Making a major splash in corporate M&A, ConocoPhillips has agreed to buy Marathon Oil for $22.5 billion, inclusive of $5.4 billion in net debt. The transaction represents a pivot in U.S. shale M&A from deals focused on increasing exposure in a single key basin or play to acquiring a multi-basin operator. Conoco is leveraging its premium market valuation, which it shares with the majors, to strike a deal that will immediately boost its free cash flow profile and enhance its capital return program for investors. Enverus Intelligence® Research (EIR)* states that combining with Marathon will boost Conoco’s market cap to more than $150 billion, extending its lead as the largest independent producer and placing it broadly in the same scale as majors, above BP and behind Shell.
The deal also adds 2,600 net remaining drilling locations to Conoco’s portfolio, giving it about 13,000 net remaining untapped locations across its U.S. shale resource plus the Montney in Canada. EIR calculates about 30% of the total deal value is being paid for the Marathon shale inventory, after allocating value for existing production and Equatorial Guinea. In particular, the deal boosts Conoco’s position in the Eagle Ford by increasing its net location count by 85%. While the inventory already screens relatively attractively, Conoco will look to improve economics on these locations with operational efficiencies. Overall Marathon’s inventory life is shorter than Conoco’s existing portfolio at their stand alone drilling cadences, but given Conoco’s pre-deal inventory depth it was under less pressure to extend inventory life compared to smaller E&Ps.
Conoco will also likely look to sell off portions of the Marathon portfolio it views as non-core. A likely candidate is Marathon’s position in the Anadarko Basin. The position produces about 45,000 boe/d, has more than 400 net remaining drilling locations and would be a good fit for a company like the private Continental Resources.
For Marathon, the sale looks like a positive outcome for shareholders. In addition to the 15% premium, comparable to what other E&Ps have received in the wave of corporate consolidation, they will receive equity in a company with a top tier inventory life and strong capital return program further enhanced by the 34% boost in Conoco’s base dividend. Conoco further plans to buy back more than $20 billion in shares in the three years after the deal closes, more than covering the additional equity issued to purchase Marathon. Selling to Conoco provides a more certain positive reaction from Wall Street and future stability versus attempting a merger with another similar sized company, as was rumored to be in the works with Devon Energy last year. Given the increased regulatory scrutiny for oil and gas deals and Conoco’s existing scale, the deal is likely to receive close scrutiny from the FTC. Working in its favor for approval is the multi-basin nature of the Marathon assets versus concentrated regional exposure like the recent large combination in the Permian. The largest area of concentration – and potential FTC concern –will be the Eagle Ford where Conoco will jump EOG to become the largest operator with 400,000 boe/d of gross operated production compared to EOG’s 300,000 boe/d gross operated production.
*About Enverus Intelligence®| Research
Enverus Intelligence® | Research, Inc. (EIR) is a subsidiary of Enverus that publishes energy-sector research focused on the oil, natural gas, power and renewable industries. EIR publishes reports including asset and company valuations, resource assessments, technical evaluations and macro-economic forecasts and helps make intelligent connections for energy industry participants, service companies and capital providers worldwide. See additional disclosures here.
