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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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U.S. Shale Mergers Continue with ConocoPhillips-Marathon Mega Deal

  • ConocoPhillips-Marathon Oil deal is accretive to cash flow and earnings.
  • ConocoPhillips plans to increase share buybacks and dividends following the deal.
  • U.S. oil industry prefers acquisitions over organic growth to increase scale.

The U.S. oil industry saw its latest announcement of a big merger this week after ConocoPhillips said it had agreed to buy Marathon Oil in an all-stock deal with an enterprise value of $22.5 billion, inclusive of $5.4 billion of net debt.   

The rationale behind the latest deal in the shale patch is slightly different from those of the previously announced transactions. But just as in earlier M&A agreements, the latest acquisition also bets on scaling up drilling inventory for the long term. 

But above all, the ConocoPhillips-Marathon Oil deal is immediately accretive to cash flow and earnings, giving investors another reason to cheer the ongoing wave of consolidation. 

Months before the announcement of the deal, ConocoPhillips CEO Ryan Lance told CNBC in an interview, “We have said our industry needs to consolidate.”  

“There are too many players. Scale matters, diversity matters, and we are going through a natural cycle of that in the business,” Lance added. 

“It’s healthy for our business. It’s the right thing to be doing for our business,” according to ConocoPhillips’ top executive.

Commenting on the planned Marathon Oil acquisition, Lance said this week, “The transaction is immediately accretive to earnings, cash flows and distributions per share, and we see significant synergy potential.”

Upon the closing of the transaction—expected in Q4—and assuming recent commodity prices, ConocoPhillips plans to buy back more than $7 billion in shares in the first full year, up from over $5 billion standalone, and repurchase over $20 billion in shares in the first three years.

Independent of the planned deal, ConocoPhillips expects to increase its ordinary base dividend by 34% to 78 cents per share starting in the fourth quarter of 2024.

ConocoPhillips, the largest U.S. independent oil and gas producer, and all other companies in the industry compete for the same small group of investors. Therefore, size matters, and so do low-cost drilling positions.

These days, U.S. oil firms prefer to use their increased market valuation to buy rivals or smaller companies in all-stock deals, which immediately add developed and operational wells to inventory without the buyers sinking more money to drill new wells from scratch. 

In the case of ConocoPhillips, the company “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,” said Andrew Dittmar, a Director on the Enverus Intelligence team. 

Merging with Marathon Oil will boost ConocoPhillips’ market capitalization to more than $150 billion. The surge in market cap will extend Conoco’s lead as the largest independent producer and place it broadly in the same scale as majors, above BP and behind Shell, according to Enverus Intelligence Research.  

Unlike Exxon and Chevron, ConocoPhillips is not pursuing either an increased Permian position (as Exxon did with Pioneer) or an entry into a prolific new basin (as Chevron seeks to do with Hess in Guyana). 

It appears that ConocoPhillips is pursuing scale and size and diversified exposure in several U.S. shale basins. 

The Eagle Ford position of the combined ConocoPhillips-Marathon Oil company could come under closer-than-usual scrutiny from the Federal Trade Commission (FTC), which will be reviewing closely the whole deal, considering the increased regulatory scrutiny for oil and gas transactions and Conoco’s existing scale, according to Enverus’ Dittmar. 

“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 boe/d of gross operated production compared to EOG’s 300,000 boe/d gross operated production,” Dittmar noted. 

Overall, the U.S. oil and gas industry prefers in this latest M&A wave to grow through acquisitions, not organically, by buying another company’s portfolio of operational assets, instead of spending more money on drilling new wells, Stewart Glickman, senior equity analyst at CFRA, told CNN’s Before the Bell

“Everybody has gotten accustomed to buybacks and dividends as a great destination for operating cash flow,” Stewart said, noting that investors currently appreciate companies adding scale via acquisitions.  

By Tsvetana Paraskova for Oilprice.com

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