On Monday, Pioneer Natural Resources (PXD) stock rose nearly 6% PXD) stock rose almost 6% on Monday on news that the Permian Basin’s third-largest oil producer was conducting informal sale discussions with Exxon Mobil (XOM).
Exxon Mobil is looking to boost its global oil inventory while adding to its Permian Basin assets. Pioneer’s enterprise value is $56 billion, or one-ninth Exxon Mobil’s, so it would be a relatively easy buy for America’s largest oil and gas integrated producer.
However, the short-term gains could become long-term pain. Here’s why.
Where Are Oil Prices Headed?
Most experts suggest that, barring a deep recession, oil prices are likely to move higher. The recent OPEC+ production cut -- 1.1 million barrels per day or 1% of global production -- increased prices, causing most analysts to increase their price forecasts for a barrel of oil.
The move by OPEC+ was made to keep oil prices high for the remainder of 2023. As a result, the latest cut will remain in effect for the rest of the year. As a result, a West Texas Intermediate (WTI) barrel is just under $80, while Brent Crude barrels are trading around $84.
Goldman Sachs stated in March that it did not see a $100 barrel in 2023. Instead, it’s predicting $94 over the next 12 months and $97 in the second half of 2024. It was previously expected to be $100 by the end of 2023.
Other analysts are skeptical that oil prices will hit $100 in the next 12 months. Citigroup analyst Ed Morse believes a barrel of oil will drop below $80 in the weeks ahead as China’s economic recovery takes longer to gain traction.
“We’re waiting to see what’s really happening with the economy, but it is a slower recovery,” Morse told Bloomberg. “If anything, that will be an end-of-year phenomenon.”
The analyst also reminded investors that any cuts from OPEC+ could be offset by increased production in Iraq and Venezuela.
More than likely, however, we won’t see sub-$40 prices for several years, ensuring oil producers don’t suffer another financial meltdown as they did between 2016 and 2020.
So, should Exxon Mobil acquire Pioneer, the acquisition would be immediately accretive to earnings.
Future Demand Is Hard to Know With Certainty
The transition from fossil fuels to renewable energy has everyone and their dog making educated and uneducated guesses about when the tipping point will pass. However, OilPrice.com contributor David Messler is bullish about the future oil demand.
“Let me state unequivocally, THERE IS NO ENERGY TRANSITION! Period, full-stop, end of story. There will be no cut off of oil and gas in 2030, 2040, or 2050,” Messler writes.
“There is of course energy ‘addition,’ in the form of wind, solar, biofuels, and Hydrogen. These ‘intermittent’ sources will share a modest part of the global energy load along with ‘on-demand,’ petroleum sources as long as there is a need for individual transportation and travel, we retain an industrial economy, and eight-billion people show up for breakfast daily.”
He’s not wrong. People like Exxon Mobil CEO Darren Woods have been saying this for years. There is no way a switch will flip in 2050, and the world will be 100% renewable energy.
However, even though Messler points out that the global output of liquids in every five-year increment through 2045 doesn’t consider the acceleration of renewable energy innovation over the next 22 years, so, assuming this innovation cuts renewable energy costs considerably, it’s hard to imagine the five-year estimates for global liquids output holding up.
Eventually, every large oil company will own assets with no practical value due to falling demand. That includes Exxon Mobil.
A September 2022 report from the International Institute for Sustainable Development (IISD) suggests global oil demand will decline by 2030. That’s only seven years away.
IISD’s report concluded: “But the inescapable starting point for Canadian energy policy is clear: global oil demand will soon unravel in an unprecedented fashion and will not recover.”
According to the IISD, it starts with road transport and moves to plastics, aviation, and shipping. As all of these demands for oil get closer to net zero, the value of assets will continue to fall.
The Bottom Line on Exxon Mobil’s Search for Inventory
The oil demand hasn’t peaked. That gives Exxon Mobil CEO Darren Woods the ammunition he needs to justify the multi-billion-dollar acquisition to his board.
However, he must pay a premium to get these Permian assets.
“A substantial premium would be required as Pioneer has time on their side, citing a multi-decade drilling inventory in the Midland basin that bests almost all independents,” Reuters reported TD Cowen analyst Jason Gabelman’s comments.
Siebert Williams Shank & Co. managing director of Equity Research, Gabriele Sorbara, suggests that Exxon Mobil must pay at least a 20% premium for Pioneer, including the assumption of debt, which comes to an enterprise value of $63 billion.
While XOM finished 2022 with nearly $30 billion in cash, it must come up with half the purchase price in new debt. It ended 2022 with $41.2 billion in total debt. The Pioneer acquisition would increase its debt load by 75%.
If we go into a deep recession, the acquisition will be like a noose around its neck, and down the road, it could be a ticking time bomb if the IISD’s report is on the money.
This acquisition could be short-term gains for long-term pain.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
