In response to the ConocoPhillips-Marathon deal announced earlier today, Rystad Energy is sharing a special market update diving into the specifics of the announcement, the rationale and comparing it to other recent shale megadeals.

The shale merger and acquisition (M&A) market had taken a bit of a breather over the past few months since Diamondback’s acquisition of Endeavor in February this year.

After a torrid pace of dealmaking since last fall, kicked off with ExxonMobil’s purchase of Pioneer, no ‘megadeals’ had been announced over the past few months, raising questions about the quality and scale of remaining private E&P inventory, and the multiples associated with such deals.

That changed today with the announcement that ConocoPhillips is set to acquire Marathon Oil in an all-stock deal that values the latter at $22.5 billion, incorporating the takeover of $5.4 billion worth of Marathon’s net debt.

The combined firm will instantly become a diversified powerhouse, with assets across several core tight oil regions of the Lower 48.

The deal marks a shift in the ‘Shale 4.0’ wave of consolidation, in which public exploration and production (E&P) companies and operators outside of the Permian become primary acquisition targets, something that Rystad Energy predicted following earlier private-focused acquisitions.

The deal ends months of speculation around the fate of both companies in the M&A market.

For Marathon Oil, which possesses a diversified asset base across the Anadarko, Bakken, Eagle Ford and Permian basins, the move sees its sale to another company with assets spanning multiple basins.

This comes after earlier speculation surrounding a potential tie up between Marathon and fellow public independent Devon Energy, another company with acreage held in multiple core tight oil regions.

As for ConocoPhillips, the move illustrates a decision to become a leader of scale across the Lower 48 rather than solely in the Permian.

ConocoPhillips’ inventory is more Permian-weighted than Marathon’s, meaning that the prolific yet pricy and heavily consolidated region will become a lower share of its total asset base.

This comes after, according to the rumors in the media, ConocoPhillips was linked to but ultimately did not purchase private E&P darlings CrownRock or Endeavor, which sold to Oxy and Diamondback, respectively.

Figure 1 shows the valuation multiples paid in recent deals, including the purchase of Marathon by ConocoPhillips.

The deal is compared against Oxy and Diamondback’s earlier purchases of CrownRock and Endeavor, respectively.

As mentioned, ConocoPhillips was linked to both in the media prior to the eventual acquisitions.

Both the earlier Permian deal values imply roughly a 5.15x multiple to 2024 upstream earnings before interest, taxes, depreciation and amortization (EBITDA), forecasted through Rystad Energy’s UCube.

On the other hand, ConocoPhillips’ $22.5 billion enterprise valuation of Marathon resembles a 3.79x multiple on its 2024 EBITDA, a relatively less expensive premium compared to the earlier deals.

Please note in all cases that EBITDA is calculated based on our latest data rather than the forecast at the time of the purchase to incorporate post-announcement operator guidance on newly acquired assets.

The discrepancy in valuations sheds some light on the changing nature of Lower 48 M&A activity.

Following the ExxonMobil-Pioneer deal, operators set off to consolidate what remained of the ‘core of the core’, or most economic locations remaining in the Permian.

The ‘Shale 4.0’ era, which started last fall, has seen a shift by management teams and investors towards building companies of scale for the long term.

After several years of “proving” the ability to generate significant free cash flow through capital discipline and return cash on hand to shareholders via buybacks and dividends, operators, recognizing the limited lifetime of their remaining inventories, have now set off to ensure that their assets can continue to deliver these returns not just in the upcoming quarters, but for decades to come.

As a result, the focus of M&A activity in the tight oil space has been heavily focused on building long-term scale in the most commercial areas.

This has, therefore, made the core of the Permian a hot commodity, and private E&Ps such as CrownRock and Endeavor, which held a scale in some of the most economic areas, were thus sold for high multiples.

The Marathon-ConocoPhillips deal marks a new chapter in this M&A cycle for several reasons.

With few remaining private E&P options of scale in the Permian, ConocoPhillips would have been forced to either buy a private E&P with limited total scale that would do little to “move the needle,” in terms of its overall inventory, potentially pay a high premium for a larger pure Permian public player or seek to purchase a smaller Permian public player that may lack in both inventory scale and quality.

Instead, ConocoPhillips chose to look outside the already heavily consolidated basin and pursue a tie-up with Marathon that will elevate into second position in terms of total inventory in the Lower 48 core tight oil plays (figure 2), just behind ExxonMobil, for a relatively less expensive EBITDA multiple than it likely would have needed to pay for a core Permian player.

