Houston — Pioneer Natural Resources said late April 1 it had agreed to acquire the leasehold and related assets of private equity-backed Permian Basin operator DoublePoint Energy for roughly $6.4 billion in a deal that further bulks it up in the large West Texas play.
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Upon closing in mid-to-late second-quarter 2021, Pioneer will slow DoublePoint's production growth, moderating it – a benefit to the US shale industry whose producers have mostly renounced galloping crude oil output in an attempt to avoid price volatility. At the same time, the deal still generates optimum value for Pioneer, the executives said.
The transaction, which comes with about 100,000 boe/d of production and 97,000 net acres adjacent to and overlapping Pioneer's own Midland Basin footprint in the eastern Permian, "checks all the boxes" of a desirable acquisition, Pioneer's top two executives said during a recorded webcast.
"It ... provides significant synergies, maintains our strong balance sheet and is extremely additive to our free cash flow generation model which improves per-share returns to shareholders," Pioneer's Chief Operating Officer Rich Dealy said.
Synergies of $175 million annual cost savings are expected through operational efficiencies and reductions in general and administrative costs, amounting to a total $1 billion over the next decade. They will be driven by what Pioneer CEO Scott Sheffield called the "hand-in-glove" nature of Double Point's acreage position that complements that of Pioneer.
Slowed production growth
DoublePoint's drilling activity will be chopped from seven rigs currently to five by year-end 2021 and potentially lower, reducing its growth rate from 30% or more in 2021 to a rate more consistent by 2022 with Pioneer's own 5%/year rate, Dealy said.
"The plan is to keep [DoublePoint's] production relatively flat at 100,000 boe/d during the second-half 2021," he said.
A large number of oil producers have pledged to limit their crude output to the low double-digit percent yearly, from what was often 30% or more per year. Double-digit production volumes have sometimes contributed to lower oil prices that fell below the $50/b level – considered to be a profitable level, below which some US producers' shale operations are not economic.
But due to a continued push for operating efficiencies, many operators have found they can meet their capital budgets, debt obligation schedules and provide healthy cash returns to shareholders at 5% or so output growth.
However, very low growth has its drawbacks – and it's not solely from lower revenues. Big producer EOG Resources, which some years back was growing its oil at 15%-20%, said it may opt for 8%-10% in 2022-2023 because that is the point where a confluence of favorable outcomes converge.
"The operating efficiencies, the operating cost, the earnings and cash flow per share growth, the return on capital employed, the three-year cumulative free cash flow and the long -term free cash slow, all are at an optimal level at an 8% to 10% growth rate," Bill Thomas, EOG's CEO, said during the company's Q4 2020 earnings conference call.
"If we go slower, some of those are not optimal; they're worse," Thomas said. "If we grow faster than that ... same thing."
Pioneer has peer-leading oil price breakevens for its Permian operations in the high $20s/b.
Capital spending allotted to DoublePoint depends on the exact transaction closing, but Pioneer forecasts spending of $470 million-$570 million on the acquired assets for the rest of 2021, Dealy said.
No federal lands exposure
DoublePoint's acreage is mostly undrilled and would increase Pioneer's Permian position to more than 1 million net acres with no exposure to federal lands that could be affected by what are presumed to be stricter drilling proposals under the new Joe Biden US presidential administration, Sheffield said.
Under the transaction terms, Pioneer will pay $1 billion in cash and 27.2 million of its common shares and will also assume $900 million of DoublePoint's debt and liabilities. After closing, Pioneer shareholders will own about 89% of the combined company while DoublePoint owners will own the remaining 11%.
Pioneer has typically not done corporate deals, although in January it closed a $4.5 billion acquisition of Parsley Energy, plus assumption of just over $3 billion of debt. Sheffield's son, Bryan Sheffield, had led Parsley for years including guiding the company through its 2014 initial public offering. Bryan Sheffield retired from Parsley in 2019.
RBC Capital Markets analyst Scott Hanold said he was a "bit surprised" that Pioneer made such a large acquisition on the heels of closing the Parsley deal.
"Today's announcement would further increase Pioneer's production base by 15%-20%," Hanold observed.
In Q4 2020, Pioneer produced 364,000 boe/d of oil, NGLs and gas, of which 204,000 b/d was crude oil. Those volumes did not include output from Parsley, which was folded into Pioneer January 12.
"Based on Enverus data, it appears that DoublePoint had nearly doubled the operated production on its properties in the last year, meaning there could be a much higher base decline rate," Hanold added. "We think the strategic rationale of this move for Pioneer is consistent with the industry mergers over the past several months, but we did not expect that to continue with the recent increase in oil prices."