Marathon Oil Corp. (NYSE: MRO) continued its shift into the Lower 48 with two mammoth deals in which it will divest from Canadian oil sands and buy 70,000 net acres in the Permian Basin, the company said March 9.
Marathon will sell its Canadian subsidiary to Royal Dutch Shell Plc (NYSE: RDS.A) and Canadian Natural Resources Ltd. (NYSE: CNQ) for $2.5 billion before closing adjustments. In the Permian, Marathon will purchase B.C. Operating Inc. and other entities for $1.1 billion. The deal includes 51,500 acres in the Northern Delaware Basin in New Mexico and 5,000 ft of oil-rich stacked pay.
The deal nearly completes Marathon’s transformation into a Lower 48-focused E&P company with holdings across three major shale plays, said Roger D. Read, a senior analyst at Wells Fargo Securities.
“Investors have been hoping for MRO to make a move into the Permian, so we expect this transaction will be well received,” he said. “MRO would take a step back in terms of production, but exits a high operating cost nonoperated venture and frees up cash to fund drilling or reduced balance sheet leverage.”
In addition to divesting its 20% nonoperated interest in the Athabasca Oil Sands Project, the company will sell average production of 48,000 barrels per day of synthetic crude oil. In the Permian, the company will acquire 5,000 net barrels of oil equivalent per day (boe/d).
“Divesting of our oil sands mining business at an attractive value while also acquiring 70,000 net acres in the world-class Permian basin are transformative milestones that will further align our portfolio with our strategy," said Lee Tillman, Marathon’s president and CEO.
Tillman said that in the past the Canadian oil sands represented “about a third of our company's other operating and production expenses” but only about 12% of production.
“The Northern Delaware basin features outstanding well economics that compete at the top of our organic portfolio and is experiencing a positive rate of change in well performance unrivaled in U.S. unconventional basins,” Tillman said.
Marathon highlighted that the acquired acreage competes at the top of its organic portfolio with attractive Wolfcamp and Bone Spring economics of 90% before-tax internal rate of returns at $55 WTI, Guy Baber, an analyst at Piper Jaffray & Co. said.
The Delaware acquisition suggests a price of about $13,900 per acre, said Scott Hanold, an analyst at RBC Capital Markets. Marathon ended December with $2.5 billion in cash and $5.8 billion of total liquidity, the company said.
The acreage is located in Lea and Eddy counties, N.M., and Marathon estimates up to 1,700 potential gross locations with up to 900 MMboe total resource potential.
“The acreage is prospective for the Wolfcamp and Bone Spring formations and may contain up to 10 target benches for development,” Hanold said. “The company plans to allocate one operated rig before adding a second rig by mid-year 2017.”
The Canadian oil sands divestiture equates to 15x 2016 cash flow and Hanold estimated the sale price “equates to $52,000 per flowing boe. This is good value for noncore, low margin oil production, in our view.”
The Permian acquisition is expected to close in second-quarter 2017, Marathon said.
Goldman, Sachs & Co. and TD Securities served as advisers on the divestiture and Evercore served as adviser on the acquisition transaction. Jefferies acted as sole financial adviser to BC Operating.
Darren Barbee can be reached at dbarbee@hartenergy.com.
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