Thursday May 30 2024 13:15
5 min
This deal, anticipated to be one of the final major consolidations in the industry, will expand ConocoPhillips’s presence in the shale basin and offer a 14.7% premium to Marathon Oil shareholders based on their May 28 closing price.
ConocoPhillips claimed that the acquisition will be immediately accretive to earnings, cash flows, and returns of capital per share. The enterprise value of the deal, including debt, is $22.5 billion, according to a press release put out by the oil major.
ConocoPhillips CEO Ryan Lance commented on the deal:
“This acquisition of Marathon Oil further deepens our portfolio and fits within our financial framework, adding high-quality, low cost of supply inventory adjacent to our leading U.S. unconventional position”.
The market had been expecting the deal after the Financial Times reported advanced talks between the two companies earlier on Wednesday. Following the announcement, Marathon Oil shares ended the session with an 8.43% gain at the $28.68 mark, while ConocoPhillips stock fell 3.12% to $115.25.
ConocoPhillips stock has notably gained close to 19% year-to-date, spurred by higher oil prices on the back of geopolitical uncertainty.
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Danilo Onorino, portfolio manager at Swiss-based Dogma Renovatio Equity Fund, had been predicting significant oil deals since 2020. He remarked that this merger would likely be the last major tie-up post-COVID:
“The consolidation comes after the COVID period [...] that was the final ignition of the energy transition. From now on, the energy transition will be more and more prevalent, therefore the oil and gas industry needs to consolidate even more.”
This acquisition follows a busy period for the sector, which included Exxon Mobil’s $60 billion takeover of Pioneer Natural Resources and Hess shareholders recently approving a $53 billion buyout by Chevron. Occidental Petroleum also agreed to buy U.S. shale-oil producer CrownRock for $12 billion.
The Permian basin, an oil-rich region in the southern United States, witnessed a historic surge in the value of U.S. oil and gas mergers and acquisitions last year, totaling $100 billion.
MarketWatch cited Citigroup analysts led by Alastair Syme as saying that the ConocoPhillips-Marathon deal "feels a little different” in its ambitions compared to other recent consolidations:
“While others have targeted inventory and growth, this transaction looks largely based around optimisation of cost and approach in the Eagle Ford and Bakken shales, maturing assets for both companies”.
Given Marathon Oil’s “lower levels of re-investment — a more mature business — the free cashflow uplift is considerable, allowing the transaction to be sweetened with a higher base dividend and more buybacks,” Syme said.
MarketWatch also cited Benchmark analyst Subash Chandra as praising the merger:
“The two companies are a good fit, merging two of the best return-of-capital frameworks, complementary acreage in the Eagle Ford/Bakken/Delaware and delivering $500 million of annual synergies”.
ConocoPhillips also announced plans to increase its base dividend by 34% to 78 cents per share starting in the fourth quarter of 2024. Post-acquisition, the company intends to buy back $20 billion in shares over the first three years, with over $7 billion in the first year alone, assuming recent commodity prices.
U.S. crude prices have risen over 10% this year, driven by geopolitical tensions, expectations of stronger demand, and voluntary output cuts by the OPEC+ cartel and its allies, primarily driven by Saudi Arabia and Russia.
At the time of writing on Thursday, May 30, the continuous futures contract for international oil benchmark Brent crude traded at $82.83, down over 0.7% on the day. Brent crude remains up by close to 8% year-to-date. A similar contract for West Texas Intermediate, the U.S. oil benchmark, was also down 0.7% at $78.69 on the ICE Futures Europe exchange. WTI is up 10% year-to-date.
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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
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