US independent Marathon Oil is acquiring the assets of the privately owned Eagle Ford Shale operator Ensign Natural Resources for a total cash consideration of $3 billion.
The companies said on 2 November that the all-cash deal involves 130,000 acres in the core of the Eagle Ford with 97% working interest in the condensate and wet-gas windows of the play, where Houston-based Ensign is producing an estimated fourth-quarter 2022 volume of 67,000 BOE/D.
The transaction will significantly expand Marathon’s Eagle Ford position, increasing its basin scale to 290,000 net acres, according to the company. The acreage is adjacent to Marathon’s existing Eagle Ford positions and spans Live Oak, Bee, Karnes, and Dewitt counties.
Additionally, the Houston-based Marathon estimates it is gaining 600 undrilled locations, representing an inventory life greater than 15 years. The inventory, according to Marathon, immediately competes for capital in its portfolio.
The acquisition also includes 700 existing wells, most of which were completed prior to 2015 with early-generation completion designs. These locations offer upside redevelopment potential, none of which was considered in the company’s valuation of the asset or inventory count, the company said.
'Securing Inventory and Production'
Andrew Dittmar, director at Enverus Intelligence Research, noted that purchase is "yet another example of a public company looking to take advantage of private equity exits to secure inventory and production."
He added that it has been the dominant theme of the post-COVID market as a slew of exits by private companies found ready buyers among public E&Ps.
"The market was temporarily challenged earlier in 2022 by the wide bid/ask caused by a spike in oil and gas prices, but seems to be regaining its footing. Following the acquisition of FireBird Energy by Diamondback Energy in the Midland Basin, this deal is the second major acquisition of Q4 where the buyer appears willing to allocate a significant portion of deal value to undeveloped land and meet seller expectations on one of these large private equity exits," he said.
"The allocation of value to undeveloped land in the Marathon purchase of Ensign looks more in line with the usual Permian valuation rather than the Eagle Ford where assets tend to trade closer to production value. However, the price looks justified as Marathon is adding around 600 net locations that are high quality."
The deal addresses one of the key issues for Marathon which was its lack of inventory life, and we have expected the company to make an acquisition of this type, Dittmar said.
"Critically, Marathon was able to extend its inventory runway while keeping the deal accretive to its own key financial multiples of cash flow multiple and free cash flow yield. Adding inventory while keeping the deal accretive to free cash flow has been among the largest challenges for public companies in the current market. That is easier to accomplish for larger companies like Marathon that trade at a premium relative to small cap E&Ps."
More Eagle Ford M&A Expected
Dittmar noted that it is not surprising to see this large transaction in the Eagle Ford as it is among the most fragmented of the major US shale plays and has significant acquisition opportunities.
"We expect to see more M&A in the Eagle Ford both from the sale of noncore assets by public companies like Chesapeake Energy as well as more large private exits," he said.
"There is likely to be significant buyer interest as the play presents an attractive mix of existing production and cash flow generation, remaining drilling opportunities, and ample supporting infrastructure with easy access to key Gulf Coast markets.”
The transaction is subject to customary terms and conditions, including closing adjustments, and is expected to close by year-end 2022.
