As Pioneer Seals the Deal with Exxon, CEO Rich Dealy's Work Continues

Pioneer Natural Resources veteran executive Rich Dealy took over from retiring Scott Sheffield as CEO on Jan. 1, and while he said he will diligently implement the plan leadership has put in place for the new year, Dealy has a side gig—leading the transition team for one of the biggest industry mergers in recent history.

The subject of rampant speculation for months before its announcement in October, Exxon Mobil’s purchase of Pioneer seemed to be the spark needed to ignite a wild period of consolidation as 2023 drew to a close. But Dealy’s focus remained steady on what’s ahead for his company, shareholders and employees. The deal is expected to close this summer, even as federal regulators dig into this transaction and others both inside and outside the oil and gas industry.

“I don’t anticipate any issues whatsoever,” Dealy told Hart Energy in an exclusive interview at Pioneer’s campus in Irving, Texas, in early December. “I think it’ll be widely voted in favor of the transaction, then we will just get the regulatory approval done and move forward.”

Dealy’s work at Pioneer has spanned more than 30 years. Armed with a degree in finance and accounting from Eastern New Mexico University in 1989, Dealy had job offers in Dallas and Houston. But he’d fallen for the Southwest, and accepting a position with KPMG in Midland, Texas, felt right.

It must have been fate.

His second client at KPMG was Parker & Parsley, where Sheffield was at the helm and, in 1997, would merge the firm with Mesa Inc. to create the nation’s third-largest independent with Pioneer.

“After a couple of years, the CFO at the time said, ‘Well, why don’t you come work here where you’ll work a lot less hours?’ Which was probably the biggest lie I was ever told because I worked a lot more hours than I ever did in public accounting,” Dealy said with a laugh. “But it has been a blessing for me for 31-plus years.”

Deon Daugherty: Taking on the CEO role at Pioneer months ahead of Exxon closing its acquisition must make the day-to-day of leading Pioneer a bit different. What’s next for you?

Rich Dealy: I’m not really focused on what’s next for me. I’m focused on what’s happening here at Pioneer and making sure that we execute our program until it closes. And then, working with Exxon so that when closing does occur, the transition is seamless, with the integrated teams working well together, and the combined company continues to execute at a high level.

DD: What goes into leading a transition of this size?

RD: It’s really just putting the right teams together throughout the organization and making sure that they’re positioned to share information in a way that allows people to figure out what’s the best way to execute the business plan in the future.

Exxon is a $400-plus billion entity; we’re a $60 billion entity. They have assets around the world. We have assets in the Permian Basin. They recognize that we do some things better than they do; we recognize they do some things better than us. How do we take the best of both worlds and integrate these two teams to execute in the best way? This opportunity is one of the reasons why it was such a compelling transaction and why it should provide significant long-term benefits.

From an investor’s standpoint—it’s a chance for our investors to essentially own 12% of a large, diversified oil and gas company, which is one of the best energy companies globally, with great assets and opportunities for employees around the world.

They’re also going to be able to reduce emissions faster than we were on the path to accomplish. They’ve committed to net-zero emissions by 2030 on their existing Permian assets and plan to accelerate our reductions from 2050 to 2035.

From an employee perspective, Exxon has global operations. So, anybody who aspires to do a lot of different challenging things around the world, they’re going to have tremendous opportunities at Exxon. We think that’s a huge benefit for our employees. Our goal with the transition is to seamlessly combine the operations and continue to execute at a very high level, while providing development and growth opportunities to our employees.

DD: What happens at Pioneer between now and closing on the Exxon merger?

RD: Our focus is going to be on executing our program. At this point, we run as two independent companies. At Pioneer, we are continuing to focus on 2024 exactly as we laid out to shareholders in our long-term plan. We’re planning on growing oil production between 3% and 5%, with total production growing a bit more. We are working to do that as efficiently and economically as we can. At the same time, we are going to continue to work constructively with the FTC [Federal Trade Commission] in its review of the transaction and we continue to expect the deal to be completed in the first half of 2024, subject to the fulfillment of the closing conditions. Prior to closing, we can start integration planning such that we are ready to combine the two teams and companies as seamlessly as possible once closing is completed.

DD: What are Pioneer shareholders saying about the merger?

RD: I think the shareholders understand it and the response has been tremendously positive. It was a transaction that people know makes sense.

Our shareholders will own roughly 12% of Exxon Mobil. Shareholders recognize that the combination of our acreage and people along with Exxon’s technology and people is a positive. They also recognize the benefits and long-term strategic value of being part of a large, diversified global energy company as the world transitions. I don’t anticipate any issues whatsoever. I expect shareholders to vote in favor of the transaction, such that when we get the regulatory approvals that are needed, we will be in a position to close and move forward.

DD: The industry’s investment thesis has come a long way since 2017, and growing shareholder returns is a leadership dictate of most public producers. How much is enough—is there a minimum return formula that shareholders are willing to accept?

RD: I don’t think there is a defined formula or threshold. You’ve seen our industry return capital to shareholders in different ways: via base dividends, variable dividends, special dividends and share repurchases—all of which are different forms of returning capital to shareholders, which is the primary request from shareholders.

There wasn’t a one-size-fits-all and companies have responded in different ways. I’d say some of it was predicated on a company’s depth of inventory, with companies wanting to add inventory choosing share repurchases are they are easier to turn off than dividends.

DD: That’s part of why using a variable dividend seemed so clever.

RD: It was, but unfortunately, we didn’t get any differentiation in terms of how our stock traded because of it.

