ExxonMobil's bold bet on shale oil has ushered in a new era of "mega-mergers" in the oil industry.

The news of ExxonMobil's acquisition negotiations with Pioneer Natural Resources has caused a stir in the shale oil industry. Analysts believe that the US oil industry is about to enter a "merger and acquisition era," with wild shale oil producers being acquired one by one by established producers.

Insiders revealed that the heavyweight agreement between ExxonMobil and Pioneer, which was disclosed as early as April, is close to being finalized.

Currently, shale oil giant Pioneer Natural Resources has a market value of about $50 billion, making it the third largest shale oil producer in the Permian Basin, second only to Chevron and ConocoPhillips. Its shale oil industry is mainly concentrated in the Permian Basin in western Texas.

After the acquisition is completed, ExxonMobil will integrate the two largest oil fields in the Permian Basin in Texas and New Mexico, becoming the largest oil producer in the basin with a daily output of approximately 1.2 million barrels, surpassing most OPEC member countries. ExxonMobil will also become the dominant player in oil production in the region.

If the transaction is successfully completed, this "bold gamble" will be the largest merger and acquisition case in the US oil and gas industry this year, and also the largest transaction for ExxonMobil since its merger with Mobil in 1999.

Opening the "Merger and Acquisition Era" in the Oil Industry

Media analysis suggests that a series of transactions may reshape the US oil and gas industry, shifting it from an era dominated by small-scale, growth-oriented oil producers to an era dominated by Western oil giants.

To some extent, this "new era" may be similar to the period of consolidation among oil industry giants that began in the late 1990s. At that time, companies such as Exxon and Mobil, Chevron and Texaco, and BP completed mergers and acquisitions one after another.

Oil producers have traditionally not been subject to strict antitrust scrutiny because regulatory agencies typically view their products as competing in the global market. Current and former oil executives have told the media that they believe regulatory agencies are unlikely to block a new round of merger and acquisition deals.

Last Friday, investors rushed to buy shares of shale oil extraction companies, expecting more merger and acquisition deals to occur. Data shows that the market value of the top ten independent oil producers increased by nearly $16 billion after the news of ExxonMobil's nearing acquisition of shale giant Pioneer was announced.

Benefiting from the post-pandemic economic recovery and the surge in commodity prices caused by the Russia-Ukraine conflict, oil giants such as ExxonMobil and Chevron have accumulated the largest reserves of funds in history.

However, these companies have been restricted by investors in terms of investment spending. The latter insists on maintaining spending discipline, paying huge dividends to investors, rather than pursuing unprofitable scale growth as they did in the past decade. Some investors are also urging oil companies to invest in more environmentally friendly energy sources and reduce emissions, and many oil producers have taken action to varying degrees. In the past two years, oil producers have been catering to investors' demands, but now it seems they are ready to "test the waters" with their "war chest" - and the first shot was fired by ExxonMobil CEO Darren Woods.

According to media reports, negotiations between Exxon and Pioneer have progressed smoothly, but individuals closely involved in the matter have warned that the two parties may still fail to reach an agreement. One issue is that some shareholders have expressed concerns about the potential merger. However, there are signs that some are betting on a possible deal, as Pioneer's stock price has risen by over 10% while Exxon's has fallen by less than 2%.

If a deal is reached, it will immediately put pressure on Exxon's competitors, such as Chevron, who may not join the "merger game" but instead seek their own acquisition targets. Currently, Exxon is the largest Western oil company with a market value of about $430 billion. Completing the acquisition of Pioneer will further enhance its market share and pricing power, while also increasing its oil production in the coming years.

It is worth mentioning that Chevron CEO Mike Wirth has been looking for his own "big deal". Insiders say that Wirth has already acquired two smaller oil producers in the past three years.

Earlier this year, Chevron also expressed interest in acquiring Occidental Petroleum, one of the largest producers in the Permian Basin, with a market value of about $55 billion, which is comparable to Exxon's deal with Pioneer. However, according to insiders, Chevron's interest in acquiring Occidental Petroleum has weakened in recent months.

