Small and nimble oil companies beat the oil giants into shale drilling 15 years ago, using new technologies to recover oil in areas that analysts had thought were tapped out. Today, Big Oil holds the advantages, and it’s bound to dominate the next era of U.S. drilling.
ExxonMobil’s (ticker: XOM) $64 billion deal to buy
Pioneer Natural Resources
(PXD) announced Wednesday puts
Exxon
in the driver’s seat in the Permian Basin, the most productive area for drilling in the U.S.
Large oil companies have emerged from the pandemic with significant advantages from both a capital and technological perspective. Newer technological advances give companies like Exxon enough money and acreage to drill laterally in shale for up to four miles to pull more oil and natural gas out of the ground. Smaller drillers may not have the wherewithal—or the land—to take advantage of those kinds of technologies.
“We’ve come up with a number of techniques and technologies” to increase productivity in shale, Exxon CEO Darren Woods said on a conference call on Wednesday.
The other major advantage that big oil companies have today is that their stocks are valued at much larger price/earnings multiples than those of smaller drillers. One reason for the valuation premium is that fewer investors overall are putting money into oil stocks today, and those that do invest in oil favor large well-known names. Exxon trades at 12 times its expected earnings over the next four quarters, a substantial premium to peers. Pioneer was trading at nine times before the first report about a potential deal last week. Other oil companies such as
Devon Energy
(DVN) trade at seven times.
In an all-stock deal like Exxon’s purchase of Pioneer, Exxon can use that valuation heft to its advantage. Each dollar of earnings that Exxon is purchasing is essentially “cheaper” than its own earnings—and theoretically, Pioneer’s earnings will be worth more in equity value when they are transferred to Exxon.
“I think [Exxon’s valuation advantage] gives them the ability to do deals like this,” said TD Cowen analyst Jason Gabelman in an interview. “You need to have a currency that’s going to make doing the deal accretive, and it’s difficult to do large deals with mostly cash.”
Chevron
(CVX), which is trading at 11 times earnings, is in a similar position. It has already made a deal this year, buying Colorado producer PDC Energy. Some analysts expect the company to make another significant acquisition, perhaps in the Permian. Enverus analyst Andrew Dittmar wrote in an email that Chevron could buy a producer like Devon or
Coterra
(CTRA).
The shale boom started small. In the next stage, it looks like the big will only get bigger.
Write to Avi Salzman at avi.salzman@barrons.com
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