The Long and Short
More room to run in Pioneer Natural Resources
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Pioneer Natural Resources (PXD – Baa1 (*+)/BBB (*+)/BBB+) bonds have jumped after the formal announcement that ExxonMobil (XOM – Aa2/AA-) and PXD will be merging in an all-stock transaction. PXD bonds climbed nearly 35 bp across the curve, but are still trading roughly 20 bp behind XOM. Questions surround XOM’s treatment of the PXD debt post-merger, as management was reluctant to explicitly say if the bonds would be guaranteed. The guarantee, or lack thereof, should affect how the bonds are rated, particularly at Moody’s as they take a different approach to rating the bonds in a merger scenario than S&P. If history is any indication of XOM’s plans for PXD debt, XOM did guarantee the debt of XTO Energy when it acquired the company in 2009.
The all-stock nature of the transaction only strengthens the combined balance sheets of both XOM and PXD. That said, PXD bonds have the potential to collapse even closer to XOM, regardless of how the debt is treated. S&P plans to equalize the ratings based on the proposed transaction, translating to a four-notch upgrade for PXD by S&P. Should XOM guarantee the debt and Moody’s equalize the ratings as well, PXD bonds are likely to trade only a couple of bp behind XOM, if not on top of XOM.
Exhibit 1. XOM Curve vs. PXD Curve
Source: Bloomberg TRACE; Santander US Capital Markets
XOM and PXD entered into a definitive merger agreement, an all-stock transaction, valued at $64.5 billion, including the assumption of net debt. PXD shareholders are expected to receive 2.3234 shares of XOM for each PXD share at closing. The Board of Directors of both companies have unanimously approved the merger which will be subject to regulatory approvals. XOM is targeting for the deal to close in the first half of 2024.
XOM and PXD’s assets are highly complementary and the ownership of PXD by a higher rated entity is positive for bondholders. The addition of PXD will more than double XOM’s production in the Permian Basin, with XOM accounting for just over 20% of Permian production on a pro forma basis. Furthermore, the combined entities are expected to realize significant capital and operating synergies while reducing its environmental impact. XOM noted that synergies are expected to be roughly $2.0 billion annually over the next decade, largely driven by improved resource recovery.
Exhibit 2. Synergy Breakdown
Source: Company Presentation; Santander US Capital Markets
Additionally, XOM will leverage its Permian greenhouse gas reduction plans to accelerate PXD’s net zero emissions plan from 2050 to 2035. XOM also plans to lower both companies’ methane emissions in the Permian Basin through the implementation of new technologies which are designed to monitor, measure and address “fugitive” methane. XOM currently employs a multi-layered detection system which tracks methane emissions. Furthermore, XOM expects to increase the amount of recycled water used in fracturing operations by more than 90% by 2030.
Agencies Place PXD on Review for Upgrade
Both Moody’s and S&P placed PXD’s ratings on review for an upgrade but will take entirely different approaches to the ratings based on if the bonds are guaranteed or not. Moody’s will need to see the debt guaranteed in order to equalize PXD’s ratings with XOM’s. Should XOM only assume the debt but not guarantee it, and provide separate audited financials for PXD’s operations, then Moody’s will notch PXD’s ratings to XOM’s, with PXD’s ratings limited to the single-A category. If separate audited financials are not provided, Moody’s will likely withdraw its ratings on PXD debt. Moody’s does believe that the merger is a positive for PXD based on XOM’s strong credit profile and anticipated parental support.
S&P will view PXD as a core subsidiary of XOM, based on the strategic fit of the assets, and the likelihood that the debt is assumed. Regardless of guarantee, S&P noted that they will equalize PXD’s ratings with those of XOM should the transaction be completed as proposed. That said, PXD bonds will have at least one double-A rating under its belt. Fitch has yet to opine on the ratings, but currently only rates PXD’s debt.
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