Latest shale mega-deal looks outside the Permian

The latest blockbuster deal to shake up the shale patch looks beyond the crowded Permian basin, where valuations have soared and merger opportunities have dwindled since the latest round of consolidation began late last year.

ConocoPhillips' $17.1bn all-stock takeover of Marathon Oil expands the leading US independent's position in the Eagle Ford of South Texas, North Dakota's Bakken, and the Anadarko basin of Oklahoma, in addition to the Permian.

The acquisition reflects a desire by ConocoPhillips to "become a leader of scale across the lower 48 rather than solely in the Permian", consultancy Rystad senior analyst Matthew Bernstein says. The combined company will produce more than 1.4mn b/d of oil equivalent in the lower 48 US states, behind only ExxonMobil and the proposed Chevron-Hess tie-up. It will also take second place when it comes to overall inventory, according to Rystad.

ConocoPhillips, which reportedly lost out in the race for previous targets, has long made the case for industry mergers to build scale, although it has cautioned against overpaying. The company sees itself as having been an early consolidator in the Permian, following its $8.6bn acquisition of assets from Shell in 2021, which built on the $9.7bn takeover of Concho Resources the previous year.

About 30pc of the total deal value is being paid for Marathon's shale inventory, after accounting for existing production and gas assets in Equatorial Guinea, according to Enverus Intelligence Research. "Combining with Marathon will boost Conoco's market cap to above $150bn, extending its lead as the largest independent producer and placing it broadly in the same scale as majors, above BP and behind Shell," says principal analyst at Enverus, Andrew Dittmar.

The transaction hands ConocoPhillips more than 2bn bl of resources with an estimated cost of supply of less than $30/bl. Savings of at least $500mn are pegged in the first year. And plans to buy back more than $20bn of shares in the first three years will more than cover the equity issued as part of the transaction.

Operational efficiencies are likely to come from both sides of the deal. ConocoPhillips has been drilling about 50pc faster than Marathon in the Eagle Ford over the past year, and its wells have been 10pc more productive, consultancy Wood Mackenzie estimates. But in the Bakken, Marathon's wells have outperformed. "While neither play will likely become a growth asset for ConocoPhillips, they will be able to provide good cash flow generation," Wood Mackenzie Americas upstream director Ryan Duman says.

Overlapping opportunities

A potential deal with Marathon only appeared on the company's radar a few weeks ago, according to ConocoPhillips chief executive officer Ryan Lance — "We know the Eagle Ford quite well, the Bakken quite well and saw the significant overlap in the opportunities that this represented."

Company executives talked up prospects for "refracking" more existing wells to boost their lifespan and production. And Lance heralded a new era for shale, centred on using new technology and data analytics to boost such efficiencies. "It allows us to extend some tier-one inventory both in the Eagle Ford and the Bakken," he says. A typical refrack costs 60-70pc of a new well. "We're even seeing some of those costs coming in below the 60pc mark, which is very encouraging," ConocoPhillips' executive vice-president for the lower 48, Nick Olds, says.

The focus on mature basins such as the Eagle Ford and Bakken could mitigate against much in the way of pushback on anti-trust grounds. However, with the Federal Trade Commission zeroing in on oil deals of late, the transaction could still face intense scrutiny.

By Stephen Cunningham