The US shale industry is on the verge of a monumental deal that could reshape the landscape of the onshore US Permian Basin. Rumours have resurfaced suggesting that supermajor ExxonMobil is nearing a US$60 billion takeover of Texas-based shale player Pioneer Natural Resources, says Rystad Energy.
These rumours first surfaced in April 2023 but remained dormant for months as others in the basin kicked off a fast-paced summer of consolidation, which saw a number of public players adding inventory via the acquisition of private exploration and production companies (E&Ps). With a report by the Wall Street Journal putting the potential Pioneer-ExxonMobil tie-up back in the spotlight, the shale industry could forever change in the coming days.
The shale industry’s trademark ‘wildcatting’ spirit is what helped push the USA to be the top producer of oil in the world, as thousands of independent operators used hydraulic fracturing technology in hopes of rapid growth. This catapulted the USA up the ranks of global producers in the 2010s thanks to highly productive, short-cycle shale oil wells. The public portion of the industry has long been marked by capital discipline and modest growth in the name of shareholder returns, even before the onset of the COVID-19 pandemic. However, this year has already seen a more notable shift in industry attitudes. With inventory on the front of investor and operator minds alike, it has been quietly acknowledged that the sector is now operating as a mature business. While Rystad Energy still sees production growth on the cards in the near term, a more disciplined approach to growth has been sought to help secure the stability of the business in the long-run.
A deal the size of ExxonMobil’s potential acquisition of Pioneer, however, could usher in a new ‘Shale 4.0’ era. The period of capital discipline since 2019 has colloquially been called ‘Shale 3.0’, with its capital-conscious nature standing in stark contrast to the technological advancements of the industry’s early beginnings and the free-spending nature of its rapid rise. While capital discipline would still reign supreme, the ‘Shale 4.0’ era would be unmistakably marked by consolidation. It would see high-spending supermajors, already in possession of large portions of the tight oil inventory, consolidate swathes of shale resources under their hold.
With Pioneer currently the second largest inventory holder in the Permian, the potential combination with currently fourth-ranked ExxonMobil would blow all others out of the water in terms of size and scale. The combined entity’s inventory would be just shy of 18 000 drilling locations.
Rystad Energy has forecast the total commercial inventory, split by the estimated real WTI breakeven price of these locations (less than US$40, US$40 – US$70, and greater than US$70). The figures attributed to each player represent the net equity locations attributable to that company that are commercial under Rystad Energy’s base case price scenario, including both risked and unrisked locations. Unrisked locations contain high uncertainty, as they have not been evaluated and are estimates of the drilling potential in undeveloped portions of acreage or untested formations. However, the Permian’s vast stacked potential gives credence to a high amount of unrisked upside potential.
Rystad Energy has also highlighted its view on several key metrics associated with the rumoured US$60 billion deal. The analysis indicates that the potential US$60 billion price tag would be equivalent to a 6.34x multiple of Pioneer’s forecasted 2023 earnings before interest, taxes, depreciation and amortization (EBITDA) proxy, and a 5.75x multiple on its 2024 forecast. As a proxy for EBITDA, Rystad Energy uses its fundamental upstream database, UCube, to project net upstream revenue and subtracts operating expenses.
While EBITDA usually includes taxes, its proxy excludes production taxes as these are typically reported as production costs. This multiple would stand in stark contrast to the 2x – 3x multiples seen in recent acquisitions of private E&Ps, indicating the tremendous upside potential associated with Pioneer’s scale. It has found that this deal would be accretive on a free cash flow boe basis in 2024. Using our forecast for fundamental upstream free cash flow in the Permian in 2024, we project that a standalone ExxonMobil would generate US$14.47 boe in the Permian next year at our base case price, as opposed to US$16.95 boe from a merged ExxonMobil-Pioneer.
The possible US$60 billion price tag for Pioneer implies a real WTI price just shy of US$70 per bbl at a 10% discount rate, according to Rystad Energy’s fundamental upstream valuation. This deal would be the largest in the history of the US shale upstream sector but would appear to be a relatively fair price when assuming a US$70 per bbl long-term real price strip. About half of the valuation at US$70 per bbl would come from upside potential, including under-development wells along with risked and unrisked locations.
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. Rystad Energy will provide a detailed analysis of the transaction if it is formally announced.