Pioneer Uses Potentially Overvalued Equity To Buy Permian O&G Company DoublePoint

Summary

• Pioneer is paying $6.4 billion for private Permian competitor DoublePoint.
• Transaction at the highest deal valuation in the past year.
• Implies Pioneer and DoublePoint financial sponsors may view the equity as expensive.

Photo by andrepra/iStock via Getty Images

Pioneer Uses Equity to Buy Permian O&G Company DoublePoint

Amid waves of consolidation of North American oil and gas assets, and in the West Texas and SE New Mexico Permian Basin in particular, Pioneer Natural Resources (NYSE:PXD) is continuing the trend with the announcement that they will acquire privately-held DoublePoint Energy in a transaction valued at approximately $6.4 billion. This comes only 5 months after Pioneer’s announcement to buy Parsley Energy for $4.5B. The PXD-DPE transaction consideration consists of 27.2 million shares of Pioneer common stock (valued at ~$4.5 billion), $1 billion of cash and assuming $900 million of debt and liabilities.

In the deal, Pioneer gains 100,000 boe/d of production and 97K net acres of contiguous Permian basin acreage that is a direct bolt-on to Pioneer’s acreage. However, Pioneer doesn’t provide much more information on the acquired assets. According to Pioneer’s transaction presentation, the pro-forma company will have nearly 600 Mboe/d of production and a 70+% oil mix. Management expects synergies will lead to cost savings of ~$175 million through operational efficiencies ($100 MM), reductions in general and administrative ($15 MM) and interest expenses ($60 MM interest savings).

Source: Pioneer transaction presentation

To get a better idea of how this compares to other transactions in the current pricing environment, it is helpful to reference two recent deals: Earthstone’s (ESTE) Midland assets acquisition and Ovintiv’s (OVV) Eagle Ford sale. Pioneer paid the most per flowing barrel by far at $64k/boe, which is the highest price per flowing barrel seen for comparable transactions in the last year.

Source: Bison Interests analysis

In cost per total acre acquired, Pioneer again paid a steep premium. At nearly $66K per net acre, Pioneer paid 2.3x the Ovintiv deal and nearly 10x the cost that Earthstone acquired their acres for. In addition to our analysis, we have included the below chart with additional analysis of recent Permian deals. The 3rd party analysis validates that the PXD-DoublePoint deal looks expensive on the below metrics compared to the Diamondback (FANG)-QEP (QEP), Devon (DVN)-WPX (WPX) and Conoco (COP)-Concho deals. And a humorous take on these above-average deal metrics can be found here.

Source: EnergyCynic

This is a synergistic deal and we don’t yet have all the metrics to assess this, but even with a bullish oil outlook, this seems like it was an expensive deal in the current price environment. Pioneer’s willingness to do this transaction with the stock at these high comparable metrics could be indicative of their assessment of the value of their shares, which have nearly doubled in the last 6 months:

Data by YCharts

This deal may be reflective of a low current cost of capital/that their valuation may be higher than peers on commonly used metrics. Regardless, Pioneer states this “checks all the boxes” for a desirable acquisition. It is clear they value the considerable size and production gains, the oily assets, and the adjacency of the land position.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Important Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment adviser capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC or CSA filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice. The author and funds the author advises may buy or sell shares without any further notice.

Comments

[Long Player]

I think when you factor in the stock in this deal, that if the stock price heads to where everyone wants it, this deal could end up costing more than $80K per barrel when that stock appreciates.

[PT Larry]

@Long Player A good argument heard supporting this acquisition was that Pioneer removed itself from the list of targets to the list of hunters. lol

[Long Player]

@PT Larry That argument makes the rounds in a lot of cases and it is a bad argument to begin with. This management is not very driven which is not good in the commodity business. They do have a good location however.

[fundydoc]

Good observations and I think it says something about O&G equity valuations in general - they have come pretty far pretty fast and have been chased to no longer bargain levels. Time to be very selective, given the current narative.
Thx for the article Josh !

[Josh Young]

@fundydoc thanks! I agree with that takeaway, well said.

[PT Larry]

Thanks for the article.

[lookuphere]

Clearly the CEO of Doublepoint is related to Scott Sheffield somehow, otherwise this deal makes zero sense from a practical and valuation perspective. Overpaying for an asset that they dont really need blows my mind

[Pillpoppinpuppy]

@lookuphere That's silly.

[River18]

@Pillpoppinpuppy
Is silly better or worse than truly irrelevant???

[River18]

@Pillpoppinpuppy
btw...today I bought a boatload of Whitecap shares, and zero PXD shares.

[thurston]

Thank you for the article. You mention the recent acquisition of Parsley, do you have an opinion? Namely, was that a good deal for the Parsley shareholders (which is how I came to own my small position in PXD)? Or was it a better deal for PXD? Was the acquisition well executed?

