ExxonMobil buys shale giant in massive $59.5bn fossil fuel deal

American multinational oil and gas corporation ExxonMobil agreed to buy US Pioneer Natural Resources for $59.5 billion in the world’s largest takeover announced this year, doubling down on fossil fuel production even as many global policymakers grow increasingly concerned about climate change and the oil industry’s reluctance to shift to cleaner energy.

The deal is the oil giant’s biggest acquisition since merging with Mobil Corp in 1999, and after decades of investments in projects around the world, will squarely lodge Exxon’s future close to its Houston base, with most of its oil production in Texas and offshore in the Gulf of Mexico and along the coast of Guyana.

By concentrating its production close to home, Exxon is effectively betting that US energy policy will not move against fossil fuels in a major way even as the Biden administration encourages carmakers to switch to electric vehicles and utilities to make the transition to renewable energy.

Exxon executives have said that in addition to producing more fossil fuels, the company is building a new business that will capture carbon dioxide from industrial sites and bury the greenhouse gas in the ground. The technology to do that remains in an early stage and has not been successfully used on a large scale.

“The combined capabilities of our two companies will provide long-term value creation well in excess of what either company is capable of doing on a stand-alone basis,” said Darren Woods, Exxon’s CEO.

By concentrating its production close to home, Exxon is effectively betting that US energy policy will not move against fossil fuels in a major way

American oil production has reached a record of roughly 13 million barrels a day, around 13 per cent of the global market, but growth has slowed in recent years. Despite a wave of consolidation among oil and gas companies, and higher oil prices after the Russian invasion of Ukraine last year, producers are having a more difficult time finding new locations to drill.

The Pioneer deal is a sign that it is now easier to acquire an oil producer than to drill for oil in a new location.

Exxon, a refining and petrochemical powerhouse, needs a lot more oil and gas to turn into petrol, diesel, plastics, liquefied natural gas, chemicals and other products. Much of that oil and gas is likely to come from the Permian basin, the most productive US oil and gas field, which straddles Texas and New Mexico and where Pioneer is a major player.

Exxon’s $US10 billion Golden Pass terminal near the Texas-Louisiana border is scheduled to begin shipping liquefied natural gas to the rest of the world next year. Gas bubbles up with oil from the Permian basin, making the basin all the more valuable for exports as Europe weans itself from Russian gas.

The Pioneer deal is bigger than the company’s ill-fated $US30 billion acquisition of XTO Energy, a major natural gas producer, in 2010. Exxon had to write off much of that investment later when natural gas prices collapsed from the high levels that prevailed when it bought XTO.

By buying Pioneer now, when the US oil benchmark is around $US83 a barrel, Exxon is counting on prices remaining relatively high in the next few years.

Exxon has been careful in recent years to invest modestly in new production as it raised its dividends and bought back more of its own stock. Buying Pioneer would add production, a big change in its strategy.

The acquisition would make Exxon the dominant player in the Permian basin, far outpacing Chevron, its biggest rival.

Pioneer has been a darling of Wall Street investors as it has capitalised on the shale drilling boom. Scott Sheffield, its CEO, got the company out of Alaska, Africa and offshore fields while buying up shale operations in the Permian at cheap prices. By 2020, it had become one of the biggest American drillers, with relatively low-cost production.

Sheffield is retiring at the end of the year. His company has a market value of about $US50 billion, roughly one-eighth the size of Exxon. Many of its oil and gas fields are still untapped.

“While the company has a solid succession plan in place, oil and gas markets have been volatile and the capital available to traditional oil and gas companies in the US has been limited,” said Peter McNally, an analyst at Third Bridge, a research and analytics firm.

The deal would be Exxon’s first major acquisition since Woods became CEO in 2017, replacing Rex Tillerson, who went on to become US secretary of state.

Exxon, which reported a record profit of $US56 billion last year, is flush with cash that it could invest in Pioneer’s untapped fields. Since Exxon is also a large producer in the Permian, analysts say the merger would bring greater efficiencies in operations of both companies.

This is just the latest in a series of mergers and acquisitions in the oil industry in recent years. But it has been consolidating. Occidental Petroleum acquired Anadarko Petroleum four years ago for nearly $US40 billion, a deal that made Occidental a major competitor to Exxon and Chevron in the Permian basin. Pioneer spent more than $US10 billion buying two other Permian producers, Parsley Energy and DoublePoint Energy, in 2021.

Exxon bought Denbury, a Texas energy company that owns pipelines that can transport carbon dioxide, for $US4.9 billion this year.