A mega-merger of two major oil firms was announced Tuesday, as ConocoPhillips (NYSE:COP) agreed to amass Marathon Oil (NYSE:MRO) in an all-stock deal value $22.5 billion. The acquisition is now pending shareholder and regulatory approvals.
It’s the third major acquisition within the oil industry up to now yr, 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 every 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 advantages from this deal. Those advantages 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, Latest Mexico, and North Dakota.
“This acquisition of Marathon Oil further deepens our portfolio and matches inside our financial framework, adding high-quality, low cost-of-supply inventory adjoining to our leading U.S. unconventional position,” said Ryan Lance, chairman and CEO of ConocoPhillips.
The corporate expects the acquisition to be “immediately accretive” to earnings, money from operations, free money flow, and return of capital per share, once it closes within the fourth quarter of 2024.
ConocoPhillips also anticipates $500 million in cost and capital synergy run-rate savings in the primary full yr. 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 a rise in ConocoPhillips’ dividend consequently of this deal, because the oil giant expects to boost its dividend by 34% to 78 cents per share after the deal closes. Lance also said the corporate will goal “top-quartile dividend growth relative to the S&P 500 going forward.”
The corporate also plans to repurchase $7 billion value of shares in the primary full yr following closing and $20 billion value of shares in the primary three years.
ConocoPhillips stock is down about 3% yr up to now, even though it’s up roughly 13% over the past yr. Over the past 10 years, the stock has recorded a mean annualized return of just 3.7%.
Analysts were bullish on the corporate’s prospects before the deal, as evidenced by the median price goal of $143 per share, which is 24% higher than the present price. Some big Wall Street firms also weighed in on Wednesday morning, including Citigroup Alastair Syme, in response to MarketWatch.
“While others have targeted inventory and growth, this transaction looks largely based around optimization of cost and approach within the Eagle Ford and Bakken shales, maturing assets for each firms,” Syme wrote in a research note.
He also cited the considerable increase in free money flow as a positive.
With an inexpensive valuation and expectations for oil prices to rise barely in 2024, ConocoPhillips could also be a solid play for some investors seeking to diversify with energy stocks.
Disclaimer: All investments involve risk. Under no circumstances should this text be taken as investment advice or constitute responsibility for investment gains or losses. The data on this report shouldn’t be relied upon for investment decisions. All investors must conduct their very own due diligence and seek the advice of their very own investment advisors in making trading decisions.