ExxonMobil (NYSE: XOM) has agreed to buy Pioneer Natural Resources (NYSE: PXD) in an all-stock transaction, making ExxonMobil the largest oil producer in the Midland basin. The acquisition consolidates two of the top four operators in the basin with the potential to optimize capital expenditures, increase drilling productivity, and develop proven acreage. With global dynamics becoming increasingly volatile and global players like Saudi Arabia and Russia limiting global supply, supermajors have increased incentives to solidify the U.S.’ ability to supply marginal crude on the global market. While the timing of the acquisition may be surprising to some, the combination of ExxonMobil’s strong cash position and the benefit of acquiring proven acreage in a major basin were likely key drivers of one of the largest E&P acquisitions in recent years.
While Pioneer accounted for 21% of total oil production in the Midland in 2022, ExxonMobil, still a top-ten producer, accounted for just 6% of total oil production that same year. Pioneer and ExxonMobil’s combined wells to sale in 2022 also accounts for 21% of all Midland wells (15.9% Pioneer, 4.9% ExxonMobil). With the acquisition, ExxonMobil has cemented itself as the most dominant player in Midland with a whopping 27% of oil production under its control.
Despite a relatively small acreage position in the Midland, ExxonMobil is consistently drilling more productive wells with higher cumulative recoveries through a combination of longer laterals, wider spacing, and strategic formation targeting. Conversely, Pioneer’s well productivity per 1,000’ lateral has decreased by 33% since 2019 even as the company has drilled progressively longer laterals. This is in part due to “delayed wells,” as per the company’s conference call in January 2023, which management said was “basically experimentation.” Considering Pioneer’s current acreage in the core of the Midland, production gains captured via operational synergies and ExxonMobil’s methodology could be substantial. For more information regarding overall Midland basin productivity and strategic distinction analysis, refer to this month’s issue of the Upstream Outlook.
The acquisition accounts for significant premium acreage in the basin (per company release statements, Pioneer holds 850,000 net acres and ExxonMobil holds 570,000 net acres). ExxonMobil stated the acquisition will enable an average cost to produce under a $35/bbl breakeven. BTU Analytics’ proprietary inventory model estimates remaining inventory by operator with wellhead economics across core U.S. plays. At $60/bbl and $3/MMBtu, the latest update shows ExxonMobil is gaining ~1,700 locations from Pioneer with a wellhead breakeven below $55/bbl. However, BTU Analytics also estimates no wells breaking even below $35/bbl. The bulk of the combined company’s remaining inventory is estimated to breakeven between $55/bbl and $65/bbl.
Prior to the acquisition, ExxonMobil had targeted 2027 Permian production of 1 MMboe/d (~0.55 MMb/d of crude assuming 55% liquids content), a goal now immediately achievable as the combined company would have produced ~0.6 MMb/d in December 2022. As a result of now meeting prior production guidance, BTU Analytics does not expect ExxonMobil to significantly grow production post-acquisition. However, this acquisition provides the opportunity to leverage economies of scale and capture operational synergies, which is likely to reduce the breakevens of their remaining inventory and potentially add inventory locations that were previously too expensive to consider.