ExxonMobil on Friday clinched its $65 billion tie-up with Permian Basin heavyweight Pioneer Natural Resources Co., but the merger has not come without drama.
The transaction, announced last October, moves ExxonMobil to the top of the heap in the Permian, with control of 1.4 million-plus net acres in the Delaware and Midland sub-basins. Estimated output today is 16 billion boe.
Oil and gas volumes are set to more than double to 1.3 million boe/d. Based on initial estimates by ExxonMobil, production could reach 2 million boe/d in 2027.
The Dallas-based independent “is a natural fit for our Permian portfolio,” CEO Darren Woods said. The combination “gives us a greater opportunity to deploy our technology and deliver operating and capital efficiency for long-term shareholder value.”
To clear the merger, though, the Federal Trade Commission (FTC) said Pioneer founder and CEO Scott Sheffield was barred from joining the board or serving in an “advisory capacity.” Sheffield had initially retired from Pioneer in 2016 but retained the executive chairman title. In early 2019, he returned to run the company.
‘Attempting To Collude’
Sheffield “has, through public statements and private communications, attempted to collude with the representatives of OPEC and a related cartel of other oil-producing countries known as OPEC-plus to reduce output of oil and gas, which would result in Americans paying higher prices at the pump, to inflate profits for his company,” the FTC consent order stated.
“Through public statements, text messages, in-person meetings, WhatsApp conversations and other communications while at Pioneer, Sheffield sought to align oil production across the Permian Basin in West Texas and New Mexico with OPEC-plus,” the FTC order stated.
Sheffield “exchanged hundreds of text messages with OPEC representatives and officials” to discuss crude oil market dynamics and pricing. The Pioneer chief also discussed his efforts to “coordinate with Texas producers” following a mandated production cut by the Railroad Commission of Texas.
According to the FTC, Sheffield said, “If Texas leads the way, maybe we can get OPEC to cut production. Maybe Saudi and Russia will follow. That was our plan…I was using the tactics of OPEC-plus to get a bigger OPEC-plus done.”
During a quarterly conference call in February 2023, Sheffield told analysts, “We remain highly constructive on oil prices…I’m still very optimistic that we’ll move back into that $90 to $100 range sometime earlier this summer as we move and get away from this $78 to $88 swing in Brent prices.”
Front-month West Texas Intermediate oil futures at that time were trading around $76/bbl.
Appointing Sheffield to the board also was cited by the FTC as “anti competitive,” as he serves on the board of natural gas pipeline giant Williams, whose businesses “directly overlap” with ExxonMobil operations.
“We disagree and are surprised” by the FTC allegations, Pioneer management stated. Neither Pioneer nor Sheffield took steps “to prevent the merger from closing. As he has for his entire career, Mr. Sheffield is electing to place the interests of investors, employees and the competitive health of the U.S. energy industry ahead of his own.”
The FTC complaint, though, “reflects a fundamental misunderstanding of the U.S. and global oil markets and misreads the nature and intent of Mr. Sheffield’s actions.”
It was not his “intent...to circumvent the laws and principles protecting market competition. On the contrary, Mr. Sheffield focused on legitimate topics…” They included “investor feedback on independent oil and gas company growth and capital reinvestment frameworks,” along with “dialogue with government officials” regarding the “need to sustain a resilient, competitive and economically vibrant oil and gas industry in the United States.”
According to Pioneer, Sheffield’s concerns, and his “right to express them, are protected by the First Amendment and an unbroken line of U.S. Supreme Court cases known as the Noerr-Pennington Doctrine.”
More E&P Merger Scrutiny Ahead?
So could the turmoil that preceded the ExxonMobil tie-up impact other exploration and production (E&P) mergers? It’s possible, said NGI’s Patrick Rau, director of Strategy and Research.
A group led by Senate Majority Leader Chuck Schumer of New York has called on the FTC to investigate other E&P mergers, including the Chevron Corp. tie up with New York-based Hess Corp. Chevron and ExxonMobil are the largest U.S.-based integrated producers by revenue.
By allowing them “to further integrate their extensive operations into important oil and gas fields, these deals are likely to harm competition, risking increased consumer prices and reduced output throughout the United States,” the lawmakers wrote in their request to the FTC.
Rau also highlighted “inquiries by the FTC” into EQT Corp.’s acquisition of Tug Hill Inc. which “delayed that deal by nearly a year.”
Rau recently spoke with a retired antitrust attorney, who “once was on the short list” to head the FTC.
The two discussed the potential merger between Chesapeake Energy Corp. and Southwestern Energy Co. The combination, when complete, would create the largest natural gas producer in the United States, “with an estimated 10% of market share by volume.”
In response to the percentage of market share, the retired attorney responded, “10%? That’s tiny,” Rau said.
However, Rau then explained that the prompt month futures contract soared by roughly 15% following Chesapeake’s decision to curtail production by roughly 25% in 2024 versus the 4Q2023 run rate.
“That got his attention,” Rau said of the attorney’s response. “So too did the idea that Chesapeake was only speaking for its supply, and not for Southwestern. Would that have happened if a much smaller producer made the announcement? Probably not.”
The attorney explained that “market share and things like concentration ratios and Herfindahl-Hirschman indexes aren’t the only thing regulators consider in making such evaluations.”
According to Investopedia, the Herfindahl-Hirschman index “is a common measure of market concentration that is used to determine market competitiveness.”
Another note about the FTC inquiries: the commission is currently controlled by Democrats, as the president determines who is on the commission.
“So they may be less favorable to such combinations, everything else being equal,” Rau noted. Ultimately, the mergers “are likely to go through, but not without tying up considerable time and resources.”
There is a “potential short-term price angle to all this as well.” E&Ps that are merging may be “more likely to refrain from adding rigs until after closing.” In addition, the gas-weighted E&Ps may not want to add rigs “until Henry Hub prices are closer to $3.00/MMBtu.
“NGI’s current Henry Hub forward curve indicates it isn't likely to happen until November,” Rau noted. “Keeping more rigs out of the fields could help balance the markets a bit sooner, everything else being equal.”
