Houston-based ConocoPhillips, the world’s largest independent producer, is moving to become even bigger in an estimated $22.5 billion all-stock takeover of crosstown rival Marathon Oil Corp.
The transaction, which includes $5.4 billion net debt, would add “complementary acreage to ConocoPhillips’ existing U.S. onshore portfolio,” CEO Ryan Lance said.
The transaction includes more than 2 billion boe of resources, weighted to the Bakken and Eagle Ford shales and Permian Basin – regions where ConocoPhillips already works. It also would increase opportunities in the Montney Shale in Western Canada and the Anadarko Basin of Oklahoma.
The ability to refracture (refrack) wells in the Eagle Ford and Montney hold particular interest for ConocoPhillips, said Andy O’Brien, senior vice president of Strategy, Commercial, Sustainability & Technology.
The Eagle Ford assets would increase production “to 400,000 boe/d and add roughly 1,000 new primary locations to our inventory,” O’Brien told investors during a conference call. “We also see significant upside potential” on refracking the South Texas wells.
“We've been implementing new refrack techniques across our existing position,” he said. “We'll be doing the same on the Montney acreage.” The Bakken addition also melds easily into the portfolio, as it is “very similar in terms of drilling rigs and fractures.” Meanwhile, the additions in the Permian would add 400 locations to an already deep inventory base.
The Anadarko “is primarily focused on natural gas,” O’Brien noted. “We see this as a call option on the normalization of U.S. gas fundamentals, driven by growing power- and LNG-related demand.”
During the first quarter, ConocoPhillips produced 1.9 million boe/d, up 110,000 boe/d from the year-ago period. Production from the Lower 48 was slightly more than 1 million boe/d, including 736,000 boe/d from the Permian, 197,000 boe/d from the Eagle Ford and 96,000 boe/d from the Bakken.
LNG Benefits
ConocoPhillips has substantial stakes in U.S. liquefied natural gas export projects, including the Port Arthur facility southeast of Houston. As of early May, the company had 7.4 million metric tons/year (mmty) of offtake contracts and the rights to 4.5 mmty of regasification capacity.
Marathon Oil also is a global LNG player. Earlier this year, the company signed a five-year sales and purchase agreement with the UK unit of Glencore Ltd. for an undisclosed amount of LNG produced with supplies from the Alba field in Equatorial Guinea (EG), where ConocoPhillips has assets.
Marathon Oil’s EG LNG volumes would be linked to the Dutch Title Transfer Facility, “signaling the conclusion of the legacy Henry Hub-linked contract.” The company is shifting more Alba supply from an adjacent methanol plant in EG to capture more earnings from LNG. It holds a 60% stake in EG LNG, which operates a 3.7 mmty terminal.
The ConocoPhillips-Marathon Oil merger follows some huge deals that began in a wave of consolidation activity last year. ExxonMobil slapped down almost $60 billion to acquire Dallas-based Pioneer Natural Resources Co. Chevron Corp. last year also agreed to pay $53 billion to buy New York City-based Hess Corp.
Independent of the transaction, ConocoPhillips expects to increase its ordinary base dividend by 34% to 78 cents/share in 4Q2024. “Assuming recent commodity prices,” once the transaction is completed ConocoPhillips plans to repurchase more than $7 billion in shares in the first full year, up from more than $5 billion standalone. It also plans to purchase $20 billion-plus in shares in the first three years after the merger is completed.
“We remain committed to our differentiated cash from operations distribution framework of returning greater than 30% to our shareholders, with a track record of returning over 40% since our 2016 strategy reset,” Lance said.
The transaction, set to be completed by year’s end, requires approval by Marathon Oil stockholders and regulatory clearance.
Bigger In Lower 48
Some analysts found positives in the merger.
“While the knee-jerk reaction may be a down day for ConocoPhillips shares, the deal makes sense operationally given the asset overlap most meaningfully in the Eagle Ford and Bakken in the Lower 48,” Tudor, Pickering, Holt & Co. Inc. (TPH) analysts said Wednesday.
The TPH team also highlighted Marathon Oil’s international natural gas assets, which “fit well with the global gas footprint that ConocoPhillips has built…”
Enverus Intelligence Research’s Andrew Dittmar, principal analyst, also weighed in on the big add to merger and acquisition (M&A) activity in the United States.
“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,” Dittmar noted. “Combining with Marathon will boost Conoco’s market cap to above $150 billion, extending its lead as the largest independent producer and placing it broadly in the same scale as majors, above BP plc and behind Shell plc.”
The transaction also would add 2,600 net remaining drilling locations to ConocoPhillips’ portfolio, “giving it about 13,000 net remaining untapped locations across its U.S. shale resource plus the Montney Shale in Canada,” Dittmar said. “In particular, the deal boosts Conoco’s position in the Eagle Ford by increasing its net location count by 85%.”
ConocoPhillips is likely to “look to sell off portions” of the Marathon Oil portfolio, including the gassy Anadarko, Dittmar said. “The position produces about 45,000 boe/d and has over 400 net remaining drilling locations and would be a good fit” for an Anadarko-weighted producer.
