In moves reflecting a continued bet on fossil fuels, ExxonMobil and Chevron have announced definitive agreements to acquire Pioneer Natural Resources and Hess, respectively. These oil and gas M&A transactions reflect both the continued consolidation of shale assets and a demonstration of the disconnect between the two largest US oil majors’ proclaimed climate commitments and their business actions, particularly when assessed under the lens of the inevitable transition away from fossil fuels to a low-carbon economy.
According to Exxon, its $59.5 billion acquisition of Pioneer initially promises over $1b worth of operational synergies, possibly escalating to $2b over time. By combining with Pioneer, Exxon aims to boost its daily oil and gas production, targeting an addition of 700,000 b/d within four years of the deal’s closure.
Moreover, the consolidation is expected to enhance the oil output per well while purportedly reducing greenhouse gas emissions, leveraging operational efficiencies and technological interventions. Chevron expects that its $53b takeover of Hess will result in free cash flow growth, underpinned by expectations of increased global oil demand.
Location, location, location?
At the heart of the Exxon acquisition are Pioneer’s Permian Basin assets, coveted for their relatively low production costs. Indeed, the transaction reflects a broader upstream trend – as top-tier drilling locations in oil shales dwindle, companies are changing strategies and consolidating assets. The deal propels Exxon to become the top producer in the largest U.S. oilfield, securing a decade of low-cost production. But Exxon’s stronghold in the Permian reinforces its commitment to fossil fuels at a time when global urgency for emissions reduction is accelerating.
For Chevron, the Hess acquisition adds promising offshore production in Guyana and shale assets in the Bakken Formation to its portfolio. The Bakken region is more mature than the Permian, with most of its prime locations thoroughly drilled.
Climate Commitments: a facade of responsibility?
Exxon’s emissions reduction strategy focuses on the company’s Scope 1 and 2 emissions, conveniently sidestepping the significant Scope 3 emissions emanating from the end-use of its products. Exxon’s narrative of accelerating emissions reductions through the acquisition falls flat, overshadowed by the reality of it escalating production. Chevron CEO Mike Wirth was less ambitious on the Hess acquisition’s impact on emissions, saying that the deal is “aligned” with the company’s objective to safely deliver higher returns and lower carbon.
A skepticism-inducing endorsement
That Engine No. 1, a climate-focused activist investor that has battled with Exxon in the past, is backing the deal for Pioneer raises eyebrows. The rationale in support of the deal hinges on the premise that the Permian assets represent a cost-effective, “responsible” means to meet short-term demand. It also reflects a begrudging acceptance of the world’s sluggish pace in transitioning away from fossil fuels, suggesting a lack of faith in global emissions reduction efforts.
Investor reflections: a call for discernment
These acquisitions represent more than mere business transactions. They are a revelatory insight into the US oil majors’ stance on climate change and their readiness (or lack thereof) to adapt to a low-carbon economy. They are also a lesson in the complexity of navigating the energy transition while striving for profitability.
Shale assets are in demand given the slower growth and depletion of existing fields, and further oil and gas M&A is expected. Producers are also no longer spending freely on expansion, as has occurred during previous boom cycles. In theory, the excess profits from higher oil & gas prices could be used to invest in cleaner energy and/or other emissions reduction solutions. But thus far, most oil and gas companies are choosing to instead return capital to investors in the form of dividends and share buybacks.
As oil and gas companies are asked by an increasing number of investors to rationalize profit motivations and decarbonization, understanding the nuanced strategies and actions of these firms becomes imperative. The sector’s consolidation trend might offer short-term opportunities for merger arbitrageurs to profit on deal volume. But the broader narrative is that recent actions of the oil & gas majors run counter to the global need to reduce emissions from burning of fossil fuels. As global temperatures continue to rise, the transition plans and actions of oil & gas companies will materially impact company performance. Long-term investors will need to evaluate those actions within the context of their own views on the scale and pace of the energy transition.