ConocoPhillips-Marathon Deal Represents a Pivot

The ConocoPhillips-Marathon Oil transaction represents a pivot in U.S. shale mergers and acquisitions, from deals focused on increasing exposure in a single key basin or play to acquiring a multi-basin operator.

That’s what Enverus Intelligence Research (EIR) Principal Analyst Andrew Dittmar said in a statement sent to Rigzone by Enverus, which describes itself as the most trusted energy-dedicated SaaS and generative AI company.

“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,” Dittmar said in the statement.

“Combing 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 and behind Shell,” he added.

Dittmar noted in the statement that the deal 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”.

“We calculate about 30 percent 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 percent,” he added.

“While the inventory already screens relatively attractively, Conoco will look to improve economics on these locations with operational efficiencies,” he continued.

“Overall, Marathon’s inventory life is shorter than Conoco’s existing portfolio at their strand 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,” Dittmar went on to say.

In the statement, Dittmar said Conoco will 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, according to Dittmar, who highlighted that the position produces about 45,000 barrels of oil equivalent per day, has over 400 net remaining drilling locations, “and would be a good fit for a company like private Continental Resources”.

Looking at Marathon’s side of things, Dittmar noted in the statement that the sale looks like a positive outcome for shareholders.

“In addition to the 15 percent 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 percent boost in Conoco’s base dividend,” he said.

“Conoco further plans to buy back over $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,” he added.

Dittmar warned in the statement that the deal is likely to receive close scrutiny from the FTC, “given the increased regulatory scrutiny for oil and gas deals and Conoco’s existing scale”.

“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,” Dittmar added.

“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 barrels of oil equivalent per day of gross operated production compared to EOG’s 300,000 barrels of oil equivalent per day gross operated production,” he continued.

Valuations, Changing Nature

In a special market update shared with Rigzone recently, Rystad Energy Senior Analyst Matthew Bernstein noted that ConocoPhillips was linked to, but ultimately did not purchase, “private E&P darlings CrownRock or Endeavor, which sold to Oxy and Diamondback, respectively”.

The update compared the ConocoPhillips-Marathon deal against Oxy and Diamondback’s earlier purchases of CrownRock and Endeavor.

“Both the earlier Permian deal values imply roughly a 5.15x multiple to 2024 upstream earnings before interest, taxes, depreciation and amortization (EBITDA), forecasted through Rystad Energy’s UCube,” Bernstein said in the update.

“On the other hand, ConocoPhillips’ $22.5 billion enterprise valuation of Marathon resembles a 3.79x multiple on its 2024 EBITDA, a relatively less expensive premium compared to the earlier deals,” he added.

Bernstein highlighted in the update that EBITDA was calculated based on Rystad’s latest data rather than the forecast at the time of the purchase to incorporate post-announcement operator guidance on newly acquired assets.

“The discrepancy in valuations sheds some light on the changing nature of Lower 48 M&A activity,” the Rystad analyst said in the update.

“Following the ExxonMobil-Pioneer deal, operators set off to consolidate what remained of the ‘core of the core’, or most economic locations remaining in the Permian. The ‘Shale 4.0’ era, which started last fall, has seen a shift by management teams and investors towards building companies of scale for the long term,” he added.

“After several years of ‘proving’ the ability to generate significant free cash flow through capital discipline and return cash on hand to shareholders via buybacks and dividends, operators, recognizing the limited lifetime of their remaining inventories, have now set off to ensure that their assets can continue to deliver these returns not just in the upcoming quarters, but for decades to come,” he went on to state.

“As a result, the focus of M&A activity in the tight oil space has been heavily focused on building long-term scale in the most commercial areas. This has, therefore, made the core of the Permian a hot commodity, and private E&Ps such as CrownRock and Endeavor, which held a scale in some of the most economic areas, were thus sold for high multiples,” Bernstein continued.

The Marathon-ConocoPhillips deal marks a new chapter in this M&A cycle for several reasons, the Rystad analyst stated in the update.

“With few remaining private E&P options of scale in the Permian, ConocoPhillips would have been forced to either buy a private E&P with limited total scale that would do little to ‘move the needle’, in terms of its overall inventory, potentially pay a high premium for a larger pure Permian public player or seek to purchase a smaller Permian public player that may lack in both inventory scale and quality,” he added.

“Instead, ConocoPhillips chose to look outside the already heavily consolidated basin and pursue a tie-up with Marathon that will elevate into second position in terms of total inventory in the Lower 48 core tight oil plays , just behind ExxonMobil, for a relatively less expensive EBITDA multiple than it likely would have needed to pay for a core Permian player,” he said.


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