What’s behind Exxon’s mega-merger and the stocks that could be next

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Exxon Mobil announced Wednesday morning it struck a massive deal to buy Pioneer Natural Resources , strengthening its position as an oil producer at a time when energy is rising as a geopolitical concern but the sector’s stocks have struggled to make up for years of underperformance. The all-stock deal, valued at roughly $60 billion , is expected to close in 2024 and would expand Exxon’s production in a key area of the United States. It’s the biggest deal for Exxon since it bought Mobil for $80 billion in 1999, and the second this year after it agreed to buy Denbury Inc. for $5 billion in July. Here’s a look at what Exxon is getting in Pioneer and how Wall Street is reacting to the deal. Why Exxon is buying The deal roughly doubles Exxon footprint in the Permian basin, a key oil-producing region that includes parts of West Texas and New Mexico. The region’s oil reserves have attracted many energy executives and investors such as Warren Buffett, who owns a large stake in Occidental Petroleum , one of the other players in the basin. Exxon CEO Darren Woods said on ” Squawk Box ” that the combined company would still represent less than 15% of total production in the Permian, which could help the deal get approved by regulators, but the deal elevates Exxon to one of the top players in the region. “From an asset level, the transaction would make XOM a clear leader in the Midland Basin from a production and inventory depth standpoint and would also come as PXD is finding ways to improve well productivity and capital efficiency,” UBS analyst John Silverstein said in an Oct. 6 note about the then-rumored deal. Woods said that the deal is not meant as a statement about the outlook for oil and gas versus renewable energy, and Exxon said in a statement that it plans to speed up the timeline of Pioneer’s net-zero Permian goal. “It’s more of a bet on our people, our capabilities and our technologies than it is about the future of oil and gas,” Woods said. The combined technologies of Exxon and Pioneer can help the new company drive its cost per barrel below $35 per barrel, Woods said, which would be highly profitable at current oil prices that are around $85. “We’re basically indifferent to where those prices go. We’re making sure we can supply cost-effectively whatever the market prices are,” Woods said. Who could be next? The move by Exxon and Pioneer could motivate other energy companies in the region to consolidate. Other Permian players include EOG Resources and APA Corp . That consolidation could take the form of smaller companies teaming up, or other oil giants stepping in. RBC Capital Markets analyst Biraj Borkhataria said in a note to clients Wednesday that Chevron could be one name to watch as a buyer. “We would expect some investors to question whether CVX may be propelled to make a sizeable acquisition following XOM, however we would note that the management track record is to be patient (with recent deals done at lower points in the cycle), while this deal effectively removes the main competition for CVX on large-scale M & A,” the RBC note said. Piper Sandler analyst Ryan Todd also pointed to Chevron as a company that could feel added pressure from Exxon’s acquisition of Pioneer. “We also expect the deal to further increase pressure on its closest peers, particularly CVX, in terms of perceived resource portfolio depth,” Piper Sandler said in a note to clients Wednesday. And if the oil and gas industry is in a deal-making mood, some companies focused on green energy could benefit. Exxon’s Denbury deal, for example, seeks to capitalize on a carbon capture, utilization, and storage (CCUS) company on the Gulf Coast and Rocky Mountain regions. What it means for Exxon’s stock Piper Sandler’s Todd maintained his overweight rating on Exxon on Wednesday and praised the Pioneer deal. “Strategically, we view the deal as a home run for XOM, filling the only identifiable ‘question’ in its portfolio, and firmly establishing itself as one of the most dominant players across nearly every business segment (deepwater, U.S. shale, LNG, refining, chems, etc) and driving a peer-leading combination of growth, returns, and sustainability, against which most of its peers will increasingly be measured,” the Piper Sandler note said. However, Exxon’s stock was down 3% in early trading Wednesday, while Pioneer rose just 1%, suggesting others are less sure. The decline could be a sign that the valuation is too high for investors, though discussions about Pioneer had been reported at about this price, according to RBC’s Borkhataria. “Given XOM’s intentions in the Permian, adding to inventory makes sense, and we would note that XOM’s valuation has expanded relative to peers in recent years, and thus [using] premium equity for the deal … is sensible. The 18% premium paid looks in line with market expectations and in-line with the most recent press speculation,” RBC said. Borkhataria has a sector perform rating on Exxon. One key component for how the deal is perceived in the short- and long-term is the ability of the combined company to exploit synergies, such as cost savings, created by the merger. In a deal of this size, such efficiencies could take time to show up in financial reports. “It appears around two-thirds of the synergy figure is driven by ‘improved resource recovery’, which we are not sure investors will pay up for until evidence on delivery,” RBC said. — CNBC’s Michael Bloom contributed to this report.