Exxon Mobil (NYSE:XOM) stock has pulled back from its recent highs as it approaches its Q3 earnings report on October 27. Despite this, investors are showing enthusiasm for Exxon’s recent bid to acquire Pioneer Natural Resources (NYSE:PXD), a move expected to generate substantial free cash flow. Here are some crucial factors to take into account:
Exxon’s Bid for Pioneer
Exxon announced an all-stock deal to acquire Pioneer on October 11. Under the agreement, every PXD shareholder will receive 2.3234 shares of XOM common stock when the deal closes, expected in the first half of 2024, pending approval. The deal is valued at approximately $57.2 billion, based on the number of PXD shares outstanding at the end of July.
Increased U.S. Oil Production
The acquisition of Pioneer will increase Exxon’s U.S. oil production to 45% of its global production. This represents a significant bet by Exxon on the future demand for oil production in the United States.
Free Cash Flow Generation
The merged entity is anticipated to produce significant free cash flow. In Q2, Pioneer generated $742 million in free cash flow, while Exxon produced an impressive $5.0 billion. The merger has the potential to deliver around $23 billion in free cash flow based on Q2 operational levels, and this figure could be even higher if oil prices remain elevated.
Shorting OTM Puts
The deal has boosted the premiums for Exxon’s put options, offering an opportunity for short sellers to generate extra income. For example, the Nov. 10 expiration period shows that $100 strike price puts are trading for 44 cents, representing a 0.44% income yield. This trade could provide an annualized return of approximately 7.48% for investors who repeat it every three weeks for a year.
Income and Downside Protection
The short-put strategy not only offers income potential but also provides substantial downside protection. Investors would have to buy the stock at $100 if the put option is exercised, and this would require a nearly 8% decline in the stock price.
In summary, Exxon’s bid for Pioneer and the potential for increased free cash flow have garnered investor interest. The short put strategy can be a lucrative option for income investors, potentially adding to the existing dividend yield. Overall, it’s possible for investors to achieve a total return of approximately 11%, combining income from short put plays and dividend income.
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