Davis Polk and Gibson Dunn Advise on Exxon Expansion

Exxon is making a $64.5 billion bet on one of the U.S.’s oldest oil and gas producing regions with its acquisition of Pioneer Natural Resources. The equity deal is expected to close during the first half of 2024.

Pioneer is a leader in the Permian Basin, which is located in western Texas and southeastern New Mexico and produces nearly 50% of the total U.S. oil output. The deal will more than double Exxon’s footprint in the region, giving the combined company the equivalent of 16 billion barrels of oil in the basin.

Source: https://www.dallasfed.org/research/energy11/permian

The Permian’s resurgence mirrors domestic oil production’s – and the United States’ dramatic turnaround from veracious importer highly dependent on foreign supplies, to become a net oil exporter as of this year. Not since World War II have U.S. oil exports exceeded imports. Following the war, steady increase in U.S. production could not keep up with U.S. demand; a situation that became dire as production declined in the 1970’s as well began to run dry.

Arab members of the Organization of Petroleum Exporting Countries (OPEC) used this strategic advantage to punish the U.S. for supporting Israel during the 1973 Arab-Israel War with an embargo that caused U.S. oil prices to quadruple. According to the Department of State, “The United States, which faced a growing dependence on oil consumption and dwindling domestic reserves, found itself more reliant on imported oil than ever before, having to negotiate an end to the embargo under harsh domestic economic circumstances that served to diminish its international leverage.”

With the region again in conflict, oil prices have indeed jumped but the reaction in the oil market has been muted. Among the many other differences between 1973 and now, the U.S.’s use of technology to tap vast new sources of domestic oil have drastically altered the geopolitical landscape.

Source: https://tradingeconomics.com/commodity/crude-oil

Like other U.S. regions, the Permian sprung back to life as new technologies enabled producers to drive oil from previously inaccessible locations. While oil production in the Permian had dropped in the 2000s to nearly 60% from their high in the early 1970s, producers applied horizontal drilling techniques to beginning in 2014, resulting dramatic turnaround in output. According to the Federal Reserve Bank of Dallas, “if it were a country, the Permian Basin would be one of the largest producers of oil in the world” – and now Exxon will control an even greater portion of it.

According to the companies’ joint press release, “ExxonMobil believes the transaction represents an opportunity for even greater U.S. energy security by bringing the best technologies, operational excellence and financial capability to an important source of domestic supply, benefitting the American economy and its consumers.” The deal arrives on the heels of Exxon’s $4.9 billion purchase of carbon capture, utilization, and storage company Denbury in July.

According to Matterhorn’s comprehensive M&A database, which harnesses AI to track current and historical deals, Exxon is advised by Davis Polk & Wardwell LLP, while Pioneer is advised by Gibson, Dunn & Crutcher LLP.