On Tuesday, June 21, Wall Street analysts began upgrading Marathon and the stock jumped another 4%.
If you bought shares based on this acquisition or are thinking of doing so simply due to this purchase, hold off. This is not as good a deal as many believe. There are easier ways to make money than to purchase a struggling oil company. The seller, Encap Investments knows the oil and gas space well and would be unlikely to part with a holding cheaply.
Marathon will pay what many consider a low price of $888 million for PayRock Energy. A UBS analyst projected that PayRock would sell for $1 billion.
Oil and gas exploration company PayRock has 61,000 surface acres in the STACK area, a massive oil production area in north central Oklahoma. It currently produces nine million barrels of oil per day. Oil currently trades at roughly $50 a barrel. That would seem to generate a massive amount of revenue daily.
But EnCap Investments has been around for 25 years and has raised 17 institutional oil and gas funds totaling $18 billion. The company understands the value of assets.
EnCap may have accepted the lower price because it has the best insight on the value of PayRock land. Marathon will pay $11,800 per acre. Compare that to the $20,000 an acre that Devon Energy paid in a deal.
Perhaps the nine million barrels that a company can draw from the STACK are not sustainable. Perhaps the oil is not of high enough grade. In this instance, it's best to trust the experts.
To be sure, PayRock will likely help Marathon Oil more than it was helping EnCap, since Marathon is an upstream/downstream oil and gas player similar to Exxon Mobil and Chevron. Marathon will likely be able to refine STACK oil, whereas PayRock would have had to sell it to a refiner, lowering its profit.
But a company as savvy as EnCap wouldn't accept less for an asset than it was worth.
Investors should consider looking at other oil and gas companies before buying Marathon, especially if the Payrock deal the motivating reason for making the Marathon purchase.
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