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Marathon Oil to Acquire PayRock Energy, but at What Cost?

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Marathon Oil announces agreement to acquire PayRock Energy

On June 20, 2016, crude oil and natural gas producer Marathon Oil (MRO) announced a definitive purchase and sale agreement to acquire PayRock Energy Holdings, a portfolio company of EnCap Investments.

PayRock currently has ~61,000 net surface acres and a current production of 9 Mboe (thousand barrels of oil equivalent) per day in the oil window of the Anadarko Basin STACK play in Oklahoma. STACK is an acronym for Sooner Trend (oilfield), Anadarko (basin), mostly in Canadian and Kingfisher (counties).

Below are some key highlights of the acquisition agreement:

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  • Marathon Oil to pay $888 million to acquire PayRock Energy Holdings
  • implied acreage value of $11,800 per acre after adjusting for 9 Mboe per day of current production
  • 2P (proved and probable) resource of ~330 MMBoe (million barrels of oil equivalent) acquired at $2.20 per boe (barrel of oil equivalent), after adjusting for 9 Mboe per day of current production
  • high-quality inventory immediately competing for capital allocation within Marathon Oil’s STACK portfolio
  • acquisition to close in 3Q16, pending customary closing conditions

Marathon Oil’s advantage

As you can see in the above graph, in the STACK Oklahoma window, PayRock acreage is an excellent complement to Marathon Oil’s existing position in the core of STACK. The acquisition will help Marathon Oil increase its liquids mix from the STACK region because PayRock’s ~90% acreage is situated in the STACK oil window.

PayRock’s acreage is not only high quality but also has superior oil well performance of 940 Mboe gross estimated ultimate recovery. It has a low completed well cost of $4.0 million–$4.5 million due to shallower depths. According to a Marathon Oil press release, this will offer 60%–80% IRR (internal rate of return) at $50 per barrel for a crude oil price.

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Commenting on the acquisition, Lee Tillman, Marathon Oil’s president and CEO (chief executive officer), said, “Acquiring PayRock’s STACK position will meaningfully expand the quality and scale of Marathon Oil’s existing portfolio in one of the best unconventional oil plays in the U.S. They’ve built a material position in the high margin oil window of the STACK, and have consistently delivered industry-leading well results.”

Many upstream companies are adding quality acreage to their portfolios at attractive prices. Last month, Range Resources (RRC), an S&P 500 (SPY) constituent, announced a merger with Memorial Resource Development (MRD) in an all-stock transaction valued at $4.4 billion. Two weeks ago, Antero Resources (AR) acquired Marcellus Shale acreage from Southwestern Energy (SWN) for ~$450 million.

In the next part of the series, we’ll see what Marathon Oil’s production volumes could be after the PayRock acquisition.

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