Weekly Wisdom – October 26, 2023

By Hightower Great Lakes on October 26, 2023

Permian Powerhouse

Early this October Exxon Mobile (XOM) announced a nearly $60 billion acquisition of Pioneer Natural Resources (PXD). This deal was done entirely in stock, at $253 per share. Each PXD shareholder will receive 2.32 shares of XOM for every share they own.[1] This represents a 9% premium to PXD’s average price for the 30 days prior to October 5 when rumors started to hit the press.[2] This was Exxon’s biggest deal (in total dollars) since they acquired Mobil Oil back in 1998 for $81 billion.

The new entity now has ultimate control over the Permian Basin considering Pioneer was the largest operator in the Basin, accounting for 9% of gross production while Exxon was the fifth largest, accounting for 6%.[3]

This kind of market share may trigger some sort of FTC action but so far there has been no information on this. Exxon Mobil can now produce 1.3 million barrels per day from the Permian Basin alone, which is more than some entire OPEC nations produce.[4] As for the free cash flow side of things this should also be meaningful since Pioneer Natural Resources is on track to produce nearly $4 billion of free cash flow on their own this year.[5]

Pioneer Natural Resources Free Cash Flow Through Cycle[6]

A New Frontier

Just a few weeks after Exxon Mobile announced its acquisition of Pioneer Natural Resources, Chevron (CVX) announced that it will be acquiring Hess Corp. (HES). This deal was also an all-stock transaction equating to $53 billion or a total enterprise value including debt of $60 billion.

Chevron paid $171 per share which is a 4.9% premium to Hess’ October 20^th closing price. The goal here was not to expand domestic production but to expand internationally, specifically in Guyana. As a result of the deal, Chevron now has a 30% stake in Guyana’s Stabroek Block which is the world’s largest crude discovery of the past decade. Exxon owns 45% of the block.[7]

This deal should begin to be accretive to cash flow per share once the fourth floating production storage and offloading vessel in Guyana is started up in 2025.[8]

The Chevron deal won’t be as much of a free cash flow monster when compared to the Exxon deal, considering Hess Corp. is predicted to achieve $580 million of free cash flow for the year compared to the billions from Pioneer Natural resources.[9]

Although, Chevron is expected to increase its annual dividend by 8% and raise its repurchase by $2.5 billion to the top end of its guidance of $20 billion as a result of the deal.[10] Some additional energy deals that had rumors circulating are Devon Energy (DVN) potentially merging with or acquiring Marathon Oil (MRO)[11] as well as Chesapeake Energy Corp. (CHK) potentially acquiring Southwestern Energy (SWN)[12].

What Does This Imply?

The ramp-up in these energy deals implies there are some good values to be found within the exploration and production space (E&P). Many companies within the E&P space have cleaned up their balance sheets over the past decade and generated substantial amounts of free cash flow. These deals also suggest that fossil fuels are here to stay.

The Energy Information Administration (EIA), a government agency, recently released a report that fossil fuel demand is going to peak during the decade. Oil companies disagree with this report; and this disagreement has been shown not only via their actions but also with their words.

Chevron’s CEO Mike Wirth replied to the EIA’s new report saying “I don’t think they’re remotely right…. you can build scenarios, but we live in the real world, and have to allocate capital to meet real-world demands”.[13] These deals were also both done in all-stock transactions which means PXD and HES still have skin in the game.

Consumer Resiliency

Considering American Express (AXP) has a 19% share of the domestic credit card market, we like to use them as a proxy for consumer health. In their latest earnings report, AXP beat on both EPS and revenue consensus while remaining to keep the full-year revenue growth guidance at +15%.

In the third quarter, the U.S. consumer posted a +9% billings growth number while international displayed strength at +15% y/y, so it remains that consumers have spending ability, and they are using it. American Express (AXP) also reported that DQ formation is stable in the third quarter, with management citing that it is likely to remain below pre-pandemic levels in 2023. We find this all to be incrementally good data on the consumer.

Looking further into consumer earnings, Coca-Cola (KO) had a strong report on October 24, reporting a double beat on EPS and revenue, as well as raising their full year guidance on the top and bottom line. Coca-Cola (KO) was able to post +11% organic sales growth, on top of +2% volumes.

With volumes improving sequentially in each month this quarter. We view this as very encouraging as consumer staples stocks have taken pricing actions at a historic rate, which has put volumes under pressure for the past couple of quarters. The Coca-Cola (KO) strength can be viewed as widespread consumer health, as all income levels enjoy their products.

Going to the high-end consumer, Hermes (HESAY) also reported earnings on October 24 with broad based strength across their categories. Hermes (HESAY) put up +16% comparable sales, beating the +13% expectation. Even more impressive, on a four-year stack, Hermes (HESAY) sales are up over 100% for Q3.

The strength of their report came from the Americas with +20% sales, Japan at +24% sales and Europe with +18% sales. The consumer is still willing to spend at all income levels, which can be viewed as a function of stronger-than-expected savings.

Savings Boost

The Bureau of Economic Analysis has recently revised government data higher, showing that consumers have hundreds of billions of dollars more in extra cash than previously believed [14].

Citigroup Inc. senior global economist, Robert Sockin, reckons that households have about $1 trillion in excess savings remaining, which is in line with other estimates. JP Morgan economists, Michael Hanson and Murat Tasci also confirmed that claim and estimated that there is $1.2 trillion in excess savings.

We view these developments as very positive for the consumer and the overall economy, as it is important to always keep in mind that the U.S. consumer is responsible for 70% of U.S. GDP.

Click here to read last week’s Weekly Wisdom (10/19).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] CNBC As Of October 11, 2023

[2] Reuters As Of October 11, 2023

[3] The Economic Times As Of October 11, 2023

[4] The New York Times As Of October 6, 2023

[5] Bloomberg As Of October 24, 2023

[6] Pioneer Natural Resources As Of August 2, 2023

[7] Bloomberg As Of October 23, 2023

[8] Green Car Congress As Of October 24, 2023

[9] Bloomberg As Of October 24, 2023

[10] Reuters As Of October 24, 2023

[11] Investing.com As Of October 19, 2023

[12] Reuters As Of October 17, 2023

[13] This is Money As Of October 24, 2023

[14] Source: BBG. As of October 10^th, 2023.