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Marathon Oil acquires Oklahoma producer for $888mn

20 Jun 2016 18:51 (+01:00 GMT)
Marathon Oil acquires Oklahoma producer for $888mn

Houston, 20 June (Argus) — Marathon Oil acquired a private Oklahoma shale oil producer for $888mn, a sign that US independents may be ready to make corporate acquisitions as prices recover.

The acquisition of PayRock Energy gives Marathon ownership of 61,000 net acres with a current output of 9,000 b/d of oil equivalent (boe/d) in the Anadarko Basin of the Stack formation. With completed well costs of about $4mn-$4.5mn, PayRock offers a 60-80pc before-tax internal rate of return at $50/bl WTI, Marathon Oil said.

"Our acquisition of PayRock will meaningfully expand the quality and scale of Marathon Oil's existing portfolio," chief executive Lee Tillman said in a call with investors. "The PayRock energy acquisition ticks all the boxes — quality, scale, value and with upside potential."

Mergers have been slow to develop among US producers as many firms are saddled with large amounts of debt acquired during the years of near-$100/bl oil. Relative volatility in crude prices, including the plunge below $30/bl in the first quarter of this year, has made valuations difficult to lock in for mergers.

A recovery to near $50/bl and relative stability in prices may be opening the window to more deals, however. Range Resources last month agreed to buy Memorial Resource for $3.3bn, and last week Devon sold its remaining non-core assets in the Midland basin of Texas for $858mn, part of which was acquired by Pioneer Natural Resources for about $435mn.

PayRock's output will more than double Marathon Oil's production in the area, add 330mn boe to its "proven and probable" resource base and add 490 gross operated locations. The implied acreage value of $11,800 per acre is more competitive than recent deals by others in the area, such as Newfield Exploration and Chesapeake, which have been about $13,000-$14,000 per acre, according to estimates by research firm Tudor Pickering & Holt.

Marathon Oil will fund the PayRock acquisition through proceeds from recent divestitures. The independent has announced or closed on $1.3bn of non-core assets sales so far this year in areas including East Texas, northern Louisiana, Wyoming and mature properties in the Gulf of Mexico. That's higher than a target set of $750mn-$1bn.

The PayRock deal is expected to close by the third quarter of the year.