Marathon Stock Jumps on $888 Million Acquisition

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Independent oil and gas company Marathon Oil Corp. (NYSE: MRO) announced Monday morning that it has signed a definitive purchase and sale agreement to acquire PayRock Energy Holdings. Marathon will pay $888 million for approximately 61,00 net surface acres in Oklahoma’s Anadarko Basin, along with current production of 9,000 net barrels of oil equivalent per day.

The acreage is located in the so-called STACK play. The acronym stands for “Sooner Trend Anadarko Basin Canadian and Kingfisher Counties” and the region is one of the top shale plays in the country.

According to Marathon, at a completed well cost of around $4.5 million, internal rates of return (IRR) will range between 60% and 80% before taxes at a West Texas Intermediate (WTI) price of $50 a barrel. That is a very high-quality resource.

Marathon also noted that proved and probable (2P) reserves total 330 million barrels of oil equivalent, with the total resource potential has increased to 700 million barrels. At the purchase price, the acreage is valued at $11,800 per acre adjusted to account for currently producing reserves.

CEO Lee Tillman said:

The recent moves we’ve taken to strengthen the Company’s balance sheet, including the successful execution above the top end of our non-core asset divestiture target, have positioned us to be opportunistic to acquire what is an excellent strategic fit.

We expect the 2016 capital program on the acquired acreage will be covered within our current $1.4 billion budget.  As we look into 2017, we would anticipate a minimum four-rig drilling program in our pro forma STACK position, which will achieve leasehold drilling requirements while accelerating delineation work.

In April Marathon said it had signed agreements to sell some noncore assets for $950 million, primarily consisting of oil and gas assets in Wyoming, along with a working interest in a Gulf of Mexico discovery and other assets. Since last summer, Marathon has divested approximately $1.3 billion in noncore assets, above the company’s targeted $750 million to $1 billion in asset sales.

It’s pretty hard to argue with Marathon’s decision to buy into the STACK play, and investors are clearly pleased. The stock traded up 9.5% in the noon hour Monday, at $14.41 in a 52-week range of $6.52 to $27.77.

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