Exxon Mobil Investors Favor Acquisitions for Increased Production, Boosting Share Price

Exxon Mobil’s investors are increasingly showing a preference for the company to utilize its strong financial position to acquire existing oil and gas production, rather than investing in long-term drilling projects. This shift in investor sentiment comes as energy investors prioritize higher returns over capital spending in oil companies. Exxon’s shares recently reached a record high of $120, driven by strong returns from its oil, gas, and refining businesses.

The company’s ongoing talks to acquire Pioneer Natural Resources, the second-largest Permian shale oil producer, for $60 billion, indicate its readiness to invest in production after falling short of its own output targets in the Permian region. If the deal goes through, Exxon’s daily oil and gas production would reach approximately 1.33 million barrels, making it the largest in the oilfield. This move aligns with the company’s strategy to expand its production capabilities and compensate for delays in achieving its previous production goals.

Bill Smead, Chief Investment Officer at Smead Capital Management, which manages $5.2 billion in funds, including a significant portion dedicated to oil and gas, highlights the political pressure against drilling new wells. He believes that acquiring a smaller company like Pioneer, which possesses excellent reserves, makes complete sense in the current environment.

Despite the rapid growth of renewable energy sources such as solar and wind, the recent surge in oil and gas prices following geopolitical events underscores the continued demand for fossil fuels. OPEC’s decision to reduce production, coupled with decreased spending by U.S. oil producers, has contributed to higher global oil prices this year.

Analysts suggest that acquisitions are well-received if they generate high cash flow for the acquiring company. With oil companies sitting on record amounts of cash, purchasing cash-positive businesses becomes an attractive option. Exxon, after paying off its significant debt from the 2020 oil-price collapse, has been holding around $30 billion in cash for the past year, positioning itself to act opportunistically when oil cycles turn.

While some investors express concerns about Exxon’s previous acquisitions in the shale sector, the industry has shifted its focus from exploration to purchasing existing production. Routine acquisitions have become the norm for oil companies, allowing them to expand their acreage and consolidate their presence in major oil-producing regions.

If Exxon’s potential acquisition of Pioneer goes through, it would significantly increase Exxon’s Permian acreage by approximately 84%, reaching around 2 million acres. This move would solidify Exxon’s position in two major oil-producing regions, the U.S. shale and Guyana. Exxon already holds a 45% stake in a Guyana consortium aiming to produce 1.2 million barrels by 2027, with most of the required capital spending already budgeted.

Matthew Bernstein, a senior shale analyst with consultancy Rystad Energy, believes that if Exxon becomes the dominant player in the Permian, the shale sector will undergo a fundamental transformation into a more mature and consolidated business.

In summary, Exxon Mobil’s investors are increasingly favoring acquisitions to boost production, which has positively impacted the company’s share price. The potential acquisition of Pioneer Natural Resources would significantly enhance Exxon’s position in the Permian and Guyana, solidifying its presence in major oil-producing regions.