Everybody Dance Now - Assessing the ConocoPhillips/Marathon Oil Deal

Another day, another mega-deal between top-tier oil and gas producers — or so it seems. Now, it’s ConocoPhillips and Marathon Oil’s turn, and you’d be hard-pressed to find a more logical pairing among the ever-shrinking list of big E&Ps that hadn’t already found a partner during the ongoing frenzy to consolidate. In today’s RBN blog, we examine ConocoPhillips’s newly announced, $22.5 billion agreement to acquire Marathon Oil with a look at their similar histories, their complementary assets, and what will now be their joint effort to boost shareholder returns. 

Just a little over a year ago, we wrote a blog called I Wanna Dance With Somebody in which we said that the cascade of upstream M&A would only intensify as E&Ps sought attractive partners — and the market has not disappointed! Last year may be a tough one to top for the value of upstream M&A announcements, but 2024 may well post a new record for the value of deals that closed. As we said in Keep on Dancing, upstream M&A soared to $192 billion in 2023, a mark 79% above the previous 10-year high and more than the previous three years combined. Last year’s announcements were headlined by two October surprises: ExxonMobil’s $60 billion purchase of Pioneer Natural Resources, which closed in early May, and Chevron’s planned $53.5 billion acquisition of Hess Corp., which was just endorsed by Hess shareholders but is still awaiting regulatory approvals and the settlement of a dispute over Exxon’s claimed right of first refusal to buy Hess’s assets in Guyana. Also expected to close over the next few months are Occidental Petroleum’s $12 billion buyout of privately held CrownRock (announced in December) and a few big deals unveiled in Q1 2024, including Chesapeake Energy’s $11.5 billion purchase of fellow gas producer Southwestern Energy and Diamondback Energy’s planned $26 billion acquisition of Endeavor Energy Resources.

ConocoPhillips and Marathon Oil also plan to tie the knot in calendar 2024 — they are eyeing a Q4 closing date on their newly announced engagement, subject to an endorsement by Marathon Oil shareholders and regulatory approvals. As we said in the introduction to today’s blog, the deal is an all-stock transaction valued at $22.5 billion, including the assumption of $5.4 billion in Marathon debt. Under the terms of the agreement, Marathon Oil shareholders will receive 0.2550 shares of ConocoPhillips common stock for each share of Marathon common stock, representing a 14.7% premium to Marathon’s closing share price on May 28, and a 16% premium to the prior 10-day volume-weighted average price.

ConocoPhillips executives said during a May 29 call that the company’s acquisition of Marathon Oil is expected to be immediately accretive to earnings, cash flows and return of capital per share. They also said that ConocoPhillips expects to achieve at least $500 million of synergy-related run-rate savings within the first full year following the closing of the transaction; that ConocoPhillips expects to increase its ordinary base dividend by 34% to 78 cents per share starting in Q4 2024; and that, upon closing of the transaction, the company expects share buybacks to total over $20 billion in the first three years, with over $7 billion in the first full year — compared to about $5 billion per year lately.

We’ll start off our analysis by noting that ConocoPhillips and Marathon Oil have remarkably similar histories and that both have a Lower 48 focus but hold international assets too. As for history, both started up with other corporate names in the last quarter of the 19th century, were quickly absorbed by John D. Rockefeller’s Standard Oil and, with the breakup of that monopoly, reverted to stand-alone companies that grew into integrated producer/refiners. Then each spun off the refining part of their businesses into separate companies: Marathon Petroleum from Marathon Oil in 2011 and Phillips 66 from ConocoPhillips in 2012.

ConocoPhillips’s Global E&P Assets