XOM - Pioneer Natural Resources: Exit The Stock If Exxon Mobil Announces A Deal

2023-10-06 13:54:53 ET

Summary

• Exxon Mobil is reportedly close to acquiring Pioneer Natural Resources in a mega deal, the largest for Exxon since acquiring Mobil in 1999.
• If true, investors should prefer a cash deal over Exxon Mobil stock due to limited growth potential and higher returns expected from Pioneer shareholders.
• Pioneer investors should use any spike in the stock price on a deal announcement to unload shares, as the stock is unlikely to reach higher prices.

Exxon Mobil ( XOM ) appears on the verge of closing a mega deal to acquire Pioneer Natural Resources ( PXD ). The rumored deal would be the largest for Exxon since acquiring Mobil in 1999 and comes following the much maligned deal last decade to buy XTO at peak natural gas prices. My investment thesis is bullish on Pioneer, but investors should prefer a cash deal vs. Exxon Mobil stock, providing a quick exit, if a deal materializes.

Deal Proposal

According to the WSJ , Exxon Mobil is reportedly looking at a deal to acquire Pioneer for $60 billion . After the recent dip, the energy company had a market cap of ~$50 billion, suggesting a 20% premium to the current stock price. At $215, the suggested value for the shale driller amounts to ~$260 per share, or equivalent with the 52-week high.

The report doesn't discuss whether the deal is all cash or a combination of cash and stock. Pioneer investors will most definitely find Exxon Mobil stock less appealing with the stock just recently bouncing off all-time highs at $120.

Exxon Mobil has a valuation of $425 billion, leading to limited growth potential for any new shareholders. In addition, an investor in Pioneer is likely looking for higher returns than a mega cap energy giant like Exxon, though Pioneer has generally trailed the S&P 500 index over the last decade.

CEO Scott Sheffield plans to retire again at year-end, so possibly this is an ideal time to cash out. Exxon Mobil has cut net debt down to $12 billion, suggesting the desire to load up on debt not so appealing to shareholders, especially an amount to up to $60 billion. The energy giant would see net debt balloon back to the levels in 2020 where the stock dipped into the $30s due in part to pressure from excessive debt.

The other big issue is the unknown regulatory view on the deal. The current DoJ has been very tough on mega deals leading to a lengthy process to close the deal and any Pioneer shareholder won't want to stick around for this process.

Peak Value

Pioneer is forecast to produce an ~$24 EPS next year, delivering a deal P/E multiple of around 11x. The independent energy company is on pace to deliver around $3 to $4 billion in free cash flow this year after delivering over $8 billion in free cash flow in 2022 due to elevated energy prices from the Russian invasion of Ukraine.

At current WTI prices, Pioneer forecast delivering ~$27 billion in free cash flow over the next five years, presumably at historically low natural gas prices. The valuation is somewhat compelling at a $60 billion deal price with this level of future free cash flows amounting to a projection of $5+ billion in annual free cash flows.

The issue is that Exxon Mobil looks to close the deal only days after WTI spiked to $90. The energy giant isn't buying Pioneer Natural Resources on energy price weakness and the stock just surged to all-time highs and quickly pulled back.

Pioneer only rallied to $260 in early 2022 based on oil prices topping $120/bbl last year. Exxon Mobil is apparently paying these peak stock prices for Pioneer, yet the risk always exists for WTI prices to again collapse down to $60 normal of most energy cycles.

Takeaway

The key investor takeaway is that Pioneer Natural Resources investors should use any spike in the stock price on an actual deal announcement to unload shares. The stock is likely to initially trade around all-time highs, but investors aren't likely to get higher prices without either waiting upwards of 18 months for a cash deal to close and the Exxon Mobil stock price isn't likely to hold up on an all-stock deal, considering the stock is already down 3%.

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