On Wednesday, ConocoPhillips (NYSE: COP) agreed to an all-stock acquisition of Marathon Oil Corp (NYSE: MRO) in a deal valued at approximately $22.5 billion (enterprise value, including about $17 billion in equity and $5.4 billion in net debt). Marathon shareholders will receive 0.2550 shares of ConocoPhillips stock for each Marathon share, representing a 14.7% premium over Marathon’s closing price yesterday.
Following the announcement of the acquisition, ConocoPhillips’ stock closed down more than 3% on Wednesday, while Marathon Oil’s stock closed up more than 8%.
In recent months, there has been a significant surge of large-scale “buying frenzies” among U.S. oil and gas industry giants, so today’s merger news did not come as a major surprise to investors.
Looking ahead, oil and gas producers seem generally optimistic, anticipating strong demand for oil and gas in the coming years. To achieve their production growth targets, they are actively seeking and acquiring new drilling opportunities, leading to the recent wave of mega mergers. Last October, Exxon Mobil (NYSE: XOM) announced a $62 billion acquisition of Pioneer Natural Resources to accelerate its integration in the Permian Basin. Shortly after, Chevron (NYSE: CVX) reached an approximately $53 billion acquisition agreement with Hess Corp (NYSE: HES).
In recent years, ConocoPhillips has significantly expanded in the Permian Basin, including the $13 billion acquisition of Concho Resources and the $9.5 billion purchase of Shell’s assets in the region. Following the acquisition of Marathon Oil, this oil and gas giant’s domestic shale operations will extend from Texas to North Dakota, with reserves reaching as far as Equatorial Guinea. ConocoPhillips expects its resource to increase by 2 billion barrels as a result of the acquisition.
Due to the high geographic overlap between the two companies, ConocoPhillips anticipates annual cost savings of $500 million in the first full year following the acquisition. Additionally, the company expects the transaction to immediately enhance its earnings and cash flow, boosting shareholder returns.
The acquisition is subject to regulatory approval and is expected to be completed in the fourth quarter.
Post-acquisition, ConocoPhillips expects to repurchase more than $20 billion of its stock over the next three years, with over $7 billion in the first full year. Furthermore, starting in the fourth quarter, the company plans to increase its regular base dividend by 34% to 78 cents per share; the stock currently has a dividend yield of 2.7%.
