ConocoPhillips's Acquisition of Marathon Oil
- Rohan Golla
- Aug 10, 2024
- 5 min read
Overview of the Deal
Acquirer: ConocoPhillips
Target: Marathon Oil Corporation
Total Transaction Size: $22.5 billion
Closed Date: Expected Q4 2024
Target Advisors: Morgan Stanley & Co.
Acquirer Advisors: Evercore
ConocoPhillips has announced its intention to acquire Marathon Oil Corporation in an all-stock transaction valued at $22.5 billion, marking one of the most significant deals in the energy sector in 2024. This acquisition comes during a period of heightened consolidation within the industry, driven by a combination of strong commodity prices, technological advancements in shale extraction, and a strategic need to bolster reserves. The transaction includes the assumption of $5.4 billion in Marathon’s debt and offers a 14.7% premium to Marathon Oil’s shareholders based on the closing share price on May 28, 2024.
This acquisition reflects ConocoPhillips’ strategic objective to strengthen its portfolio with high-quality, low-cost assets that align with its existing operations, particularly in U.S. shale basins. ConocoPhillips will issue 0.2550 shares of its common stock for each share of Marathon Oil, integrating Marathon’s assets into its extensive U.S. onshore portfolio. This move is expected to be immediately accretive to ConocoPhillips’ earnings, cash flows, and return of capital per share, and will significantly enhance its position in key U.S. shale plays, including the Eagle Ford, Bakken, and Permian basins.
Acquirer Details - ConocoPhillips
ConocoPhillips, based in Houston, Texas, is one of the world’s largest independent exploration and production companies. The company has a diverse global portfolio that includes conventional and unconventional resources, with a significant presence in the U.S. onshore market. As of March 2024, ConocoPhillips had approximately $95 billion in total assets and employed around 10,000 people. The company’s production averaged 1,902 thousand barrels of oil equivalent per day in the first quarter of 2024, with proven reserves of 6.8 billion barrels of oil equivalent (BOE) as of the end of 2023.
ConocoPhillips’ strategy focuses on maintaining a balance between cash flow generation and capital discipline, with an emphasis on returning value to shareholders. The company has consistently prioritized investments in high-quality, low-cost assets, particularly in the U.S. shale plays, where it has established a leading position. ConocoPhillips is known for its strong operational execution, financial stability, and commitment to sustainable growth.
Target Details - Marathon Oil Corporation
Marathon Oil Corporation, headquartered in Houston, Texas, is an independent exploration and production company with a focus on U.S. unconventional resources. The company’s operations are concentrated in four key resource plays: the Eagle Ford in South Texas, the Bakken in North Dakota, the Permian in New Mexico and Texas, and the STACK and SCOOP plays in Oklahoma. Marathon Oil also has a significant international presence, including an integrated gas business in Equatorial Guinea.
Marathon Oil has built a reputation for its operational efficiency, financial discipline, and commitment to environmental, social, and governance (ESG) principles. The company’s asset portfolio is characterized by its high quality and low cost of supply, making it a strong strategic fit for ConocoPhillips. As of 2023, Marathon Oil produced approximately 300 thousand barrels of oil equivalent per day, with a strong focus on maximizing returns and maintaining a robust balance sheet.
Short-Term Effects
The acquisition of Marathon Oil is expected to deliver immediate financial benefits to ConocoPhillips, including accretion to earnings, cash from operations, and free cash flow per share. The transaction is projected to generate at least $500 million in annual cost and capital savings within the first year, primarily through the elimination of redundant general and administrative costs, optimization of operating expenses, and enhanced capital efficiencies due to the complementary nature of the two companies’ asset portfolios.
In the short term, ConocoPhillips’ shareholders can expect to benefit from a 34% increase in the company’s ordinary base dividend, raising it to 78 cents per share starting in the fourth quarter of 2024. This dividend hike reflects ConocoPhillips’ confidence in the cash flow generation capabilities of the combined company. Additionally, ConocoPhillips plans to repurchase over $7 billion in shares in the first full year following the closing of the transaction, with a target of repurchasing over $20 billion in shares within the first three years.
Operationally, the integration of Marathon Oil’s assets into ConocoPhillips’ existing U.S. onshore portfolio is expected to be relatively seamless, given the geographic and strategic alignment of the two companies’ operations. Marathon’s assets in the Eagle Ford, Bakken, and Permian basins are highly complementary to ConocoPhillips’ existing operations in these regions, enabling the company to optimize its drilling programs, enhance production efficiency, and reduce operating costs.
Long-Term Effects
Over the long term, the acquisition of Marathon Oil positions ConocoPhillips for sustained growth and value creation. The addition of over 2 billion barrels of oil equivalent to ConocoPhillips’ reserves significantly strengthens the company’s resource base, providing a low-cost inventory that will support production growth for years to come. The average cost of supply for these additional resources is estimated to be less than $30 per barrel of West Texas Intermediate (WTI), ensuring that ConocoPhillips remains competitive even in a volatile commodity price environment.
One of the key strategic benefits of the acquisition is the enhanced scale and operational flexibility that ConocoPhillips will achieve. With a larger and more diversified portfolio of high-quality assets, the company will be better positioned to allocate capital to the most attractive opportunities, optimize its production mix, and respond more effectively to changes in market conditions. This increased scale will also enable ConocoPhillips to achieve greater economies of scale, further reducing its cost structure and enhancing its ability to generate strong cash flows.
Another significant long-term benefit of the acquisition is the potential for enhanced technological innovation. Both ConocoPhillips and Marathon Oil have a strong track record of leveraging technology to improve operational efficiency, reduce costs, and enhance production. By combining their expertise and resources, the two companies will be well-positioned to develop and deploy new technologies that can further enhance the efficiency and productivity of their operations. This focus on innovation will be critical as the industry continues to evolve, with increasing emphasis on digitalization, automation, and the development of new drilling and completion techniques.
Risks and Uncertainties
Despite the significant potential benefits, the ConocoPhillips-Marathon Oil merger also carries several risks and uncertainties. One of the primary risks is the potential for integration challenges. Merging two large, complex organizations is always a difficult task, and there is a risk that the integration process could be more challenging than anticipated. This could result in higher-than-expected integration costs, delays in realizing synergies, and disruptions to ongoing operations. ConocoPhillips will need to carefully manage the integration process to ensure that the anticipated synergies are realized and that the combined company operates effectively.
Regulatory challenges also pose a significant risk to the success of the merger. The energy industry is highly regulated, and large mergers such as this one are often subject to scrutiny from antitrust regulators. While ConocoPhillips has expressed confidence that the deal will receive the necessary regulatory approvals, there is always a risk that regulators could impose conditions on the merger or even block it altogether. This could delay the closing of the transaction, increase costs, and potentially reduce the anticipated benefits of the merger.
Commodity price volatility is another risk that could impact the success of the merger. The value of oil and gas companies is highly sensitive to changes in commodity prices, and a significant decline in prices could impact the financial performance of the combined company. While ConocoPhillips has a strong track record of managing commodity price risk, the company will need to continue to be vigilant in managing its exposure to price fluctuations to ensure that it can deliver on its financial objectives.
Finally, there is a risk that the merger could face opposition from shareholders. While the deal has been structured to provide attractive returns to shareholders of both companies, there is always a possibility that some shareholders could oppose the merger, particularly if they believe that the deal undervalues their shares or if they have concerns about the strategic direction of the combined company. ConocoPhillips and Marathon Oil will need to engage with their shareholders to address any concerns and build support for the merger.