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ConocoPhillips’ $22.5bn Acquisition of Marathon Oil

By Haci Eren Sidar, Leon Gaster, Adalia Melvin, Aviral Jain (University of Nottingham); Gabriela Pérez-Hernández, Tarvo Simons, Juan Pelaez, Gabriel Ferraz Girotto (IE University)


Photo: Arvind Vallabh (Unsplash)

 

Overview of the deal


Acquirer: ConocoPhillips

Target: Marathon Oil


Implied Equity Value: $17.1 Billion

Total Transaction Size: $22.5 billion

Closed date: Exp. Q4 2024

Target advisor: Morgan Stanley & Co. (financial), Kirkland & Ellis (legal)

Acquirer advisor: Evercore (financial), Wachtell, Lipton, Rosen & Katz (legal)


In a strategic move to expand its energy portfolio, ConocoPhillips, one of the world’s largest independent oil and gas producers, announced its acquisition of Marathon Oil, reinforcing its position in the U.S. oil and gas sector. The $22.5 billion acquisition, which includes $5.4 billion in net debt, is an all-stock transaction. Both companies see opportunities for long-term shareholder value growth and are looking forward to joining forces.


The acquisition of Marathon Oil lends ConocoPhillips access to Marathon Oil's assets, which operate in key U.S. oil-producing regions, aligning with ConocoPhillips' financial strategy by strengthening its low-cost supply inventory. As a result, the transaction generates significant cost and capital synergies, allowing the company to compete with industry giants and gain market share through economies of scale.


ConocoPhillips is following recent trends in the sector, competing with huge acquisitions by ExxonMobil and Chevron for $60 billion and $53 billion, respectively. This acquisition further solidifies ConocoPhillips’ competitive edge, positioning the company as a leading force in a rapidly evolving U.S. energy market.


“This acquisition of Marathon Oil further deepens our portfolio and fits within our financial framework, adding high-quality, low cost of supply inventory adjacent to our leading U.S. unconventional position,” Ryan Lance, Chairman and CEO (ConocoPhillips)

Company Details (Acquirer - ConocoPhillips)


ConocoPhillips is one of the world’s largest independent oil and gas exploration and production companies, operating in 13 countries including the United States, Canada, the Middle East, and Asia. Their global portfolio encompasses the extraction, transportation and marketing of traditional energy resources, with investments in lower carbon energy resources like Liquefied Natural Gas. The company leverages technological advancements, with a strategic focus on sustainability to provide secure and affordable energy.


Founded in 2002, headquartered in Houston, Texas

CEO: Mr. Ryan M. Lance

Number of employees: ~9,900

Market Cap: $129.10bn (as of 07/11/2024)

EV: $142.29bn

LTM Revenue: $56.93bn

LTM EBITDA: $24.45bn

LTM EV/Revenue: 2.5x

LTM EV/EBITDA: 5.82x

Recent Transactions: $8.6bn acquisition of Shell's Permian Basin (Jul 2022); $9.7bn acquisition of Concho Resources (Oct 2020), $390mn acquisition of additional Montney acreage from Kelt Exploration Ltd. (Aug 2020)


Company Details (Target - Marathon Oil Corporation)


Marathon Oil Corporation, headquartered in Houston, Texas, is a prominent American oil and gas exploration and production company. It focuses on the production and marketing of crude oil, natural gas liquids, and natural gas, with major operations in key U.S. regions, including the Eagle Ford, Bakken, STACK/SCOOP, and Permian Basin, as well as international operations in Equatorial Guinea. As of 2024, Marathon employs over 1,600 people and is known for its strong commitment to safety and ESG (Environmental, Social, and Governance) initiatives. The company is being acquired at a 14.7% premium over its closing share price on May 28, 2024, the last trading day before the acquisition announcement.


Founded in 1887, headquartered in Houston, Texas

CEO: Lee M. Tillman

Number of employees: ~1,600

Market Cap: $14.61B (as of 29/10/2024)

EV: $19.83B

LTM Revenue: $6.59B

LTM EBITDA: $4.28B

LTM EV/Revenue: 3.02x

LTM EV/EBITDA: 4.43x


Projections and Assumptions


Short-Term Consequences


ConocoPhillips' acquisition of Marathon Oil can be seen as a strategic reach for expansion of its U.S. shale position, solidifying the company's position in two key oil-producing strongholds: the Eagle Ford and Bakken. The deal follows the trend of growing "Shale 4.0" consolidations, whereby companies look to build scalable and sustainable energy portfolios by adding low-cost, high-value assets. Hence, with the acquisition of Marathon, ConocoPhillips adds enormous low-cost resources that are likely to hold great benefit, with the transaction being accretive to earnings per share and cash flow in the near term, tempering initial concerns.


