The Wall Street Journal recently reported that ExxonMobil and Pioneer Natural Resources have had preliminary conversations about a combination. This rumor has surfaced before but there has never been any fire with the smoke.
The rumor has Wall Street speculating that the oil and gas industry is poised for another merger wave – the fourth in the industry’s history. The late 1990s merger wave created the oil mega-majors, capped by the ExxonMobil deal in 1999.
Oil company mergers typically occur in industry downcycles. While this merger wave will be different, should it develop, (aren’t they all?) it will still reflect the divergence between optimism and pessimism about the industry’s future. And there are certainly arguments supporting each side.
The Exxon/Pioneer rumor conjures up the last Exxon deal when CEO Rex Tillerson bought XTO Energy for $41 billion in 2010. In hindsight, Exxon paid top dollar for XTO’s acreage and shale exploration expertise, a revolution Exxon had missed. Four years later, oil prices collapsed, and ExxonMobil found themselves struggling to survive. The disastrous XTO timing and the industry downturn weakened Exxon’s historically solid balance sheet. The company’s shares underperformed, and debt mushroomed. When the 2020 pandemic piled on and destroyed oil demand, a levered Exxon was forced to cut its dividend and end its share repurchase program, alarming shareholders.
Now, oil demand is rising with the waning of Covid, and higher prices have followed. The lean oil industry has been printing money, increasing investment, and rewarding shareholders. However, rather than being a savior, the industry has become an even bigger target of climate activists and government policymakers. Polluters need to be shut down.
Recently, the CEOs of two mega-majors – BP and Shell – have rediscovered the critical role of oil and are backing away from their headlong rush into renewable energy. Money talks and the poor returns from renewables are hurting financial performance. Moreover, the fantasy of a world powered exclusively by renewable energy is being exposed every day. Shell’s CEO Wael Sawan told the Wall Street Journal, “I fundamentally believe in the role of oil and gas for a long, long time to come.” Importantly, he said Shell will not use its oil and gas profits to support renewable investments.
This industry merger wave will be different. Barely two years ago, ExxonMobil battled activist investor Engine No. 1 and lost. Gone is “production growth at any cost.” Key Exxon executive positions are being filled from outside the company and industry. Clean energy projects are receiving greater attention, but they are capitalizing on the company’s scale, technical and project management skills, and restored financial muscle. A deal with Pioneer will not necessarily lead to wiping out jobs, as every oil company is struggling to find engineers and technical workers.
Importantly, oil and gas exploration and development worldwide continue to receive the lion’s share of the global oil industry’s capital expenditures. Mergers would add assets to be exploited quickly, given the years of industry underinvestment and the pressing need for more oil supply to meet growing demand. Frontier exploration is suddenly being reemphasized which will benefit the offshore industry. Do not fear an oil industry merger wave – it could be the ticket to a longer cycle.