Current MRO Stock Info

Marathon enters Permian for $13,900 per acre; exits oil sands with $2.5 billion cash sale to Shell and Canadian Natural Resources

Marathon Oil (ticker: MRO) has agreed to acquire approximately 70,000 net surface acres in the Permian basin from BC Operating, Inc. and other entities for $1.1 billion in cash.

Marathon Jumps into the Permian with 70,000-Acre Acquisition, Sells Canadian Oil Sands Interest

Marathon Jumps into the Permian with 70,000-Acre Acquisition, Sells Canadian Oil Sands Interest. Source: Marathon Oil

The acquisition includes 51,500 acres in the Northern Delaware basin of New Mexico, and current production of approximately 5,000 net BOEPD.

Marathon also said it had signed an agreement to sell its Canadian subsidiary, which includes the company’s 20% non-operated interest in the Athabasca Oil Sands Project (AOSP), to Shell (ticker: RDSA) and Canadian Natural Resources Limited (ticker: CNQ) for $2.5 billion in cash.

“This deal expands the quality and depth of our already robust inventory while securing a foundational footprint in the Delaware basin with 5,000 feet of oil-rich stacked pay,” the company said in a press release.

“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,” Marathon Oil President and CEO Lee Tillman said.

Marathon enters Permian for $13,900 per acre; exits oil sands with $2.5 billion cash sale to Shell and Canadian Natural Resources

Source: Marathon Oil

“Historically, our interest in the Canadian oil sands has represented about a third of our company’s other operating and production expenses, yet only about 12 percent of our production volumes,” Tillman said.

Under the terms of the Canadian divestiture, $1.75 billion will be paid to Marathon Oil upon closing and the remaining proceeds will be paid in first quarter 2018. The sale is expected to close in mid-2017 with an effective date of Jan. 1, 2017, and concurrent with a related transaction between Shell and Canadian Natural Resources, also announced today. Proceeds will be used to fund resource capture, organic investment, to reduce gross debt and for general corporate purposes.

Permian acquisition highlights:

  • Up to 10 target benches within approximately 5,000 feet of stacked pay; base case assumes up to 6 target benches
  • 70,000 total net acres with 51,500 net acres in the Northern Delaware basin
  • Total implied acreage cost of approximately $13,900 per acre, adjusting for existing production
  • High quality Northern Delaware inventory produces greater than 90% before-tax IRRs at $55 WTI flat and competes for capital allocation at top of Marathon Oil’s portfolio
  • Primary targets in world-class Wolfcamp and Bone Spring
  • Approximately 350 million BOE of risked resource at a cost of about $2.80 per BOE with 630 gross company operated locations
  • Approximately 900 million BOE of total resource potential with 1,700 total upside locations from both tighter density and secondary targets
  • One operated rig drilling with plans to add a second rig mid-year; one rig required to hold term lease
Marathon Jumps into the Permian with 70,000-Acre Acquisition, Sells Canadian Oil Sands Interest

Source: Marathon Oil

Marathon said the BC Permian basin acquisition is expected to close in second quarter 2017 with an effective date of Jan. 1, 2017.

Oil sands divestiture highlights:

  • $2.5 billion sale price equates to approximately 15 times 2016 OSM operating cash flow
  • Anticipating approx. 25% reduction in 2017 company expenses (production and other operating) based on expected closing dates for both transactions
  • Avoids material future capital requirements in a non-operated business
  • Net synthetic crude oil production averaged 48,000 barrels per day in 2016
  • Year-end 2016 proved reserves from Canada totaled 692 million barrels of synthetic crude oil

Goldman, Sachs & Co. and TD Securities served as advisors on the divestiture transaction, and Evercore served as advisor on the acquisition transaction.


Analyst Commentary

From Capital One:
MRO: Goodbye Oil Sands, Hello Permian
$14.87, Overweight, $24.00 Target, Johnston
• Positive. Transformative portfolio makeover whereby MRO will exit a non-core & non-operated 20% interest in a Canadian oil sands mine with chronic reliability issues and use ~45% of the cash proceeds to establish a beachhead in the New Mexico Delaware Basin.
• The $2.5B sale price is below the $3.1B of value that we carry for the Canadian OSM in our model (~65c/share delta), but the Street has been clamoring for MRO to sell this odd bird / no growth asset for some time and we think mgmt is using the proceeds wisely by not overpaying to enter one of the most attractive basins in the US.
• We will need more time to assess the impact of the two deals on MRO’s NAV, cash flow profile, EV/EBITDA multiples, and leverage ratio, but our first-blush take is positive.
• Please click here for relevant maps showing the Delaware Basin properties and offset operator activity.