The company has projected the generation of $500 million in synergies by cutting redundancies in administration, operations, as well as capital spending. This is already underway, with ConocoPhillips’ announcing a significant sacking of around 500 employees from their Houston facility on the 4th of November. Although it is said that many employees are to be trained and replanted into new roles, many are sure to face permanent job losses. In all, these efficiencies combined with improved resource allocation are projected to generate as much as $1 billion in savings over time. Such steps will be deemed integral to quickly developing shareholder profit, which will need some reassurance of successful integration and substantial operational efficiencies. But there are, naturally enough, sizable issues surrounding the deal that must be considered.


Since Marathon operates in high-cost extraction areas, conflicts are likely to be drawn between the revered low-cost model that ConocoPhillips’ pride themselves on and the high-cost nature of these assets. Furthermore, stock market reactions have been cautious, with investors sharing concerns about the cost surrounding these assets, in addition to the high acquisition price and potential integration risks.


Moving forward, ConocoPhillips must skillfully handle these issues if this purchase is going to pay off and yield the expected results that will continue shareholder confidence and help them meet their financial goals.


Long-Term Upsides


The acquisition of Marathon Oil by ConocoPhillips is poised to deliver substantial long-term benefits, enhancing ConocoPhillips' strategic position in the oil and gas sector. This merger will expand ConocoPhillips' asset base, particularly in key U.S. shale regions, thereby increasing operational scale and geographic diversification. The integration of Marathon Oil's assets is expected to add over 2 billion barrels of resource with an estimated average point forward cost of supply of less than $30 per barrel WTI, significantly strengthening ConocoPhillips' position in the Permian Basin and Eagle Ford, two of North America's most prolific shale plays. 


Additionally, ConocoPhillips can leverage Marathon Oil's strong infrastructure and expertise to improve production efficiency and lower operating costs. The company anticipates achieving the full $500 million of cost and capital synergy run rate within the first full year following the closing of the transaction, with savings coming from reduced general and administrative costs, lower operating costs, and improved capital efficiencies. 


Furthermore, with increasing global energy demand, this acquisition enables ConocoPhillips to secure a larger market share, ensuring its competitiveness as fossil fuel markets evolve. The combined company is likely to generate significant revenue growth, supported by synergies from operational efficiencies, a consolidated infrastructure, and enhanced technical expertise. These strategic advantages position ConocoPhillips to capitalize on future market opportunities and technological advancements, securing its role as an industry leader well into the future.


Risks and Uncertainties


Despite the expected Synergies, the acquisition of Marathon Oil also presents challenges and potential downsides for ConocoPhillips. 


The profitability of oil and gas companies heavily depends on crude oil and natural gas prices, which are influenced by geopolitical events, global demand, and regulations. A downturn in prices could impact ConocoPhillips’ ability to generate expected returns, especially given the capital-intensive nature of the sector. Additionally, merging two large oil and gas companies can bring operational challenges, especially integrating Marathon’s heavy assets and workforce. Achieving the $500 million in expected annual synergies could therefore take longer than expected and harm ConocoPhilip’s short term profitability. 


Additionally, external factors, such as recent M&A activity by large competitors, such as ExxonMobile and Chevron, will potentially intensify international and national competition. The global shift toward renewable energy also presents a significant long-term risk for ConocoPhillips, as evolving energy policies and the growing demand for cleaner alternatives could steadily reduce the reliance on fossil fuels. This transition could ultimately diminish the long-term value of oil and gas reserves, compelling ConocoPhillips to adapt strategically to maintain relevance in a rapidly changing energy landscape.


Finally, the acquisition includes Marathon Oil’s $5.4 billion in net debt, which increases ConocoPhillips’ overall leverage. While this transaction is expected to strengthen cash flow, it also introduces financial vulnerabilities. Any adverse financial developments, such as rising interest rates or unexpected capital requirements, could strain the company’s financial flexibility, posing potential challenges to its stability and growth plans.


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