The article notes that: "In the deal, Pioneer gains 100,000 boe/d of production and 97K net acres of contiguous Permian basin acreage that is a direct bolt-on to Pioneer’s acreage. However, Pioneer doesn’t provide much more information on the acquired assets." ... and there is some discussion to the effect that PXD might have paid a lot.

In the press release www.businesswire.com/...

... PXD notes that "This transaction represents a contiguous position of approximately 97,000 high quality net acres directly offsetting and overlapping Pioneer’s existing footprint. The acquired acreage is PRIMARILY UNDRILLED and augments Pioneer’s premium asset base". (Caps Added).

It is a little hard to draw conclusions from the stock price as all oil stocks are down today.

But if the acreage is "primarily undrilled" it seems that we would have to place our trust in the expertise of management and their geologists, or not. @21793061 notes that "DP flowing barrels are pretty high decline" but if the acreage is primarily undrilled how much can we draw from the decline rate?

The situation is a bit murky but I bought another 100 shares and might buy a little more on the theory that if this was a bad deal then why would PXD do it?

[Josh Young]

@thurston they did not provide enough information to fully vet the deal, but there are acreage maps, well productivity studies, production decline rate analyses out there in investment bank research reports and 3rd party studies. I think this captures the sentiment well: twitter.com/...
The advisors on the deal love it, everyone else is unimpressed.
The article provides an alternative theory to your rhetorical question.

[Energex]

What about the existing infrastructure? The cost and value can be very significant. A better comparison would be flowing boe (or barrel if one hates boe, lol) plus undeveloped acreage, plus Infrastructure. The latter is seldom mentioned in these transactions, except when an E&P hungry for cash sells a stake in its infrastructure, often for a very good price.

[Josh Young]

@Energex not a lot of infrastructure here

[User 21793061]

@Energex

DP has an upside down hedge book too, I've heard. Not sure if that was included in the debt or not.

[User 21793061]

DP flowing barrels are pretty high decline. (Look how recent the growth was. ShaleProfile.com, will display it.) So I wouldn't use a very high per barrel flowing.

Also, it is amusing how little info PXD shares about the assets. You can see the wells are quite a bit worse than PXD average, on ShaleProfile.

[Josh Young]

@21793061 it's funny seeing your comment vs some of the others. Even a cursory look at the assets raises questions about this deal

[Pillpoppinpuppy]

@Josh Young Not sure I understand your point. Anyway, I guess the curious thing is why neither of us have adequate information to make serious valuation calculations. I think your comments about price per acre and price per flowing barrel are irresponsible without caveats that you don't know acres that are developed v undeveloped or that you don't know what part of the purchase price is for undeveloped acres.

[Josh Young]

@Pillpoppinpuppy I have maps that I can't publish. And the comps I shared are directly relevant.

[vxmike]

This makes Canadian O&G look sooooo cheap by comparison. The takeaway issues appear solved with upcoming pipelines and the light oil differential is down to $2.

[River18]

@vxmike
For the cost of 1 PXD share, I can buy 2.6 shares of every Canadian producer that I own. And have way more torque to higher oil prices.

[Pillpoppinpuppy]

@River18 That is truly irrelevant.

[River18]

@Pillpoppinpuppy
It sure sounded good though.
Better to have a basket of names, than one share of PXD.

[Avatar910]

“Pioneer’s willingness to do this transaction with stock at these high comparable metrics could be indicative of their assessment of the value of their shares, which have nearly doubled in the last 6 months.” However, if you look at the stock since the previous acquisition, the gain is not nearly as robust.

[Pillpoppinpuppy]

I'm not sure why you think they are paying so much. PXD is paying $6.4B for a business that could be worth $8.6B based on comparable production, assuming PXD can improve DPE's well economics to equal its own.

(DPE Mboepd/PXD Mboepd)*$40B = $8.6B

[User 21793061]

@Pillpoppinpuppy

It's much worse PDP. Because the base decline is worse. DP is doing 53 M bopd* as of end of DEC2020. Of that 80% is from wells brought on in 2020. 15% is from 2019 (still high decline). And a little over 5% is from 2018 or older wells (slow decline).

*BOE accounting is for amateurs.

[Pillpoppinpuppy]

@21793061 I never suggested I wanted to use BOE accounting. I like to know what the reserves are so I can calculate the estimated present value based on the futures curves and estimated costs. But we don't have that.

[Pillpoppinpuppy]

How can you assess valuation based on acreage if you don't know the percentage that is developed v. undeveloped? Also, how can you assess valuation based on flowing barrels if you don't back out of the deal cost the estimated value of the undeveloped acreage? You are assuming the $6.4B is all for flowing barrels when there must be some undeveloped acreage, although we don't know how much.

[Prezzo giusto]

LOVE the humorous take! Great find, Josh.

[Dadgitator]

Really overvalued. I’ve heard it all