Marathon Magnifies Permian Position With $700 Million Bolt-On

by:

Oil And Gas Investor

Emily Patsy Associate Editor, Digital News Group Hart Energy

Within a span of 12 days, Marathon Oil Corp. (NYSE: MRO) has signed on to create a 90,000 net-acre Delaware Basin position in two deals worth $1.8 billion.

Marathon said March 21 it agreed to pay $700 million in cash for a bolt-on acquisition of 21,000 net surface acres largely in the Northern Delaware of New Mexico from Black Mountain Oil & Gas and other private sellers.

Combined, the company has assembled 1,070 gross, risked operated locations and resource potential estimated at roughly half of a billion barrels of oil equivalent (boe) in the Permian.

The acquisition comes less than two weeks after Marathon entered the basin with a $1.1 billion deal for about 70,000 net surface acres from BC Operating Inc. and other entities. The BC deal included 51,500 acres in the same area as well as 18,500 acres in the Northwest Shelf.

“Strategically, [the] acquisition makes sense as [the] acreage offsets [the] BC transaction, allowing MRO a larger backbone to bolt-on and core up in the Delaware Basin,” Tudor, Pickering, Holt & Co. (TPH) said in a March 21 report.

However, TPH pointed out that the transaction value of the Black Mountain acquisition is significantly more expensive than Marathon’s previous deal.

“[The Black Mountain] deal equates to about $34,000 per acre after netting off production and including only the 20,000 net acres in the Northern Delaware Basin,” the firm said.

TPH estimated the BC transaction came out to about $18,000 to $19,000 per acre.

Marathon said that, combined, the acreage price for the deals is $23,400 per acre, adjusting for average production of 5,000 boe/d.

Black Mountain, based in Fort Worth, Texas, built its position through leasing primarily in Eddy and Lea counties, N.M., according to its website. The company is backed, in part, by Natural Gas Partners (NGP) of Irving, Texas. Black Mountain received a $150 million commitment from NGP in February 2016.

Marathon said Black Mountain’s position gives them a “natural overlay” to compliment their basin entry point.

Black Mountain acreage highlights:

  • Up to 10 target benches within about 5,000 feet of stacked pay (base case assumes up to six target benches);
  • About 21,000 net acres with 20,000 net acres in the Northern Delaware Basin;
  • Primary targets in Wolfcamp and Bone Spring;
  • Roughly 400 boe/d of current production;
  • About 230 MMboe of risked resource with 440 gross company operated locations; and
  • About 550 MMboe of total resource potential with 950 total gross company operated locations.

The Northern Delaware inventory produces greater than 90% before-tax internal rate of returns at $55 West Texas Intermediate flat and competes for capital allocation at the top of Marathon Oil’s portfolio, the company said.

“Today’s 21,000-acre bolt-on in the Northern Delaware is an excellent fit with the basin entry acquisition we announced earlier this month. The combined deals provide us more than 90,000 acres in the Permian, over 70,000 of which is concentrated in the Northern Delaware,” Lee Tillman, Marathon Oil’s president and CEO, said in a statement.

By mid-year, Marathon plans to supplement the single rig on BC’s acreage with two more.

Tillman signaled that Marathon’s M&A appetite might be satiated for now. Since 2016, the company has divested $3.8 billion in assets, including its March 9 Canadian oil sands divestiture that was announced concurrently with its first Delaware purchase.

During the same time period, Marathon acquisitions, including the pending Delaware deals and an $888 million Stack play transaction, total $2.7 billion.

“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,” he said.

Marathon said it expects to close both Permian acquisitions in second-quarter 2017. The Black Mountain acquisition will have an effective date of March 1.

Vinson & Elkins advised Black Mountain Oil & Gas LLC and Black Mountain Operating LLC on the transaction with Marathon.



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