Oil and Gas Investor A&D Trends: A ‘Whydunnit’

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[Editor's note: A version of this story appears in the May 2021 issue of Oil and Gas Investor magazine. Subscribe to the magazine here.]

Pioneer Natural Resources Co. is officially a lot. Too much? No, probably not. But, yeah, a lot.

On April 1, Pioneer agreed to buy DoublePoint Energy LLC for $6.4 billion, or roughly half of what Amazon spent last year on its streaming music and video content.

A single deal doesn’t tell us whether the Permian Basin is past its prime. But this may be difficult to see objectively, in the blinding camera flash of Pioneer’s huge deal.

Valuations and deal activity, largely made up of corporate mergers, once again pushed the Permian as a first-among-equals in last year’s race to congeal struggling E&Ps. But there’s more than one example of Permian deals that have proven less than sanguine. Once upon a time, RSP Permian Inc. made deals that, in contrast, make buying an NFT of Twitter CEO Jack Dorsey’s first tweet (for $2.9 million) seems like an act of absolute genius.

As Rudyard Kipling’s curious elephant would say, “So many questions!” Some can be answered immediately: An NFT is a non-fungible digital token that can be bought and sold like an actual token, but without the convenience of being able to drop it in a slot and play foosball.

What Pioneer’s purchase tells us is that it’s now OK to occasionally feel queasy when a huge deal goes down and the reasons aren’t entirely clear. Investors reacted to that same feeling by dropping Pioneer’s stock price by 6% after the deal was made public.

Pioneer may have taken control of the core of the Midland Basin, but at this cost?

Bernstein’s Bob Brackett regarded the deal with skepticism centered on it’s valuation, the strategic logic and the “communication strategy” around the transaction. In other words, the whole shebang.

Brackett argued in an April 5 report that valuing DoublePoint’s production at $25,000 per flowing barrel of oil equivalent (boe/d) was too expensive. “The least valuable flowing barrel is the fastest declining one,” Brackett said.

The deal also gives Pioneer many locations that it doesn’t need for more than a decade. That “seems punitive to the deal economics, especially given [the] plan to drop rigs from seven to five,” Bernstein said.

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Of course, all companies need runway. But usually not so much that refueling is needed while still mid-takeoff.

Then there’s the question of what Pioneer really gains, aside from 100,000 boe/d by the second quarter, synergies and that elusive “scale” all E&Ps covet. Brackett: “Spending cash and adding debt in theory reduces the FCF [free cash flow] pool for the future variable dividend. If PXD’s goal is to consolidate the basin then showing why that’s a good idea and how that consolidation balances with FCF needs to be explicitly laid out.”

Indeed, some have surmised that Pioneer’s move helps stem the prodigious volumes being pumped out by private companies such as DoublePoint.

But that’s an effect, not a cause.

Added to that, Brackett was suspicious of the timing of the deal’s news. He rightly noted that the deal hit inboxes on a Friday before a holiday—otherwise known as the place press releases go to die.

Pioneer’s deal was also oddly pricey, though much of it is tied to Pioneer stock. Fort Worth’s DoublePoint will receive 27.2 million shares of its buyer, $1 billion in cash and forgo $900 million in debt. Analysts valued its costs at a range from $39,000 per acre to $42,000. Those prices are comparable to the bull land market of 2016 to 2018, Enverus’ Andrew Dittmar said.

Notably, Kimbell Royalty Partners purchased Delaware Basin interests last January for $44,000 per acre, according to Raymond James. But Pioneer’s deal comes at a time when the median acreage price in the Permian is $4,100.

If there’s one thing that can be concretely understood about the deal, it’s Pioneer CEO Scott Sheffield’s faith in the Midland. And that he’s bought from DoublePoint’s co-CEOs, Cody Campbell and John Sellers, before.

Campbell and Sellers, who assembled their acreage with personality and incredible hustle, might as well have been working on spec for Sheffield. The acreage seems to drop-in for the holes Pioneer had like a 920,000-acre jigsaw puzzle.

Another thing to note about Sheffield: He has a tremendous poker face.

Last year, after Pioneer agreed to acquire Parsley Energy Inc. for $7.6 billion, Sheffield said that consolidation looked to be waning.

“It seems like the best companies have been picked off … with Parsley and Concho and the other transactions,” he said.

Pioneer is now billing itself the Premier Permian E&P, and it’s hard to argue with the bravura and equally hard to divine the plan.

“If PXD’s goal is to consolidate the basin,” Brackett said, “then showing why that’s a good idea and how that consolidation balances with FCF needs to be explicitly laid out.”