A mega-merger of two major oil companies was announced Tuesday, as ConocoPhillips (NYSE:COP) agreed to acquire Marathon Oil (NYSE:MRO) in an all-stock deal worth $22.5 billion. The acquisition is now pending shareholder and regulatory approvals.
It is the third major acquisition in the oil industry in the past year, as ExxonMobil (NYSE:XOM) bought Pioneer and Chevron (NYSE:CVX) acquired Hess in October.
Investors were a bit wary of the move, as ConocoPhillips’ stock dropped 3.6% on Wednesday, while Marathon stock rose nearly 9%.
“Highly complementary” acquisition
The $22.5 billion deal is inclusive of $5.4 billion of Marathon’s debt. In return, Marathon shareholders will receive 0.2550 shares of ConocoPhillips common stock for each share of Marathon Oil common stock, which represents a 14.7% premium to the May 28 closing price.
ConocoPhillips, the third-largest U.S. oil company behind ExxonMobil and Chevron, sees several benefits from this deal. Those benefits include “highly complementary acreage to ConocoPhillips’ existing U.S. onshore portfolio,” adding over 2 billion barrels of resource across the shale oil fields in across shale fields in Oklahoma, Texas, New Mexico, and North Dakota.
“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,” said Ryan Lance, chairman and CEO of ConocoPhillips.
The company expects the purchase to be “immediately accretive” to earnings, cash from operations, free cash flow, and return of capital per share, once it closes in the fourth quarter of 2024.
ConocoPhillips also anticipates $500 million in cost and capital synergy run-rate savings in the first full year. The savings will come from reduced general and administrative costs, lower operating costs and improved capital efficiencies.
What does this mean for investors?
Investors will see an increase in ConocoPhillips’ dividend as a result of this deal, as the oil giant expects to raise its dividend by 34% to 78 cents per share after the deal closes. Lance also said the company will target “top-quartile dividend growth relative to the S&P 500 going forward.”
The company also plans to repurchase $7 billion worth of shares in the first full year following closing and $20 billion worth of shares in the first three years.
ConocoPhillips stock is down about 3% year to date, although it’s up roughly 13% over the past year. Over the past 10 years, the stock has recorded an average annualized return of just 3.7%.
Analysts were bullish on the company’s prospects before the deal, as evidenced by the median price target of $143 per share, which is 24% higher than the current price. Some big Wall Street firms also weighed in on Wednesday morning, including Citigroup Alastair Syme, according to MarketWatch.
“While others have targeted inventory and growth, this transaction looks largely based around optimization of cost and approach in the Eagle Ford and Bakken shales, maturing assets for both companies,” Syme wrote in a research note.
He also cited the considerable increase in free cash flow as a positive.
With a reasonable valuation and expectations for oil prices to rise slightly in 2024, ConocoPhillips may be a solid play for some investors looking to diversify with energy stocks.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