MRO: Goodbye Oil Sands, Hello Permian, Continued
• Permian acreage valuation metrics: The 70,000 Delaware Basin acres are split b/t 51,500 acres in the Northern Delaware and 18,500 acres in the Northwest Shelf. If all of the purchase price is allocated to the Northern Delaware, the price tag is ~$18K – $19K/adjusted acre. This is in line with CXO’s November Northern Delaware acreage acquisition at ~$19K/adjusted acre but above EOG’s Yates acquisition with implied Northern Delaware acreage value of ~$5K - $8K/acre. The majority of the Delaware acreage is located near MTDR’s/WPX’s Rustler Breaks and Ranger/Arrowhead. We note MTDR has been posting good results for its Wolfcamp XY, A, and B wells in Rustler Breaks. The Delaware acreage is ~75% operated with avg WI ~55%.
• Transaction details: MRO agreed to sell its interest in the Athabasca Oil Sands project to Shell and Canadian Natural Resources for $2.5B in cash. In a separate transaction, MRO will purchase 70,000 Permian acres in the Northern Delaware and NW Shelf for $1.1B in cash. The Permian acquisition includes 5 Mboe/d of production. MRO estimates 630 gross Wolfcamp and Bone Spring drilling locations on 51,500 net Northern Delaware surface acres with upside of 10 producing benches and 1,700 additional locations. The seller is BC Operating Inc and closing is expected in 2Q. The Canadian OSM closing is expected mid-year with $1.75B to be paid then and the remaining $750MM to be paid in 1Q18.
• Other deal metrics: The Permian acquisition price tag equates to ~6% of MRO's enterprise value (production only ~1% of MRO’s total) and the OSM sale price represents 14% of MRO’s enterprise value. The OSM production represented ~12% of MRO production but ~1/3 of operating expenses. MRO will inherit one operating drilling rig in the Delaware and plans to add a second mid-year. It only requires 1 rig to HBP the acreage.

From KLR:

MRO ($14.87, B, $26, Gerdes) – Logical Long-Term Portfolio Reconfiguration, Delaware Basin Acquisition, Canadian Oil Sands Divestiture (Minor Negative Value Impact) – Marathon announced an acquisition of ~70,000 net acres in the Permian Basin for ~$1.1 billion. The acreage comprises ~51,500 net acres in Eddy/Lea Counties and ~18,500 net acres in the NW Shelf. Production associated with the properties is ~5,000 Boepd. Assuming a ~$40k/Boe production rate multiple and minimal value for the NW Shelf acreage, the acquisition equates to ~$17.5K/acre, net of production, which is slightly below recent precedent northern Delaware Basin transactions. The company is conducting a one-rig program and plans to increase activity to two rigs in the Delaware Basin in 2H/17. Assuming six horizons (Second Bone Spring through Lower Wolfcamp), the company has 630 risked locations in the Delaware Basin, including ~35% long laterals. The transaction should close in 2Q/17. Additionally, Marathon announced a divestiture of its 20% non-operated interest in the Athabasca Oil Sands Project for $2.5 billion, below our expectation of $3-$4 billion. The company will receive $1.75 billion upon closing and the remaining ~$0.75 billion in 1Q/18. The divestiture equates to ~$42K/bbl and should close in mid-’17.The transactions should have a minor negative value impact due to the short-term value leakage associated with the oil sands divestiture.

From Wells Fargo:

Opinion. A good transaction for MRO that nearly completes its transformation to a Lower 48-focused E&P company with holdings across three major shale plays. Investors have been hoping for MRO to make a move into the Permian, so we expect this transaction will be well received. MRO would take a step back in terms of production, but exits a high operating cost non-operated venture and frees up cash to fund drilling or reduced balance sheet leverage.

Summary. MRO has sold its 20% non-operated interest in the Athabasca Oil Sands project for $2.5 billion in cash. MRO is to be paid $1.75 billion at closing in mid-2017 and the remainder in early 2018 . In a separate transaction, MRO is to acquire 70,000 acres in the Northern Delaware Basin in New Mexico. Current production on these acres is just 5,000 barrels per day oil equivalent. The Canadian operations produced approximately 49,000 barrels per day in 2016 for MRO, representing approximately 12% of its total production.  

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