Pioneer Natural Resources (PXD -2.28%) is one of the larger U.S. onshore oil and natural gas companies. There are a lot of things to like about the stock, including the company's 20 years' worth of future drilling opportunities and highly efficient operations. It's why ExxonMobil (XOM -2.78%) has agreed to buy the company. Here's why you might not want to follow Exxon's lead.
What if something goes wrong with the Exxon deal?
Exxon and Pioneer Natural Resources have agreed on a purchase price of $253 per share. The deal is an all-stock transaction, so in actuality Pioneer shareholders will get 2.3234 shares of Exxon for each Pioneer share they own. That means that the real value of the transaction is entirely dependent on Exxon's share price when it closes. Given that the energy sector is highly volatile, that $253 per share figure is likely to change over time.
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But here's the big takeaway from the above information: The price Exxon offered was 18% higher than Pioneer's price prior to the news of a potential deal being leaked to the media. Given the way mergers work, the price of Pioneer now likely reflects most of that premium. If the deal goes through, buying Pioneer stock now wouldn't be all that profitable a trade. Sure, you would end up owning Exxon, which is fine, but there's no particular reason to be excited about Pioneer today.
The big risk is actually to the downside. If the deal falls through, that 18% premium now largely reflected in Pioneer's price will probably go away as soon as the news hits the market. This is a very real risk, since the U.S. government has been a bit more cautious about approving mergers of late and the Federal Trade Commission (FTC) has already made a second request for information. While a second request doesn't mean the deal is destined to be turned down, it is exactly what would happen if the FTC was thinking of scuttling the transaction.
There's one other problem with Pioneer
Let's assume the Exxon takeover fails and Pioneer stock falls. Should you buy it then? The answer isn't a clear "Yes," but rather a more considered "It depends." That's because Pioneer has a variable dividend policy that ties the quarterly dividend to the company's financial performance. Given that energy prices are highly volatile, the dividend is also highly volatile.
Paying a larger dividend when oil and natural gas prices are high is an efficient way to return value to shareholders. So some investors might like the practice. However, if you are a dividend investor attracted to Pioneer's 6.2% dividend yield, well, you can't really place too much value on that figure. The dividend will change, by design, and that will mean the income you end up collecting will change, too.
To be fair, having a dividend that changes along with energy prices can provide a hedge of sorts for real-world energy costs. Indeed, as you pay more for things like gasoline and heating, Pioneer's larger income stream would help you afford those higher costs. But the dividend will fall when oil prices are weak, so there's a downside here that probably won't be worthwhile for most dividend investors, particularly those trying to live off the income their nest eggs produce.
Pioneer isn't a bad company, but it may not be a good investment
So Pioneer is such an attractive company that industry giant Exxon has agreed to buy it. That's great for investors who owned it prior to the deal's announcement. But now that the premium offered is priced in, the downside risk is likely to be larger than the potential upside gain. However, that isn't the entire story here, since Pioneer's variable dividend policy would probably turn off conservative income investors even if there were no Exxon deal.
