Commentary: Addition by Subtraction and Other Fuzzy Math Problems

The absorption of Pioneer Natural Resources by supermajor Exxon Mobil is the inevitable end of the Permian Basin pure play’s story. It was just a matter of timing.

And consolidation is key to corporate growth. To some extent, either everybody’s doing it or they surely—perhaps quietly—want to do it.

That’s how the big guys get bigger: after examining the track record of their successful but smaller, more nimble peers, they buy them up. It works for independent producers that want to grow via M&A—as we reported on deals during the first half of the year when public E&Ps gobbled up a buffet of private companies: Diamondback Energy bought Lario Permian and Firebird Energy; Marathon Oil acquired Ensign Natural Resources; and Ovintiv took out Black Swan Oil and Gas, PetroLegacy Energy and Piedra Resources.

Here come the biggest fish

And now it may be time for the supermajors to dine.

The Exxon-Pioneer deal is the largest in the upstream oil and gas space since Exxon bought Mobil in 1998 for $82.5 billion. The all-stock $60 billion price edged aside Occidental Petroleum’s $57 billion purchase of Anadarko Petroleum in 2019.

In some instances, the real value of a big deal isn’t immediately clear. As Chris Mathews, our A&D senior editor, reported, this latest Exxon acquisition revisited the angst of the supermajor’s 2010 purchase of XTO Energy for $36 billion. At the time, it raised eyebrows, but it’s hard to argue against the deal value today.

Similarly, Occidental came under fire for the Anadarko purchase, led largely by activist shareholder Carl Icahn. But the company—and its Teflon leader, CEO Vicki Hollub—today have a strong balance sheet and as much shareholder support as any other U.S. producer.

Moreover, this sort of consolidation among shale producers is part of their corporate lifespan.

Hours after the Exxon buy was announced, Pioneer CEO Scott Sheffield told Bloomberg Television as much.

“Shale companies cannot survive on their own, long term. They’re going to have to merge up, consolidate and be part of diversified companies,” he said in October.

And for all the reasons we’ve examined and reported on at length inside Oil and Gas Investor and on HartEnergy.com—scale, scale and scale—plus a few others, there is no denying that consolidation is an industry standard.

Independents and independence

The Pioneer story is different. And its assimilation by Exxon is a loss.

By definition, an independent producer is more nimble and risk-taking than the lumbering giants that control the vast majority of resources and profit.

CEO Scott Sheffield’s tenure is dappled by independent displays.

Sheffield was the first leader of a large oil and gas company to, in 2019, hold his business and his peers accountable for the rampant flaring of natural gas in the Permian Basin. That was the same year I had reported on my findings from six months spent analyzing Texas Railroad Commission records that proved the agency had literally never denied a producer’s request to flare natural gas. When it came time for me to write about the issue, Sheffield was the only CEO in the Permian willing to take my call.

He went on to tell me and dozens of others around the world that Permian flaring is a “black eye” that needed some healing. It was bold, and at least part of the reason the industry continues to effort—at various levels—measurable and meaningful reductions.

The next CEO to assume such public accountability was Matt Gallagher, chief at Parsley Energy until October 2020. That’s when Pioneer bought the firm and put Gallagher on its board of directors.

The flaring issue is not the only example of Pioneer’s leadership being willing to make a bold move and to do it independently.

The E&P was among the first to respond to deep and widespread shareholder anxiety over dismal returns, tweaking executive compensation to put the C-suite’s interest in line with those of investors and then introducing a variable dividend, an oil and gas rarity.

He publicly challenges the leadership of OPEC whenever it strikes his fancy. He knows what his sector of the U.S. oil and gas industry can do—and has done—to impact the global energy economy and tweak OPEC’s power. He called out the cartel when it tried to undermine the shale revolution with a pseudo price war in 2014, and he was a respected, reasonable voice during Railroad Commission talks about a production cap during the early months of the pandemic. 

Sheffield’s departure from the limelight will leave a void in the industry’s accountability and its global voice. But it also presents an opportunity for other oil and gas executives to grab the independent mantle in front of God and everybody and step into prime time.