Exxon Investors Prefer Buying Existing Oil over New Drilling
Introduction: Exxon Mobil’s investors are shifting their preference towards acquiring existing oil and gas production instead of investing in new drilling projects. This article explores the reasons behind this change and discusses Exxon’s potential acquisition of Pioneer Natural Resources.
Investors Favor Higher Returns over Capital Spending
Energy investors have been divesting stocks in oil companies that prioritize capital spending, opting for higher returns instead. However, Exxon Mobil’s shares reached a record high of $120 last month due to strong returns from its oil, gas, and refining businesses.
Exxon’s Talks to Acquire Pioneer Natural Resources
Exxon Mobil is currently in talks to acquire Pioneer Natural Resources, the second-largest Permian shale oil producer, for $60 billion. This move indicates Exxon’s readiness to invest in existing production after falling short of its output targets in the Permian.
Exxon’s Production Goals and Political Pressure
Exxon had set a goal of reaching 1 million barrels of oil and gas per day by 2025, which was later postponed to 2027. With increasing political pressure against new drilling, acquiring a smaller company like Pioneer, known for its fantastic reserves, makes strategic sense.
Pioneer’s Strong Balance Sheet and Growth Potential
Pioneer Natural Resources’ strong balance sheet and growing production make it an attractive acquisition target. The company has managed its spending and debt levels well, making it a favorable candidate for Exxon.
The Global Demand for Fossil Fuels
Despite the rapid growth of renewable energy sources, the recent surge in oil and gas prices following geopolitical events has highlighted the continued need for fossil fuels. Reduced spending by U.S. oil producers has allowed OPEC members to increase global oil prices by cutting their production.
Acquisitions and Cash Flow Generation
Analysts suggest that acquisitions are highly favored if they can generate high cash flow for the acquiring company. Oil firms, including Exxon, are currently sitting on record amounts of cash, making it an opportune time to invest in cash-positive businesses.
Exxon’s Financial Leeway and Previous Acquisitions
Exxon has been hoarding cash after paying off its debt from the COVID-19 oil-price collapse in 2020. The company’s Chief Financial Officer, Kathryn Mikells, stated that the cash reserve of $30 billion provides them with the flexibility to act when oil cycles turn in their favor. This potential acquisition would not be Exxon’s first venture into shale, as it previously acquired XTO Energy and expanded its Permian assets.
Concerns and Maturity of the Shale Sector
Some investors express concerns about Exxon’s track record with large acquisitions. The cultural differences between U.S. exploration and production companies and larger integrated entities have posed challenges in the past. However, the oil industry has shifted towards acquiring existing production rather than exploring untapped fields.
Exxon’s Potential Dominance in the Permian
If Exxon successfully acquires Pioneer Natural Resources, it would solidify its position as the dominant player in the Permian basin. This consolidation would contribute to a more mature and consolidated shale sector, according to shale analysts.
Exxon’s Presence in U.S. Shale and Guyana
The acquisition of Pioneer would significantly expand Exxon’s acreage position in the Permian, increasing it by approximately 84% to around 2 million acres. It would also consolidate Exxon’s presence in two major oil-producing regions: U.S. shale and Guyana, where the company holds a 45% stake in a consortium aiming to produce 1.2 million barrels of oil by 2027.
In conclusion, Exxon Mobil’s shift towards acquiring existing oil and gas production aligns with the preferences of energy investors seeking higher returns. The potential acquisition of Pioneer Natural Resources highlights Exxon’s commitment to expanding its production capabilities. By fulfilling these objectives, Exxon aims to solidify its position as a dominant player in the Permian basin and benefit from the financial advantages of cash-positive businesses.