ConocoPhillips is buying Marathon Oil for $17.5 billion in what may be the last big oil deal

By Barbara Kollmeyer

Look for the smaller deals now, fund manager says

ConocoPhillips on Wednesday announced an all-stock deal for Marathon Oil Corp. that values the latter at $17.5 billion, in what could mark the end of several years of consolidation among the industry's big players, says one fund manager.

The deal, which will expand ConocoPhillips's shale basin, represents a 14.7% premium for Marathon Oil shareholders based their May 28 closing price. ConocoPhillips (COP) said the acquisition of Marathon (MRO) will be immediately accretive to earnings, cash flows and return of capital per share.

Including debt, the enterprise value of the deal is $22.5 billion, the oil major said in a press announcement.

"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," said Ryan Lance, chair and chief executive officer at ConocoPhillips.

Investors were anticipating such a deal after the Financial Times reported earlier Wednesday that the two companies were in advanced talks.

Marathon's stock jumped 9% in early trading, while ConocoPhillips shares fell 2.5%.

Danilo Onorino, portfolio manager at Swiss-based Dogma Renovatio Equity Fund, has been predicting oil deals since 2020, when the industry was struggling to survive the pandemic fallout. Speaking ahead of the deal announcement, he said a joining of the two oil majors would mark the last of such big tie-ups.

"The consolidation comes after the COVID period. ... that was the final ignition of the energy transition," he said. "From now on, the energy transition will be more and more prevalent, therefore the oil and gas industry needs to consolidate even more."

Read: This money manager has been predicting oil deals since 2020. Here's what he sees happening after Chevron's Hess buy.

The sector has seen a busy 24 hours. Late Tuesday, Hess Corp. (HES) shareholders voted to approve a proposed $53 billion buyout by Chevron Corp. (CVX). Other big deals in the past year include Exxon Mobil Corp.'s (XOM) $60 billion takeover of Pioneer Natural Resources. In December, Occidental Petroleum Corp. (OXY), a holding of Berkshire Hathaway (BRK.B), agreed to buy U.S. shale-oil producer CrownRock in a $12 billion cash and stock deal.

A team of analysts at Citigroup said the ConocoPhillips-Marathon deal "feels a little different in its ambitions" compared with consolidation seen elsewhere in the sector.

"While others have targeted inventory and growth, this transaction looks largely based around optimization of cost and approach in the Eagle Ford and Bakken shales, maturing assets for both companies," said Citi's Alastair Syme and his colleagues.

Read: These companies are expected to be the fastest earnings growers in the cheap S&P 500 energy sector

Given that Marathon Oil has "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.

ConocoPhillips said that independent of the deal, it plans to lift its ordinary base dividend by 34% to 78 cents per share beginning in the fourth quarter of 2024. Once the deal closes and "assuming recent commodity prices," the oil major said it planned to buy back $20 billion in shares in the first three years, with over $7 billion of that in the first full year.

U.S. crude prices (CL00) have gained more than 11% so far this year, following a 10% drop in 2023, with a laundry list of factors supporting the gains. Those include geopolitical tensions in the Middle East, expectations for stronger demand when markets were assuming Federal Reserve interest-rate cuts, and continued voluntary output cuts by the Organization of the Petroleum Exporting Countries and its allies.

"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," Benchmark analyst Subash Chandra said.

But given that Devon Energy was reportedly vying for Marathon, Chandra said that company is left in a tougher spot, adding, "We can't think of another combination as appealing."

Get ready for a smaller round two of deals

Dogma's Onorino said deals will now focus on the second-tier players. Along with consolidation to come in the oil-services industry, he sees moves downstream into refining and marketing as possible.

"From now on we have second-tier [deals] within the oil-and-gas industry - Diamondback, Devon Energy, Occidental Petroleum, Targa Resources, Williams Co.," all of which could be potential takeover targets, he said. On the services side, he said that Schlumberger Ltd. (SLB) is too big to be a takeover target but could merge with Halliburton Co. (HAL) or Baker Hughes Co. (BKR).

Onorino said his firm had been waiting for ConocoPhillips to make some kind of acquisition move.

"It's the same deal as Chevron did with Hess. It's defensive. It's an all-share deal, not designed to grow but to consolidate the industry, because the industry is in defensive mode, because energy transition is irreversible. You can slow it down, but you can't reverse it," he said.

-Barbara Kollmeyer

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-29-24 1009ET

Copyright (c) 2024 Dow Jones & Company, Inc.