The Lesson From Pioneer’s Latest Permian Deal: Bigger Is Better

When Pioneer Natural Resources
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hired former CEO Scott Sheffield to return to that role two years ago, rumors flew that his mission would be to high-grade and streamline the company’s asset base to turn it into an attractive takeover target. It turns out the rumors were wrong and the plan instead was to grow the asset base with highly-contiguous bolt-on acquisitions, transforming the company into one of the handful of dominant players in the world’s most active oil play in the Permian Basin.

In fact, with this week’s $6.4 billion acquisition of privately-held DoublePoint Energy, Pioneer becomes the dominant player in the Permian region’s Midland Basin, with roughly 920,000 net acres, all located in Texas. Pioneer also operates roughly 100,000 acres in the Delaware Basin to the southwest, also all in Texas. As the company noted in the statement announcing the acquisition on Friday, this means Pioneer’s 1 million-plus net acreage has “no exposure to federal lands,” and thus to the Biden/Harris Administration’s efforts to impede oil and gas development activities.

This ‘federal-free’ boast is one that none of the other major players in the Permian region can make, as they all own sizable acreage positions in Southeast New Mexico, where roughly half of the oil production takes place on federal lands. While some of those players – ExxonMobil
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, Occidental, ConocoPhillips
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and Chevron
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– can sell potential investors on an overall Permian acreage position that rivals Pioneer’s in scope, none are able to point to a similar level of connectivity within their respective portfolios.

This is the second multi-billion dollar acquisition by Pioneer in the past 6 months, following last October’s $8 billion takeout of Parsley Energy, a company that was started by Sheffield’s son, Bryan Sheffield. As can be seen in the map above, the combination of these three companies creates a Midland Basin acreage position made up of vast swaths of uninterrupted leasehold, enabling Pioneer to take advantage of the economies of scale and operational efficiencies that promise to be the envy of the region.

As Enverus’ Senior M&A Analyst, Andrew Dittmar said in a Friday email, these factors should enable Pioneer to create large cost savings, and also will help mitigate one growing concern among the investor community. “There have been concerns about the rate that private companies are increasing drilling and its potential to lead to an oversupplied market,” Dittmar said. “Roll-ups of these high-growth private companies by public E&Ps focused on fiscal discipline is certainly one way to address that concern. Pioneer expects to moderate growth by reducing the number of rigs on the DoublePoint acreage from 7 currently to 5 by the end of 2021 and gain $175 million in annual synergies.”

Noting that this transaction represents the largest public company acquisition of a private U.S. upstream player since 2011, Dittmar points out that it’s not all positive: “As a challenge though, Pioneer will likely face relatively steep decline rates from the DoublePoint assets, which are currently generating production growth of >30% implying significant new and therefor high-decline wells,” he said.

Pioneer paid a premium for DoublePoint over the per-acre cost of its Parsley acquisition, but Dittmar also notes that that is mitigated by the fact that about 70% of it is being paid with Pioneer equity that has doubled in value since last October. Based on a Thursday-close share price of $164.60, Pioneer held an enterprise value of $36.73 billion prior to the deal to acquire DoublePoint, and as we are increasingly seeing over time, bigger is better when it comes to the Permian Basin.

This is increasingly true not just due to the economies of scale and efficiencies to be gained by putting together large blocks of contiguous acreage, but also related to growing pressures from investors. David Ramsden-Wood, Principal of Prevail Energy LLC, said in a note that “All the rock in the U.S. worth owning is already owned and the Permian is the only oil play with significant drilling inventory, and is therefore, the only basin that matters. To “win,” you must ‘drill your returns’ with huge scale to maximize supply chain savings, lateral length and footprint efficiencies and manage the ever growing ESG pressure.

“There is no reason to exist if you are less than a $20 b company,” he continued. “The capital markets are closed unless it’s for debt (and it’s expensive if you are small), the cost pressures are too high to compete with OPEC when API supports carbon taxes and sooner or later, U.S. companies are going to need to focus internationally again.”

What it all boils down to is this: The best way for a shale-focused domestic upstream company to become more competitive in today’s financial environment is to grow larger and take advantage of the synergies and economies of scale that result. And, as Ramsden-Wood notes and as we have witnessed in the mergers and acquisitions market over the last two years, the place in the U.S. where getting bigger really matters is in the Permian Basin.

Bigger is better, and getting bigger in the Permian is best.