Marathon Oil Corporation's (NYSE:MRO) $2.5B sale of its oil sands mining assets and $1.1B entrance into the Delaware Basin continues its transformation towards a U.S. unconventional resources focused E&P. BMO Capital Markets reviewed the company's Delaware Basin acquisition with analysis focused on BC Operating and offset peer well performance and economics, production growth expectations for the Delaware assets, and valuation scenarios. The $2.5B OSM sale proceeds were slightly above BMO's previously published $2.3B valuation.
Marathon’s $1.1B acquisition of BC Operating expands its U.S. unconventional footprint to include the northern Delaware Basin. BC Operating’s acreage position is focused in Eddy and Lea Counties, but also includes acreage on the New Mexico Shelf. BMO expects investor focus to be on the Eddy County acreage as this area is generally less understood with historically less industry activity compared to Lea County. The firm's analysis of BC well productivity suggests results below Lea and Eddy County averages, but data is minimal and offset peers WPX and Matador have achieved notable improvements.
BMO views the BC acquisition similar to PayRock in that Marathon paid an attractive valuation, leaving room for upside as the overall acreage position is less contiguous, with a large portion in a more emerging/less de-risked area. The firm estimates Marathon paid ~$18,000 per acre, less than half the ~$40,000 median for Delaware A&D in 2H16. The firm's DCF model is included in the report. BMO's base case valuation for the BC Operating assets is $1.8B based on risked resource potential and BMO’s commodity price forecast. At NYMEX, the firm estimates the acquisition value is $1.1B, which equates to the deal price. Bottom line, under most price scenarios, BMO estimates the deal is accretive for Marathon using its base case assumptions.
While the sale of OSM gives up FCF and raises reinvestment rate, net Debt/EBITDAX is reduced, pro-forma growth is enhanced, while operating costs and leverage are lowered. BMO views the transaction as neutral to EV/EBITDAX, while the Permian assets should better appeal to Marathon’s investor base and is more consistent with its unconventional strategy, while also helping to address questions around its inventory depth.
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