Exxon and the prophecy of the Great Consolidation

For the last few years, the oil and gas sector has been waiting to be reshaped through mergers and acquisitions. Is ExxonMobil’s latest move a sign of the prophecy?

ExxonMobil recently shocked the energy industry with its nearly $60 billion bid to acquire Pioneer Natural Resources in an all-stock deal¹. When the deal closes, one of the world’s supermajors will have the acreage and production runway of the Permian Basin’s top driller. ExxonMobil CEO Darren Woods justified the deal simply²:

Their [Pioneer’s] capabilities, bringing in their Tier 1 acreage, our technology, our development approach, frankly, brings higher recovery at lower cost.

You can find plenty articles discussing the financial sense of this deal–and by all appearances, the deal makes plenty financial sense. But, as a hopeless writer, I can’t help looking at the acquisition from a storyteller’s lens.

Energy analysts have been predicting a wave of mergers of acquisitions (M&A) for a while now. The long-awaited prophecy appears to finally be coming true with the news of Exxon’s pending acquisition of Pioneer.

The early 2000s saw American exploration and production (E&P) activity dominated by the independent producers, as the majors decided to take their money international³. When those overseas ventures failed, the majors struggled to establish a foothold in America’s onshore plays. I was lucky to have started my oil and gas career during this independent-dominated phase, when even a marginally capable and reliable warm body could quickly climb the ranks. (A note for the young: Scott Galloway is right when he says it’s better to be mediocre in a booming field than to be outstanding in a mediocre field. Unfortunately, I can’t find the article/video in which he said this, but trust me on this one–he totes did.)

Many of the land professionals of my generation started their careers working with land services brokers in North Texas' Barnett Shale, most likely running title and leasing for Chesapeake Energy. Under CEO Aubrey McClendon, Chesapeake sought to acquire as much acreage as possible, as fast as possible–costs and fiscal responsibility be damned. When natural gas prices fell from $14/MCF to sub-$3 and oil climbed to over $100 a barrel, the long-written off Permian Basin with its stacks and stacks of oil-producing formations became the industry darling⁴. The great land grab eventually led to chants of ‘Drill, baby, drill!’ as operators sought to prove up their assets. Mineral and royalty buyers sought to seize on this activity by buying in areas most likely to be drilled in the near future, ensuring they’d make their money back fast.

In the age of the independents, opportunities abound for money. But what about now, as we’re heading into the age of the majors? What happens to the industry as the majors spend money to make haves of the have-nots, to ensure the big only get bigger?

If Exxon really is kicking off the Great Consolidation, then we can expect to see less drilling in general. We haven’t seen significant sustained exploration of new fields for at least a decade. With reduced drilling, the mineral and royalty buyers will need to alter their business models.

Oil and gas is likely entering a less exciting but more stable era–an era far different from the one that let me start and develop my career. So I lean into this new era with melancholy as I accept that I’m getting old and the world around me is changing. I’m wise enough to know this new era won’t last forever. But I’m not smart enough to know how or when it will change, or what will change it.

In the late ’80s and the ’90s, conventional wisdom said the Permian Basin was dead. But conventional wisdom got bucked by unconventional drilling thanks to the combination of horizontal drilling and hydraulic fracturing (fracking)⁵. Technology may very well again transform the industry, but who knows what those technological innovations will look like, or when they’ll happen. Fracking was discovered out of desperation and experimentation, not because of scientific theory that suggested the process would increase production⁶. Maybe the next great innovation will happen because someone somewhere says Hell, what have I got to lose? and tries something stupid that ends up looking genius in the end.

The industry may also change due to economics. If oil and gas prices go through the roof, fields once deemed uneconomic to drill will then make sense. The Permian Basin will still be the apple of the industry’s eye, but at least there will be more fields to play in and explore.

Yes, Exxon’s acquisition of Pioneer likely signals a shift in the industry. Since the news broke, word has leaked that Chesapeake is mulling acquiring Southwestern Energy⁷. And Devon Energy is also mulling acquiring Marathon Oil Corp. or CrownRock, the latter of which recently announced it was open to being acquired⁸.

One thing is certain: This era too shall pass. But what it shall pass to, we do not know.