Media reports citing insiders said that Chevron has turned to other smaller targets. There are several options in the Permian Basin, including CrownRock, one of the largest private producers in the region. It is worth mentioning that the company has hired bankers to provide advice on potential transactions and is seeking a price of about $10 billion to $15 billion.

Small producers have driven the shale boom, adopting new production techniques to extract overlooked oil resources in areas that others have avoided, turning the United States into the world's largest oil producer. Large publicly traded companies then followed suit, shifting their focus from distant places to the Permian Basin and other areas.

A large number of wild "shale oil explorers" expanded shale production by deploying thousands of oil wells, taking on billions of dollars in debt and with the support of investors. However, many of these small producers depleted their cash reserves when oil well profits fell short of expectations during the oil price collapse from 2014 to 2015, and filed for bankruptcy. During the pandemic, oil prices plummeted to record lows. Now, a large number of medium-sized shale companies that have accumulated huge debts in pursuit of rapid growth are too small to attract Wall Street funds. They are exhausting their "first-mover advantage" in the "best drilling locations," making them increasingly attractive acquisition targets with higher cost-effectiveness.

Mark Viviano, Managing Partner of investment firm Kimmeridge Energy Management, said:

"There are too many companies here... Consolidation is the final piece of the puzzle for rationalizing the shale industry."

Dan Pickering, Chief Investment Officer of financial services company Pickering Energy Partners, believes that the current market conditions are very favorable for transactions because oil prices have recovered from earlier lows this year, high enough to make sellers believe they can get a substantial return without being too high to deter potential buyers.

Historically, large-scale transactions in the oil industry have often occurred in waves. In 1998, British Petroleum (BP) acquired Amoco for $48.2 billion, triggering a wave of deal-making.

In recent years, following the outbreak of the pandemic in 2020, ConocoPhillips acquired Concho Resources and Shell's Permian assets for nearly $20 billion in total; Pioneer acquired Parsley Energy and DoublePoint Energy for approximately $11 billion; Chevron acquired Noble Energy for about $5 billion.

Pickering said that if a deal is reached between Exxon and Pioneer, it will bring new momentum to transactions in the Permian Basin, as it would indicate that even one of the largest US producers must accumulate inventory, and the remaining resources in the richest basin in the US are becoming scarcer. He said:

"When a company takes a major step, it forces everyone to think more seriously about where their pieces should be placed and whether they will miss out on something if they don't act quickly."

Triggering a bigger wave of mergers and acquisitions

Recently, larger companies in the oil industry have attracted more investment. Last year, some of the largest institutional investors, including Capital Group, Fidelity, and T. Rowe Price, increased their total holdings in US energy to a combined $170 billion, a 27% increase from 2017.

However, most of the investment flowed into the five major US oil companies - Exxon, Chevron, ConocoPhillips, EOG Resources, and oilfield services giant Schlumberger. According to Kimmeridge's analysis, the assets held by these investment firms last year amounted to $88 billion, a significant increase from $49 billion in 2017.

Investors say that the lack of available funds is squeezing out smaller participants and prompting them to sell their companies. The CEO of Quantum Energy Partners, a private investment firm, Wil VanLoh, said:

"At the current oil prices, many boards will have to evaluate whether to sell their companies within the next year."

VanLoh stated that such transactions can lower the borrowing costs for the acquirer, extend the remaining economic drilling points' lifespan, and reduce operating costs. VanLoh added, "There is a lot of industrial logic behind this."

An executive from the shale oil industry told the media that if the transactions continue and receive favorable responses from investors, it could trigger a frenzy of acquisitions by major operators to acquire smaller competitors.

According to data from energy research firm Wood Mackenzie, if the deal is reached, ExxonMobil will become the largest domestic oil and gas producer in the United States, surpassing Chevron by 50%, which is currently the largest producer in the region.

Wood Mackenzie analyst Alex Beeker stated that seeing Pioneer sell itself after acquiring smaller competitors in the Permian Basin could trigger panic among other industry participants. Beeker said:

"If there is any deal that could trigger a larger wave of mergers and acquisitions, this might be it - seeing Pioneer go from an integrator to a seller."