Exxon Mobil’s Pioneer Deal Sends Mixed Signals for Permian Midstream

Exxon Mobil’s acquisition of Pioneer Natural Resources will have repercussions on nearly every midstream company with a stake in the Permian Basin, but analysts disagree on who stands to win, lose and even the outcome for the storage and transport sector as a whole.

The question is how much Exxon Mobil will continue to increase production in the region, and whether the growth will be enough to outweigh possible consolidations of midstream services.

Between Exxon and Pioneer, Exxon showed more aggression in the Permian Basin, targeting 10% production growth over the year, which could indicate more volumes for midstream companies to handle in the future.

“The transaction has positive general implications for those midstream operators in the region, driven by a modest acceleration of development versus what each company was planning on their own,” said Hinds Howard, a portfolio manager at CRBE Investment Management.

However, as Exxon moves to eliminate any redundancies, it’s likely some producing facilities, and the pipelines supporting them, will no longer be needed.

Two producers combining efforts indicate that the number of operating rigs in an area will fall, East Daley Analytics (EDA) noted in an analysis of the deal. “EDA’s review of recent upstream deals finds buyers and sellers have dropped rigs by nearly 30 percent once companies combine,” EDA analyst Ajay Bakshani said in a research note.

Pioneer owns 27.2% of Targa Resources’ West Texas system and sends most of its Permian gas to the company.

Exxon primarily sends gas to both Targa and Energy Transfer, bringing to the table its gathering and processing system in the region, including a terminal in Wink, Texas, and operates the 650-mile Wink-to-Webster pipeline, which it owns with six other companies.

According to EDA, Exxon and Pioneer had a combined 38 rigs in the Delaware and Midland basins in September. Targa serviced the most rigs in the time frame, averaging 11, according to EDA. West Texas Gas Midstream and Enlink Midstream were second at four rigs. Exxon also used its subsidiary XTO Energy to service four rigs in the Delaware.

The companies most vulnerable to consolidation are those with stakes where Pioneer’s and Exxon’s acreage overlap. Targa and Energy Transfer, companies that have benefitted the most from Exxon’s rising production in the area, are also facing the most risk, Bakshani said.

However, EDA also acknowledged that a combined company would have less overhead and could use the extra money to develop areas that have otherwise been seen as too marginal to develop.

Wells Fargo analysts reported that the merger would be an overall “positive for midstream as (Exxon Mobil) intends to accelerate Permian production growth.” Targa and Plains, which operates a network of 5,500 pipeline miles in the region, would be the “main winners” while Energy Transfer and Enterprise Products Partners would also see more business.

The positive overall outlook follows from Exxon Mobil’s plans to grow its overall production from 1.3 MMboe/d in 2023 to 2 MMboe/d by 2027, an 11.4% CAGR — compared to about 5% CAGR that the companies had planned individually, according to Wells Fargo’s “early read” of the deal.  

Other midstream companies, which are expanding their networks in the Permian and terminals on the Gulf Coast, are expecting a greater amount of traffic from the deal, especially since behemoth Exxon has joint ventures with most of the industry’s major players.

Kinder Morgan is expanding the Permian Highway Pipeline (PHP) system, which it jointly owns with Exxon Mobil and Kinetik Holdings. KMI CEO Kim Dang said operations on the PHP are “nearly complete” during the company’s third-quarter earnings call and should be in-service by December. Kinder Morgan will operate the pipeline, which increases its natural gas capacity by about 550 MMcf/d.