Shale firms jump on report of Exxon’s interest in Pioneer

(Bloomberg) — Shale producers rallied Monday as traders bet they could be potential takeover targets for oil majors looking to expand following Exxon Mobil Corp.’s reported interest in Pioneer Natural Resources Corp.

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Pioneer shares rose 5.8%, the biggest gain since October, on a report of Exxon’s preliminary takeover talks, leading shale oil companies higher as the S&P 500 Energy Index rose 0.7% on Monday. Oil and gas producer Diamondback Energy Inc. rose 1.9%, while Devon Energy Corp. rose 0.9%.

After years of growth, the US shale patch may be poised for consolidation.

Production is declining as some of the most productive drilling areas become less fertile, making acquisitions the main growth engine in regions including the oil-rich Permian Basin in West Texas and New Mexico. Buying Pioneer would make Exxon the largest producer in the Permian, providing more than a decade of runway with lucrative locations to drill wells.

While Stifel analyst Derrick Whitfield sees “an imminent deal with PXD as unlikely,”[ads1]; if Exxon buys Pioneer, then Diamondback and Permian Resources Corp. “the best derivatives,” he wrote in a note. Whitfield called the Diamondback the closest peer to the Pioneer.

Some investors see Exxon’s interest in Pioneer as an isolated play for a significant number of drilling sites. “This could be unique,” said Eric Nuttall, senior portfolio manager and partner at Ninepoint Partners, noting that Pioneer has the “longest-dated holding” in the Permian in Texas.

However, Nuttall does not expect a wave of oil takeovers, especially outside of Texas and beyond the US into Canada and elsewhere.

Truist Securities analyst Neal Dingmann disagrees, and expects the rest of 2023 to be a busy time for oil deals. He expects Exxon and competitor Chevron Corp. are on the hunt, given their desire to increase inventory. And he’s looking at Devon, Diamondback, Coterra Energy Inc., APA Corp. and Permian Resources as firms that “may remain active in the M&A market,” he wrote in a note.

“There’s no doubt that this industry is going to consolidate,” said Smead Capital Management president and CEO Cole Smead, adding that several major oil companies will be eager participants. “Where’s Chevron If Exxon Makes Deals?”

–With assistance from Kevin Crowley and Mitchell Ferman.

(Updates for the market close all the way.)

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