2023-10-06 20:53:28
Exxon Mobil investors now prefer that the company use its stock price and financial muscle to acquire existing oil and gas production, rather than invest in drilling that might take years to bear fruit. Over the past four years, energy investors have dumped oil company stocks that were increasing capital spending, preferring higher returns to spending on expensive, long-term new projects. But last month, Exxon shares hit a record high of $120, driven by returns from its oil, gas and refining businesses.
Its negotiations to acquire Pioneer Natural Resources, the Permian’s second-largest shale oil producer, for $60 billion indicate it is willing to pay for production following missing its own production targets in the Permian.
A deal would bring Exxon to regarding 1.33 million barrels of oil and gas per day, making it the oil field’s largest producer. In 2019, Exxon set a target of 1 million barrels per day for 2025 and recently pushed it back to 2027. “There is incredible political pressure once morest drilling new holes in the ground to find oil and gas,” said Bill Smead, chief investment officer at Smead Capital Management, which manages $5.2 billion in funds, 25% of which is dedicated to oil and gas.
“So it makes perfect sense to buy a smaller company. Pioneer has fantastic reserves,” he said. Soaring oil and gas prices following Russia’s invasion of Ukraine have highlighted the need for fossil fuels, despite rapid advances in solar and wind power. Cuts in spending by U.S. oil producers have allowed OPEC members to raise global oil prices this year by cutting production.
Analysts say acquisitions are easily accepted if they can generate high cash flow for the acquirer, said Alexandre Ramos-Peon, head of shale research at Rystad.
“These companies have record amounts of cash,” he said. “You’re buying a cash-flow positive business, with cash that won’t be used otherwise.
Exxon has been stockpiling cash this year following paying off the massive debt it took on in 2020 during the COVID-19 oil price collapse. It has retained some $30 billion in cash over the past year to provide financial flexibility to act in the event of a downturn in oil cycles, Kathryn Mikells, the company’s chief financial officer, said in a statement. July, following the publication of second quarter results.
THE KING OF THE PERMIAN
This would not be Exxon’s first or second shale operation. The company paid $36 billion to acquire XTO Energy in 2010, following missing out on the first phase of the U.S. shale revolution. In 2017, it continued its momentum by purchasing $6.6 billion worth of assets in the Permian from the billionaire Bass family.
This history worries some.
“Exxon’s efforts to acquire large U.S. producers have not been widely viewed as a success by investors,” said Scott Hanold, an oil analyst at RBC Capital Markets. “Cultures tend to be very different between U.S. E&Ps and larger, more integrated entities.
But in recent years, the oil industry has shifted away from drilling exploration and toward purchases of existing production rather than untapped deposits. Oil companies have become accustomed to routine purchases, analysts say.
Acquiring Pioneer would allow Exxon to increase its position in the Permian by approximately 84%, to approximately 2 million acres. It would also allow it to consolidate its position in two major oil-producing regions of the Americas: American shale and Guyana.
Exxon owns a 45% stake in a Guyanese consortium that aims to produce 1.2 million barrels by 2027, with most of the capital expenditure already budgeted.
“If ExxonMobil is crowned the undisputed king of the Permian in the coming days, the shale sector will fundamentally become a more mature consolidated business,” said Matthew Bernstein, senior shale analyst at consulting firm Rystad Energy.
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