ConocoPhillips (COP) to Buy Marathon Oil in a $22.5B Transaction

ConocoPhillips (COP), the U.S. oil giant, has announced a definitive agreement to acquire Marathon Oil Corporation MRO in an all-stock transaction valued at $22.5 billion, including $5.4 billion of net debt. This strategic move is set to be immediately accretive to ConocoPhillips’ earnings, cash flows and return of capital per share.

Key Details of the Acquisition

Per the terms of the deal, Marathon Oil shareholders will receive 0.2550 shares of ConocoPhillips common stock for each share of Marathon Oil common stock. This represents a 14.7% premium to Marathon Oil's closing share price on May 28, 2024.

ConocoPhillips chairman and CEO Ryan Lance emphasized the strategic alignment of the acquisition. He highlighted that the addition of Marathon Oil would enrich the company’s portfolio. The buyout would also be in sync with COP’s financial strategy, bolstering its low-cost supply inventory alongside its prominent U.S. unconventional assets. Lance emphasized shared values of safety and responsibility, aimed at generating consistent shareholders’ value.

Marathon Oil chairman, president, and CEO Lee Tillman echoed these sentiments, expressing confidence in ConocoPhillips as the ideal platform to advance their legacy. He emphasized the unique benefits of combining both companies, enhancing scale, resilience, and long-term viability. Tillman anticipates significant shareholder value creation through the integration of assets and expertise within ConocoPhillips' global portfolio.

Synergy and Financial Impact

The acquisition is anticipated to deliver substantial cost and capital synergies. ConocoPhillips expects to achieve at least $500 million in run-rate cost and capital savings within the first year post-transaction. These savings should primarily come from reduced general and administrative costs, lower operating costs and improved capital efficiencies.

The acquisition is also expected to enhance ConocoPhillips' premier Lower 48 portfolio by adding more than 2 billion barrels of resources with an estimated average point forward cost of supply of less than $30 per barrel WTI.

Enhancing Shareholder Value

Apart from the acquisition, ConocoPhillips plans to increase its ordinary base dividend by 34% to 78 cents per share, beginning fourth-quarter 2024. Post-transaction, ConocoPhillips expects to conduct share buybacks exceeding $20 billion over the first three years, with more than $7 billion in the first year alone, based on recent commodity prices.

Lance affirmed the company's dedication to its unique cash distribution strategy, aiming to return more than 30% of cash from operations to shareholders. Since 2016, the company has been consistently exceeding 40% returns. Its plans to include a 34% increase in ordinary dividends in the fourth quarter and achieve top-quartile dividend growth compared to the S&P 500. Furthermore, COP prioritizes share buybacks post-transaction, intending to retire newly issued equity within two to three years at existing commodity prices.

Conclusion

The acquisition of Marathon Oil by ConocoPhillips marks a milestone in the energy sector, reflecting a strategic consolidation aimed at enhancing operational efficiency, cost savings and shareholder returns. The transaction is set to deliver a strengthened position in the U.S. onshore market, positioning ConocoPhillips for long-term value creation and resilience.

Zacks Rank & Key Picks

Currently, ConocoPhillips carries a Zack Rank #3 (Hold).

A couple of better-ranked players in the energy sector are Marathon Petroleum Corporation MPC and SM Energy Company SM. While Marathon Petroleum currently sports a Zacks Rank #1 (Strong Buy), SM Energy carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Marathon Petroleum's acquisition of Andeavor has expanded its foothold in the Permian Basin, creating an enviable retail and marketing portfolio. MPC’s emphasis on operational excellence, safety and environmental responsibility, coupled with investments in low-carbon initiatives, positions it well for sustainable growth and continued value creation for shareholders. 

The Zacks Consensus Estimate for MPC’s 2024 EPS is pegged at $19.28. The company has a Zacks Style Score of A for Value. It has witnessed downward earnings estimate revisions for 2024 in the past 30 days.

SM Energy is set to expand its oil-centered operations in the coming years, with an increasing focus on crude oil, especially in the Permian Basin and Eagle Ford regions. The company’s attractive oil and gas investments should create long-term value for shareholders.

The Zacks Consensus Estimate for SM’s 2024 EPS is pegged at $6.63. The company has a Zacks Style Score of B for Value. It has witnessed upward earnings estimate revisions for 2024 in the past seven days.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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