It was different and shareholders understood it. We received many accolades, but it didn’t bring the big “dividend” funds in because it was still going to be variable.

Overall, in 2022, it looks like those companies that bought back shares outperformed those that had variable dividend policies.

DD: How do you see diversification within the energy space going forward? It seems the general emphasis on cleaner fuels has opened it up to mean more than simply being an active operator in multiple basins.

RD: It’s going to come down to economics, ultimately. Can we generate a rate of return that makes sense for shareholders and investors in alternative energies?

We have seen significant drilling and completion efficiency improvements, combined with productivity enhancements, which have helped oil and gas returns and the overall economics associated with drilling new wells. We need to see that same trend continue in solar, wind, hydrogen, nuclear, carbon capture, etc. Also, longer term, we need to figure out how to get more comfortable with safety aspects of nuclear as I think it is one of key opportunities for sustainable energy.

All energy sources have to be looked at, and we have to figure out how to develop them safely and reliably. Probably the biggest thing out there that could be a potential game changer is battery technology. If we were able to provide long-term battery storage, more of the renewable projects like solar and wind would provide better reliability 24/7, 365 days a year.

Those are the things that we need to continue to develop—not only for the U.S., but for China, India, Africa and Southeast Asia (each with 1.4 billion people and growing demand for energy)  as they are starving for reliable energy that can help improve their quality of life. How do we get energy to them in a way that is low-cost and reliable?

The beauty of what we do in the U.S. is that we [produce] the lowest emission barrels in the world. So, why wouldn’t you want us to produce more of that to export to others?

DD: Both Exxon and Pioneer have done some work with extracting lithium and other minerals from produced water. How might this sort of research, or even development of these resources, figure into the U.S. energy industry?

RD: For Pioneer, it really comes down to the quantity of rare earth minerals (not just lithium) in the water that we produce. It’s one of the potential benefits of combining with Exxon. They’re working on their own technology in Arkansas to extract lithium from brine. The combined companies will benefit from that work and we will see over time if we can economically extract minerals from produced water in West Texas.

Time will tell, but I think we need to progress up the learning curve on all those things. Hopefully, one day we can figure out how to use this produced water rather than disposing [of] it. How do we desalinate it and convert it to water that we can use for irrigation, crops and livestock? And then, how do you extract needed minerals rather than relying on importing them from countries that we may not always be best friends with?

I think it makes the U.S. more self-sufficient and allows us and our allies to be less reliant on other countries that we may not always have common goals or the best relationships with.

DD: What do you expect from oil prices in 2024?

RD: As we get to ’24, we see Brent oil prices averaging $80 or above. I think the inflationary pressures and the increase in interest rates around the world has stymied investment and is impacting demand. As you know, China’s demand hasn’t been what people anticipated, but India’s demand had been strong. There’s probably been more supply barrels on the market than people originally anticipated in 2023, with U.S. shale growth and growth from other countries being higher than anticipated. Despite this backdrop, I’m still generally in the over-$80 Brent price range for 2024. We’re not there today, but I do think we’re going to see a pickup. The forecasted global demand growth in 2024 will soak up the incremental supply we have today and we should see a more balanced market or the need for incremental supply over the course of 2024.

Having said that, there are many unknown factors in the world, whether it’s Israel or Ukraine issues, interest rates, or something else that impacts the market, so oil prices are hard to predict.

I think the lack of global investment is still an issue that is out there and that we’re not finding and developing much new supply in the world. There is not a lot of money going into exploring for new supply. I think at some point we are going to be in short supply again, which is going to cause inflationary pressures on oil.

DD: Let’s talk about shale’s runway. There’s been lots of prognosticating about its lifespan and what’s left. How do you view its future?

RD: Well, I think human ingenuity is a wonderful thing, and you’ve seen the benefits of that even in 2023, with U.S. production being quite a bit higher than people anticipated, while running fewer drilling rigs, which highlights the industry’s continued efficiency gains.

If you look at the EIA production numbers, production at the end of last year was 12.4 million barrels a day versus today we’re at 13.2 million barrels per day, so call it 800,000 barrels a day of incremental oil production. I think coming into the year, most people thought that the U.S. would grow around 400,000 to 500,000 barrels a day. We achieved significantly more growth than expected, such that I wouldn’t want to undersell the capabilities of U.S. producers and shale production.

For future growth, I will focus on the Permian, which is what we know best. We see the Permian Basin growing to about 7 million barrels a day by 2030, an increase from the 5.6 million barrels per day when we exited 2022. The basin is currently producing about 6 million barrels a day today. Even when production hits 7 million barrels per day by the end of this decade, we expect that it’ll be flat at that level for a significant number of years after that, given the depth of inventory in the Permian Basin.

Those projections also don’t take into account any new incremental recoveries through enhanced oil recovery, downspacing or technology changes. We are only getting 8%-10% of the oil out of the ground, so there still is a vast resource in the basin to be recovered.  As a result, I tend to think shale still has significant running room, particularly in the Permian.

When we think about the other basins in the U.S., I have been surprised with the increases that we have seen. Coming into the year, we thought most of them would be flat. In particular, the Bakken, Eagle Ford and Gulf of Mexico have all shown production increases. Of the 800,000 barrels of oil per day increase, the Permian makes up half of the increase, with growth from the other three areas making up the other half. Going forward, I would expect that oil production from these other basins will remain flat or decline some over the next decade, while the Permian will continue to grow.

Overall, U.S. oil production should still grow modestly over the remainder of the decade, which provides the U.S. with a reliable energy source.  This is good for the country, our national security and our allies.