UPDATE: Marathon enters Permian at $1.1B, adds bolt-on for $700M

By Luke Geiver | March 15, 2017

Marathon Oil Corp. is moving out of the Canadian Oil Sands and expanding its presence in the Delaware Basin of Texas and New Mexico. For $2.5 billion, Marathon has agreed to sell 48,000 barrels of synthetic crude produced per day and other assets to Shell and Canadian Natural Resources Limited. The move into the Permian positions Marathon Oil Corp. as the only U.S.-based operator with a presence in the four major U.S. shale oil plays of the Permian, Bakken, Eagle Ford and SCOOP/STACK.

“Historically, our interest in the Canadian Oil Sands has represented about a third of our company’s other operating and production expenses, yet only about 12 percent of our production volumes,” said Lee Tillman, president and CEO of the company.

Upon closing of the deal in Q2, Marathon will receive $1.75 billion with the remainder coming in 2018. The money will be used to fund operations in Texas and to reduce debt.

In the Permian’s Delaware Basin, Marathon will be acquiring 70,000 net surface acres from BC Operating Inc. and others for $1.1 billion. Roughly 51,000 acres are located in New Mexico’s Northern Delaware Basin. Tillman said the features of the basin there offer outstanding well economics and “a positive rate of change in well performance unrivaled in US unconventional basins.”

The Permian acquisition will give Marathon access up to 10 benches of stacked pay, the company believes. The costs per acreage were roughly $13,900 per acre. Earlier this year, acreage in New Mexico had sold in a range of $30,000 to $40,000. At $55 WTI, Marathon will receive a pre-tax initial rate of return of 90 percent. One drilling rig will operate on the acreage to hold the term leases there and another rig will be added to develop the area. Marathon estimates it has 630 drilling locations already, with more than double that total likely to come.

Well performance in the area has increased by roughly 100 percent in the past three years based on 180-day cumulative production totals. “As the saying goes, rig counts don’t lie,” the company said during its investor call on the acquisition. There are currently 30 drilling rigs operating in the area.

Marathon could purchase the acres due to its ability for a quick sale. The deal was done in a matter of days and was paid for with cash, the company said. 

UPDATE: Marathon has added 21,000 net surface acres in the Permian's Northern Delaware basin of New Mexico from Black Mountain Oil & Gas for roughly $700 million. "While we expect to pursue additional trades and grassroots leasing, this bolt-on achieves the scale necessary for efficient long-term development in the basin," said Tillman. 

The acreage area can produce 90 percent before-tax IRRs at $55 WTI. The targeted zones of the properties will be the Wolfcamp and Bone Springs formations.