Marathon Oil Continues to Look Attractive Despite Paying Up to Double Down in Permian

Marathon Oil Corp. (MRO) said Tuesday, March 21, it would acquire 20,000 net acres in the northern Delaware Basin, a subformation of the lucrative Permian Basin in west Texas and New Mexico, from Black Mountain Oil & Gas and other undisclosed sellers for $700 million. 

The deal comes a little under two weeks after Marathon Oil announced it was breaking into the Permian Basin with the $1.1 billion acquisition of BC Operating Inc.'s 70,000 net acres in the play. 

But contrary to the company's entry deal, which analyst praised at an affordable $15,000-per-acre price tag, this deal will likely drive shares down in the near term, as its price comes in at the higher end of the range of recent asset sales in the Delaware Basin.

KLR Group LLC analysts calculate Marathon's Tuesday acquisition at an "elevated" $34,000 per acre assuming a multiple of $40,000 per flowing barrel of oil equivalent. Current production associated with the properties is 400 barrels of oil equivalent per day, according to Marathon's release.

"The acquisition should have a minor negative value impact due to the elevated purchase price," KLR's John Gerdes wrote Tuesday morning.

Shares of Marathon ticked down about 7 cents Tuesday midday, after falling about 3% Monday following the add-on deal in the Permian.

Analysts at Seaport Global Securities LLC agree the deal comes at premium, but argued in a Tuesday note the price makes some sense given the newly acquired acreage appears to be generally located close to the New Mexico-Texas state-line. Assets in New Mexico's portion of the Permian Basin often garner a discount compared to those in west Texas.

On the other hand, the so-called elevated price tag is good news for Black Mountain and its private equity backers, Natural Gas Partners LP, which provided a $150 million equity commitment to the independent oil and gas company in February 2016.

And SGS asserted Marathon should have more than enough liquidity to cover Tuesday's $700 million deal plus the $1.1 billion initial transaction earlier this month after it's $2.5 billion Canadian oil sands divestiture, which it announced in conjunction with its entrance into the Delaware.

Tuesday's deal brings Marathon's Permian position to 91,000 net acres, including 71,500 in the northern Delaware Basin of New Mexico. The company currently has one operated rig drilling in the play, but has plans to add two more later this year.

Marathon expects to close the deal in the second quarter. 

Editor's note: This article was originally published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.

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