Pioneer Natural Resources Co. surprised many on April 1 with the announcement of its second big purchase in the past year, continuing the trend of consolidation in the oil patch that analysts say should help alleviate concerns of a shale drilling binge.

As the shale industry continues to embark into this new era of capital discipline, rising oil prices have caused some to worry that some in the sector will not be able to hold the line. In particular, privately backed operators—which account for about 30% of shale production—are feared to drive extra drilling activity.

“There have been concerns about the rate that private companies are increasing drilling and its potential to lead to an oversupplied market,” Andrew Dittmar, senior M&A analyst with Enverus, said in an emailed statement on April 2.

Yet, Dittmar added that the acquisition of privately held companies by mature operators, like Pioneer’s agreement on April 1 to acquire DoublePoint Energy, should help.

“Roll-ups of these high-growth private companies by public E&Ps focused on fiscal discipline is certainly one way to address that concern,” he continued.

Pioneer’s purchase of DoublePoint in a cash-and-stock transaction worth roughly $6.4 billion is the largest acquisition of a private U.S. E&P since 2011 and one of the largest private E&P acquisitions of the last 20 years, according to Dittmar.

The deal adds 97,000 net acres in the Midland Basin to Pioneer’s asset base, increasing the company’s acreage position to greater than 1 million net acres in the Permian Basin. Production from the acquired assets is projected to hit 100,000 boe/d by late second-quarter 2021, when the transaction is set to close.

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Pioneer said it plans to moderate growth by reducing the number of rigs on the DoublePoint acreage to five from seven by the end of 2021 and gain $175 million in annual synergies.

“As a challenge though, Pioneer will likely face relatively steep decline rates from the DoublePoint assets, which are currently generating production growth of >30% implying significant new and therefor high-decline wells,” Dittmar said.

Upstream Consolidation

After A&D activity came to a halt early last year following a collapse in oil prices caused by the coronavirus pandemic, dealmaking started to pick up in the second half of 2020 driven in large part by upstream M&A.

In 2020, corporate M&A dominated transactions overall, constituting nearly 88% of all deals last year, with few asset deals for producing properties. Upstream M&A accelerated dramatically in the second half of 2020, particularly in the fourth quarter with three multibillion-dollar mergers centered on the oil-rich Permian Basin.

According to Dittmar, however, Pioneer has been the most active acquirer in the upstream space since the COVID-19 downturn.

The biggest deal of the fourth quarter and of 2020 was ConocoPhillips Co.’s $13.3 billion acquisition of Concho Resources. Though, ConocoPhillips’ Concho deal was quickly followed by news that Pioneer Natural Resources intended to acquire Parsley Energy.

Combined with Pioneer’s $7.6 billion purchase of Parsley Energy, which closed in January, the DoublePoint deal means Pioneer has spent $14 billion adding assets to its pure-play position in the Permian Basin in about six months.

“It is somewhat surprising to see Pioneer announce another major acquisition so soon after the Parsley deal, but the company may have felt the assets are simply too close a fit with their existing position to pass up,” Dittmar said.

Still, Dittmar said Pioneer appears to have paid a “hefty premium” for DoublePoint Energy relative to the string of public company mergers in late 2020, including its own combination with Parsley. The price per acre on the DoublePoint deal is “reminiscent of Permian deals in the bull land market from 2016-2018,” he added.

“Helping offset the high headline price, Pioneer is primarily handing over equity that has doubled in value since announcing the Parsley deal in October 2020,” he said.

DoublePoint Energy is a Fort Worth, Texas-based upstream oil and gas company focused in the Midland Basin. The company was formed by Double Eagle Energy in 2018 through a partnership with FourPoint Energy LLC and is backed by equity commitments from Apollo Global Management Inc., Quantum Energy Partners, Magnetar Capital and GSO Capital Partners LP.

Dittmar noted that Pioneer has already indirectly acquired the assets of the first Permian effort of DoublePoint co-CEOs Cody Campbell and John Sellers, who sold Double Eagle Energy to Parsley for $2.8 billion in 2017.

The various Double Eagle creations have a successful history of monetizing their investments, although “the unusually high number or private equity companies involved may have further escalated pressure to find a successful exit,” Dittmar said.

Shares of Pioneer Natural Resources declined 5.6% to $155.49 on April 1 following the announcement of the DoublePoint acquisition, according to a Reuters report.

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