Conoco’s Marathon deal is cheap and cheerful

Marathon Oil

30/05/2024 13:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
    By Robert Cyran
       NEW YORK, May 29 (Reuters Breakingviews) - While rivals
are going big and risky, ConocoPhillips  COP.N  is taking a
cheerful boogie board ride on oil’s merger wave. The $139
billion oil driller said on Wednesday that it has agreed to buy
rival Marathon Oil  MRO.N  for $23 billion, including the
target’s net debt. Compared with some of its peers’ recent
acquisitions, Conoco’s deal is pedestrian in all the right ways.
    Marathon is not a bet on growth. Its production in the first
quarter was down 7% from the same period a year ago. The company
spits out cash, however. Its production also sits near existing
Conoco wells in the Bakken and Eagle Ford basins. Combining
operations may cut $500 million of costs in just one year. Add
this to projected operating profit of $2.4 billion this year,
according to estimates compiled by LSEG, and that’s a 10% return
on Conoco’s investment.  
    Compare that with the bigger, racier acquisition of Hess
 HES.N  by Chevron  CVX.N . That $53 billion merger, based on
numbers disclosed by the companies and consensus estimates of
Hess’s 2025 operating profit, will have a return of around 8.5%.
And Chevron may not even clinch its prize, since Exxon Mobil
 XOM.N , its co-investor in a coveted Guyana oil field, has
challenged the sale.
    A good deal for Conoco might imply Marathon has the short
end of the stick. The premium on the all-stock deal is just
under 15%. That’s less than the 18% Pioneer Natural Resources
snagged in its deal with Exxon. But it’s bigger than the 5%
premium that Hess shareholders voted to accept on Tuesday. Most
possible U.S. acquirers are already busy with other deals.
Besides, Conoco’s shares have outperformed Marathon, Exxon and
Chevron over the past five years.  
    While this will leave the three biggest U.S. oil drillers
digesting acquisitions, the drivers of the consolidation wave
remain. Oil demand is probably peaking soon, and combining
allows costs to be cut, and capital channeled to the best
opportunities. Once these deals have bedded down, it will be
time for the next round of acquisitions – which might include
Conoco again, only this time as a target.
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    CONTEXT NEWS 
    ConocoPhillips said on May 29 it had agreed to buy Marathon
Oil in a $17.1 billion all-stock transaction, valued at $23
billion including the target’s net debt. Marathon shareholders
will receive 0.255 shares of Conoco common stock for each of
their own shares, equivalent to a 14.7% premium, based on
closing prices on May 28.
    Conoco also said the company will increase its dividend by
34% starting in the fourth quarter, and that after closing the
deal the company would repurchase over $7 billion of stock in
the first year and over $20 billion within three years, based on
recent commodity prices.

 (Editing by John Foley and Sharon Lam)
 ((For previous columns by the author, Reuters customers can
click on  CYRAN/ 
robert.cyran@thomsonreuters.com; Reuters Messaging:
robert.cyran.thomsonreuters.com@reuters.net))