Pioneer Natural, other Permian stocks rally on news an Exxon deal may be next

The Wall Street Journal late Thursday reported that Exxon was near a roughly $60 billion “blockbuster” deal to buy Pioneer. The companies have not commented.

Citi analyst Alastair Symes said that the “logic of consolidation in the highly fragmented Permian shale remains compelling,” with significant gains from economies of scale.

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“This particular combination would create the largest Permian player and, even with a modest deal premium, we estimate can generate a positive return on investment,” Symes said.

Symes estimated that Pioneer is No. 2 largest owner of resources in the Permian and Exxon’s the fourth, and a merger “elevating the combination just ahead of [Chevron Corp.
CVX,
-1.02%
] as the largest resource-owner in the basin.”

A high percentage of Pioneer’s Permian holdings are Tier 1, or best quality reservoirs, “that would likely command a premium.” Given Pioneer’s size, “there are likely not many suitors, and certainly none with the currency (the equity valuation premium) that [Exxon] has,” he said.

Exxon, for its turn, has invested around $28 billion in its downstream operations over the past decade, and its refineries, petrochemical plants, and liquified natural gas export facilities “all need to be fed with hydrocarbons and adding Pioneer Natural Resources at this point in Exxon’s history would offer both speed and scale,” Third Bridge analyst Peter McNally said.

“Integrating both Exxon and Pioneer’s upstream volumes with the scale of the downstream would bring economic benefits to both,” he said.

J.P. Morgan analysts, led by Arun Jayaram, said that oil giants such as Exxon historically have shied away from mergers and acquisitions while oil prices are on the upswing, but “the stars could be aligning on several fronts” for a deal with Pioneer.

Pioneer shares have lagged oil-futures prices, and trading at a discount. Chief Executive and founder Scott Sheffield is set to retire at year-end, and a deal would be “a fitting way to conclude his tenure in what appears to be a shareholder friendly manner.”

Moreover, “the U.S. shale industry is currently engaged in an M&A wave,” the J.P. Morgan analysts said. The wave has not only included independent producers, but also larger companies such as Chevron, with its deal for Noble Energy and PDC Energy as well as ConocoPhillips’
COP,
+1.68%
and Shell Plc
SHEL,
+2.98%
2021 deal in the Permian.

“We think this would represent the primary motivation for a deal given the magnitude of [Pioneer’s] undrilled inventory,” they said.

Exxon shares have dropped more than 2% so far this year, contrasting with an advance of about 11% for the S&P 500.