Dallas-based Pioneer Natural Resources Co., whose focus has long been in the Permian Basin Midland, is plunking down $6.4 billion to build its base with the takeover of West Texas competitor DoublePoint Energy LLC. 

Pioneer logo

The deal, a cash-and-stock split, would add 97,000 net contiguous acres directly offsetting and overlapping Pioneer’s existing footprint. The mostly undrilled acreage would increase Pioneer’s Midland sub-basin leasehold to one million-plus acres with “no exposure to federal lands.” DoublePoint’s footprint in the Midland would “complement our unmatched position in the core of the Permian Basin,” Pioneer CEO Scott Sheffield said. 

Fort Worth, TX-based DoublePoint was formed in 2018 by two Lower 48 explorers, Double Eagle Energy Holdings III LLC and Denver-based FourPoint Energy with private equity commitments from Apollo Global Management Inc., Quantum Energy Partners, Magnetar Capital and GSO Capital Partners LP.

“The combination of Pioneer and DoublePoint is compelling from both a financial and operational standpoint and a natural fit for DoublePoint,” said Apollo’s Geoffrey Strong, co-head of Infrastructure and Natural Resources. “This acquisition continues the trend of consolidation in the prolific Permian Basin, combining two complementary footprints in a transaction with both top- and bottom-line synergies.”

DoublePoint co-CEOs Cody Campbell and John Sellers said they had long admired the Pioneer management team. “The fit and the synergies are clear, and we look forward to working with Pioneer to continue creating value.”

Pioneer last October took over Permian pure-play Parsley Energy Inc. in a blockbuster $7.6 billion deal. That merger added Midland and Delaware sub-basin land. 

With the notable spending perhaps in mind, management noted that Pioneer’s pro forma leverage metrics would remain “relatively unchanged” to preserve “financial and operational flexibility.” 

To buy DoublePoint, Pioneer plans to issue 27.2 million common shares and provide $1 billion cash, giving existing Pioneer shareholders 89% of the combination. The Pioneer board has unanimously approved the deal, which is set to be completed by the end of June.

According to Pioneer, production from the DoublePoint assets is forecast to be hit 100,000 boe/d by mid-year. By combining adjacent operations, the merger is expected to result in total annual cost savings of about $175 million from operational efficiencies and cost reductions. 

DoublePoint is running seven rigs in the Midland today, but by year’s end, Pioneer plans to knock it down to five rigs and reduce activity by about 30%. Once the transaction is completed, estimated by mid-year, around $470-570 million in capital spending would be directed to the DoublePoint assets.

Mixed Reaction

Reaction to the deal was negative early Monday, with Pioneer’s share price off by 5.5%. Analysts with Tudor, Pickering, Holt & Co. (TPH) said they had expected as much. Analysts offered two reasons.

“First, after Pioneer snatched Parsley up on the cheap…through a merger of equals, we think the company had solidified its top spot in terms of Tier 1 inventory in the Permian and could selectively bid at attractive valuations on future deals or simply pass versus paying full price,” analysts noted.

“Second, we think buying a high proved developed producing decline asset…from a private equity-backed company pushing hyperbolic growth may not be well received by investors, as clients are looking for companies to lower corporate declines — not raise them.”

The DoublePoint acreage quality “looks to be on par given the location, although at first glance, the 160 wells drilled since 2017 are about 10-15% below our blended core Pioneer curves. But at this transaction price, absent a rally in crude, we think Pioneer essentially paid for that upfront.”

Raymond James & Associates Inc. analyst John Freeman also weighed in. “Given Pioneer’s top-tier contiguous Midland acreage position and leading inventory backlog, the acquisition was certainly a surprise. However, the glove-like nature of the acreage fit certainly drives long-term value accretion.”

Analyst Nitin Kumar with Wells Fargo Equity Research said Monday the “resurgence of private shale activity has been a concern for many investors who see it potentially overtaking the ‘restrained growth’ narrative from public operators adopting our Shale 3.0 mantra, led by Pioneer…

“In the absence of free market controls over the activity of sponsored private shale players, Pioneer is trying to do its part to control the global oil price narrative while still focusing on free cash flow (FCF) accretion. Will shareholders reward its efforts, and will others follow?” Kumar asked.

Kumar said investors may be concerned about whether the DoublePoint transaction “means another round of shale consolidation is coming. We think the current backdrop differs notably” from last fall. “But, the need for scale in light of evolving regulations and investor demands could force more small/private operators to consider ‘tapping out.’”