After Exxon Mobil (XOM, Financial) and Chevron (CVX, Financial) struck significant deals, acquiring Pioneer Natural Resources (PXD, Financial) and Hess (HES, Financial), respectively, ConocoPhillips (COP, Financial) has announced its intention to acquire Marathon Oil (MRO, Financial) in an all-stock transaction valued at $22.5 billion, including $5.4 billion in net debt. This move signifies a continued belief in the enduring demand for oil and gas, as energy companies capitalize on substantial cash flows from recent years.
- COP shares are trading sharply lower due to the risks associated with financing the transaction through new stock. MRO shareholders will receive 0.225 shares of COP common stock for each MRO share, representing a 14.7% premium to MRO's closing price yesterday. However, uncertainties about regulatory approval mean the full premium isn't reflected in MRO shares today.
- Notably, on May 2, the U.S. Federal Trade Commission (FTC) conditionally approved the merger between XOM and PXD, provided PXD co-founder Scott Sheffield, accused of colluding with OPEC to boost oil prices, is excluded from the new company's Board of Directors. This approval could give COP and MRO some leverage in arguing for their merger.
- COP expects the transaction to be immediately accretive, adding to its earnings, cash flow from operations, and free cash flow. These gains will be driven by $500 million in cost savings and capital synergies within the first year, primarily through reduced SG&A costs and improved capital efficiencies.
- To mitigate the impact of financing the transaction with equity, COP plans to repurchase over $7.0 billion in shares in the first year, up from its previous expectation of over $5.0 billion as a standalone company.
- Strategically, acquiring MRO will enhance COP's assets in the Eagle Ford and Bakken shale basins in North Dakota. MRO's total production in Q1 was 189,000 net bop/d. For context, COP's Q1 "lower 48" production totaled 1.046 million boe/d, with Permian Basin production averaging 736,000 boe/d, Eagle Ford producing 176,000 boe/d, and Bakken Shale contributing 96,000 boe/d.
Lastly, COP appears to be paying a reasonable price for MRO. Based on MRO's FY23 adjusted net income of $1.58 billion, COP is paying approximately 14x last year's earnings for the company. This acquisition will help COP keep pace with XOM and CVX as the oil and gas industry continues to consolidate.
