the Pioneer acquisition now more than doubles ExxonMobil's production volume to 1.3 million boe/d, with plans to increase Permian production to 2 million boe/d. Most of ExxonMobil's Permian acreage is in the Delaware portion of the Permian Basin, while Pioneer has largely contiguous acreage in the Midland portion of the basin. Acquiring Pioneer's acreage gives Exxon a much larger and all-encompassing position in the Permian, and is a natural fit given ExxonMobil's goal to make the Permian its largest regional production driver.
In its investor presentation, ExxonMobil highlighted the cost savings that will come from merging with Pioneer. It also believes it will be able to get higher volumes at lower costs thanks to its technology, which allows it to do things like drill up to four miles horizontally in multiple directions from a single well. All told, ExxonMobil expects 2027 production to exceed 5 million boe/d, 60% of which will come from the Permian Basin, offshore Guyana and Brazil, and liquefied natural gas.
Chevron's deal is more of a diversification play than it is adding to something that is already working. Reserves offshore from Guyana have proven to be one of the largest untapped oil fields in the world. Hess is part of a consortium with ExxonMobil that operates there. Hess has 30% ownership in more than 11 billion boe, 465,000 net acres in the Bakken Basin, and Gulf of Mexico assets. Further discoveries at offshore Guyana, paired with low production costs, have made Guyana a hotbed for investment.
Hess estimates that offshore Guyana breakeven prices will range from $25 to $35, providing long-term cash flows even at lower oil prices. Chevron's acquisition of Hess effectively means it will be working with Exxon to further develop Guyana.
Environmental objectives lose their luster
All-stock transactions are a way to leverage the value of a company's equity to buy another company. It makes sense for ExxonMobil and Chevron, which have seen massive gains in their stock prices over the last few years.
The same goes for Pioneer and Hess shareholders, who have also enjoyed big gains. They can choose to continue riding the wave when they receive their Exxon shares (for Pioneer investors) or Chevron shares (for Hess investors), or simply sell the stock and cash in on the gains.
However, some investors may question Exxon and Chevron's decisions to leverage their higher stock prices to buy oil companies instead of accelerating their diversification into low-carbon solutions. After all, Chevron pledged its net-zero aspiration by 2050 on Oct. 11, 2021. And on Jan. 18, 2022, ExxonMobil announced its ambition for net-zero greenhouse gas emissions on operated assets by 2050.
Buying oil assets when equity values have enjoyed a multi-year upswing is going to make these 2050 targets harder to achieve, and supports the narrative that integrated majors like ExxonMobil and Chevron are truly oil companies, not diversified energy majors.
In interviews with CNBC, Exxon and Chevron executives were keen to note their low-carbon investments -- ExxonMobil mainly through carbon capture and storage and Chevron through green hydrogen and low-carbon fuels. But at least for now, these ESG efforts do little to offset the emission profiles of the broader companies.
The timing is right for both companies
If oil prices remain higher for longer than expected, Exxon and Chevron's moves could look genius in hindsight. And while neither company is getting a great deal for its acquisition, they aren't terrible deals considering the run-up in their stock prices, especially ExxonMobil.
ExxonMobil and Chevron were some of the only oil majors to not cut their dividends during the worst of the COVID-19 pandemic. And outsized gains in recent years have supported growth and balance sheet improvements, which helps make these sizable acquisitions more reasonable. In fact, ExxonMobil and Chevron's pre-acquisition total net long-term debt and debt to capital ratios are near 10-year lows -- which is remarkable given the uptick in debt that both companies took on in 2020 and 2021.
XOM Net Total Long Term Debt (Quarterly) data by YCharts
Both acquisitions illustrate the oil market's focus on the importance of energy security and reliability, and are bold bets on the long-term relevance of fossil fuels even as the energy transition marches on. Both acquisitions are fairly reasonable given the financial positions of the two companies and the fact that neither has made an acquisition of this size in over 20 years. Again, the headline numbers seem large. But once you put into context the gains and balance sheet improvements both companies have made in a short amount of time, both deals make more sense.
Two worthwhile core holdings for oil and gas investors
ExxonMobil and Chevron aren't screaming buys like they were in 2020. But both companies have stable growing dividends and are able to support those dividends with cash even if oil prices fall considerably. There are less expensive pure-play choices out there. But for investors who believe that fossil fuels are still underappreciated by markets, Exxon and Chevron are two solid, foundational choices that have only gotten stronger in recent years.
However, investors that think majors should be taking advantage of high oil prices by diversifying into low-carbon solutions and renewable energy would probably disagree with Exxon and Chevron's decisions to double down on fossil fuels, and therefore may want to pass on both stocks despite the advantages of their mergers.
