Exxon Mobil (NYSE:XOM) is reportedly in preliminary talks about a potential acquisition of the oil and gas company Pioneer Natural Resources (NYSE:PXD), according to Wall Street Journal. The news sent Pioneer’s shares up nearly 6% on Monday, with the stock closing at $220.22.
Though the talks between the two oil companies are reportedly still informal, it suggests that Exxon is in pursuit of a blockbuster deal after accumulating piles of cash in 2022, when it reported record profits. The oil giant is reportedly considering all options that could significantly reshape the oil and gas industry in the U.S., while also increasing its footprint in the West Texas shale.
Why is Exxon Interested in Pioneer?
Exxon executives have held discussions about a potential merger with at least another company, the WSJ reports. The deal, if agreed upon, would not happen before later this year or 2024. Even though there is no formal process between Exxon and Pioneer yet, Exxon views the Irving, Texas-based company as a top target.
The buyout of Pioneer would mark Exxon’s biggest acquisition since its colossal merger deal with Mobil Corp. in 1999. The acquisition would reinforce Exxon’s position in the Permian Basin of West Texas and New Mexico region, which the company sees as central to its growth strategy.
Given Pioneer’s market cap of $51.75 billion, the tie-up would be bigger than the latest industry blockbuster deal - Occidental (NYSE:OXY) Petroleum’s acquisition of Anadarko Petroleum (NYSE:APC) for $38 billion in 2019.
Pioneer reported $8.4 billion in surplus cash in 2022, of which nearly $8 billion was distributed to shareholders through dividends and share buybacks. The company is also the biggest oil producer in Permian Basin, while Exxon is the sixth-largest.
Exxon has been seeking to increase its presence in the Permian for a while now. The oil giant has been doubling down on U.S. shale recently, indicating that the company may be looking to strengthen its ties to fossil fuels in the future.
Record Yield Puts Exxon in a Strong M&A Position
Exxon’s strategy, mainly focused on oil-and-gas assets, yielded significant profits for the oil behemoth last year of $55.7 billion as oil and natural gas prices hit record highs in the wake of Russia’s invasion of Ukraine. The figure not only marked a historic high for Exxon but also for the entire Western oil industry.
Other major oil producers also broke their own annual records boosted by high prices and a surge in demand, taking their combined profits to $200 billion in 2022. Before this, Exxon’s previous record profit was $45.2 billion it reported in 2008 when commodity traders pushed oil prices to $142 per barrel amid the global financial crisis.
Apart from the war between Russia and Ukraine, sharp cost reductions during the coronavirus pandemic also drove oil companies’ earnings last year.
“Overall earnings and cashflow were up pretty significantly year on year,” said Exxon CFO Kathryn Mikells in January. “So that came really from a combination of strong markets, strong throughput, strong production, and really good cost control.”
Exxon also reported a $1.3 billion hole in its Q4 earnings due to a Europan Union windfall tax that came into effect in the final quarter, as well as from certain asset impairments. The oil company took legal steps against the EU, claiming the tax charge exceeds the bloc’s legal authority.
The unprecedented profits that were reported last year led to renewed criticism of the oil industry and calls for more countries to impose significant profit taxes on oil companies.
Oil Exploration Setback
Earlier this month, the WSJ reported that Exxon has abandoned its multibillion-dollar drilling bet in Brazil after a series of failures in the offshore acreage the company started buying with partners for $4 billion in 2017.
“Our initial exploration drilling program in Brazil is now complete,” said Michelle Gray, a spokeswoman for Exxon. “We continue to work with our co-venturers to analyze the data acquired from the extensive drilling program to assess the potential for future exploration activities in those blocks.”
After failing to find significant amounts of crude in Brazil for the third time, Exxon has sent its geologist and engineers to other countries including Canada, Angola, and Guyana. Exxon has reportedly not submitted tenders to drilling contractors for exploratory operations in Brazil since its last active rig contract ended in April 2022. Further, the oil company also did not participate in the latest offshore auction in Brazil late last year.
Exxon returned to Brazil in 2017, hoping to repeat the success its rivals had in the country’s offshore areas more than ten years ago. Over the past years, Brazil has become one of few places in the world where oil majors continue to splash money in pursuit of oil. Despite Exxon’s recent failure there, Brazil remains one of the most coveted markets for offshore drilling.
The company said it plans to spend the majority of its annual capital budget of up to $25 billion in the Americas in 2023.
Summary
Pioneer Natural Resources shares surged on Monday after the WSJ reported that oil behemoth Exxon Mobil is holding informal talks about potentially acquiring the Texas-based company. Exxon Mobil is seeking to increase its presence in the Permian Basin and sees Pioneer as its top target to implement this strategy.
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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.