Behind The Scenes: The Pioneer Exxon Deal from A to XOM

Pioneer Natural Resources was looking at buying a mystery E&P last spring before beginning talks on June 22 to exit to Exxon Mobil, according to an updated preliminary proxy statement filed with the Securities and Exchange Commission.

The resulting $65-billion deal was the U.S.’ largest in 2023, closely followed by Chevron’s $60-billion bid for Hess.

Identified only as “Company A,” Midland Basin-focused Pioneer had “preliminary discussions” on terms, such as how much of Pioneer the Company A shareholders would own post-closing, Pioneer reported Dec. 22.

But no agreement was reached on that or other terms, it added.

It described the target as “an upstream company with operations in the Permian Basin,” but did not identify it further, such as whether it is a fellow Midland Basin pure play, a Permian (both Midland and Delaware Basin) E&P or a multi-basin operator.

J.P. Morgan Securities analyst Arun Jayaram reported in June that Rich Dealy, Pioneer’s president at the time and now CEO, said at a recent dinner that Endeavor was interesting to Pioneer but “at the right price.”

Meanwhile, the description in Pioneer’s proxy statement would exclude buying wholly Appalachian gas-focused Range Resources Corp. Pioneer was compelled to comment in February to rebut a report by Bloomberg that the company was in talks to buy Range.

Pioneer’s stock price fell from more than $200 to $180 in intra-day trading. To quell the rumors, it made a rare statement that “it is not contemplating a significant business combination or other acquisition transaction.”

The Wall Street Journal then reported on April 7, citing unidentified sources, that Pioneer and Exxon Mobil held “preliminary talks” to merge and that Exxon was looking at a second potential target as well.

During Pioneer’s April 27 earnings call, then CEO Scott Sheffield said he wouldn’t comment on the new rumor.

Pioneer did state in the Dec. 22 proxy that it and Exxon had “preliminary discussions” at times during the past several years about what a deal could bring to each, but none resulted in proposals before last summer.

Earthstone? Endeavor?

Publicly held Permian merger deals signed in 2023 included the combination of Midland- and Delaware Basin-focused Earthstone Energy with Delaware-focused Permian Resources.

Earthstone’s proxy describing the background of that deal stated that it and Permian Resources had already entered a confidentiality agreement (CDA) beginning April 19. Pioneer reported in its Dec. 22 proxy that, prior to the Exxon deal, it had not signed a CDA or similar agreement in the “past several” years.

But it limited that statement to CDAs involving a potential “acquisition of” Pioneer. It did not mention whether it had signed a CDA as a potential buyer during that timeframe.

Permian operators remaining in conversations this year as potential sellers include Endeavor Energy, which Hart Energy estimates could fetch up to $30 billion on the market based on the valuation metrics of the Pioneer-Exxon deal.

Pioneer reported Dec. 22 that it ultimately didn’t pursue a deal with Company A further because of “potential investor reaction,” among other reasons. Instead, it “concluded that the transaction with ExxonMobil would be more advantageous.”

It did not provide a timeframe of when that decision was made, except alluding to it via stating that the Exxon deal was already on the table when mulling over whether to remain independent and buy Company A.

In 110 days

On June 22, however, Exxon’s Chairman and CEO Darren Woods initiated a conversation with Sheffield. In a back and forth through early October, they ultimately agreed on keeping Pioneer’s Irving, Texas, and Midland offices for at least two years and to “seek to retain most of” Pioneer’s employees for two years.

On other points, Sheffield told Woods as late as Sept. 6 that he personally supported a 20% premium on the Sept. 5 closing prices of the two stocks.

Also, Pioneer wanted two members on Exxon’s board, Sheffield said.

On Sept. 19, Woods presented a formal proposal (dated Sept. 18) to Sheffield, including a 9% premium based on the current stock prices and one board seat. Pioneer’s board rejected the offer.

Woods returned on Sept. 26 with a revised offer and the Pioneer board agreed to an exclusivity agreement through Oct. 15.

Woods’ new offer included Pioneer the right to terminate the deal if it received a superior proposal; two Pioneer board members; and up to 18 months for deal completion.

Walk-away fee

The new offer also included a termination fee Pioneer would have to pay in “certain situations” of 3.25% of the $59.5 billion in equity value that the final deal ultimately came to — about $1.9 billion.

Exxon also wanted to be able to walk away if any antitrust ruling required it to divest assets or do anything it considered adverse to the combined companies.

Neither party would be allowed to look at buying anything before closing that could interfere with getting regulatory approval. And Exxon wouldn’t have to pay a termination fee if the deal failed to clear antitrust hurdles.

Pioneer countered on Oct. 2 by paying both its base and variable dividend for the first quarter and, after that, an unspecified amount.

Also, Exxon would have to pay a reverse termination fee if it didn’t get antitrust clearance and the deal would end after 12 months but have another six months if only still waiting for regulatory approval.

On Oct. 5, Exxon rejected the reverse termination fee. Talks continued.

Sheffield told Woods that Pioneer shareholders should own 12% of the combined company; Woods offered 11.75%. Eventually they split the difference and agreed to 11.875%.

Pioneer followed with an ask of a base-plus-variable dividend through April 1, then quarterly dividends of no more than $1.25 per Pioneer share. Also, it offered a 3% termination fee if Pioneer didn’t close the deal but a 3% reverse-termination fee if Exxon didn’t win antitrust clearance.

Exxon accepted the termination-fee deal but limited the first-quarter dividend to 75% of free cash flow and nothing more.

Pioneer agreed to limit the fourth-quarter 2023 variable part of the dividend to 75% and the current quarter to 50%, then a fixed $1.25 total dividend thereafter.

An exchange ratio of 2.3234 XOM share per PXD was settled.

The deal was signed Oct. 10 and announced before markets opened Oct. 11. The transaction is under scrutiny by the Federal Trade Commission.

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