The figure above illustrates the total net equity locations under a flat, real, long-term WTI price strip of $60 per barrel, split by basin.

This includes both risked and unrisked locations. With the Marathon acquisition, ConocoPhillips now positions itself as a leading multi-basin consolidator with significant undeveloped locations across the Bakken, Eagle Ford and Permian basins.

While still retaining a significant Permian portion of its inventory- built up in part from acquisitions of Concho Resources and Shell’s Permian assets- ConocoPhillips’ decision to forgo another Permian deal in search of diversification also helps to further bolster the analysis that the Permian is already heavily consolidated, with few remaining opportunities for entry or expansion at a relatively inexpensive price.

According to Rystad Energy’s analysis, six firms- ExxonMobil, Chevron, Diamondback (including Endeavor), ConocoPhillips (even before Marathon), Oxy (including CrownRock) and EOG- control about 62% of remaining net tight oil resources in the basin.

Moving forward, Rystad Energy expects M&A activity to continue to pick up outside of the basin, with this being the second significant Eagle Ford acquisition this month, following Crescent Energy’s purchase of SilverBow, as operators look to pursue less expensive options outside of an already crowded Permian.

That said, we also see this as a pickup in public-to-public M&A activity, something that Rystad Energy has previously prognosticated would be the next phase of the ‘shale 4.0’ M&A cycle.

With ExxonMobil, Chevron, Oxy, ConocoPhillips and Diamondback all now having closed or in the process of closing megadeals of their own and few private operators of scale available in the Permian, we also expect this deal to foreshadow additional public-to-public dealmaking, potentially including among mid-cap pure Permian operators, who may look to merge in order to appear as attractive targets of scale in their own right.

Looking more at the near term, the deal will elevate ConocoPhillips to the third position in terms of total net production, in barrels of oil equivalent terms, in the US Lower 48.

Figure 3 shows the top producers of hydrocarbons- including gas-focused companies- in the US Lower 48 according to Rystad Energy UCube’s 2024 net forecasts.

The combined firm will produce over 1.4 million barrels of oil equivalent per day (boepd), behind only ExxonMobil and Chevron (including Hess’ Bakken production), and well ahead of the next highest oil-focused producer- the combined Oxy-CrownRock firm.

All deals include pro-forma production for the full-year value of production from all assets, including those shown as currently closing acquisitions or those (such as APA Corp) who have recently closed deals.

The deal also emphasizes the continuing shifting structure of the US tight oil industry as a result of the recent spate of dealmaking, something that Rystad Energy has emphasized frequently in the past.

A far cry from the ‘wildcatting’ spirit of earlier eras of the industry, the shale landscape has become a much more mature, consolidated industry.

Figure 4 highlights this in stark terms by illustrating the fact that, according to Rystad Energy’s UCube, the supermajors and ConocoPhillips now control 25% of the remaining US tight oil resources.

As a result of the Pioneer, Hess and now Marathon acquisitions, this figure (assuming all deals had closed on 1 January 2024) is now up from 18% as of 1 January 2023 and only 8% in the early days of the industry in 2010.

Figure 5 sheds light on the strategic rationale of the deal by investigating the inventory depth of each operator in their main plays, using the change in oil estimated ultimate recovery (EUR) per foot between 2023 and 2019 as a proxy.

This measure is a useful tool to analyze inventory quality and depth, as it can be assumed that a drop in well recoveries over the course of these vintages would suggest that an operator is depleting its best locations.

The analysis looks at only oil EURs from oil or oil/gas-focused wells and uses 2023 and 2019 in order to offset the potential effects of the turbulent periods caused by Covid-19 and the following spike in oil prices between 2020-2022.

The chart also compares ConocoPhillips and Marathon’s results to that of the median well in each play.

We find that ConocoPhillips’ operated wells have been among the best performers in the Permian Delaware, with a 41% improvement in EUR per foot in this period, suggesting a deep inventory and improved performance on acreage acquired from Concho and Shell.

Marathon has also exhibited strong results on this position, with a 20% improvement in EUR per foot between 2023 and 2019, compared to the play average of an -8% degradation.

However, in the more mature Eagle Ford, we find that ConocoPhillips’ oil results have declined significantly, suggesting the operator possesses a much more limited inventory and has depleted some of its best locations over the past several years.

ConocoPhillips’ EUR per foot declined -45% in this period versus a play average decline of 13%.

By contrast, although still declining, Marathon’s wells have shown effectively stable results, deteriorating by just -6% between 2019 and 2023 and faring better than the median play well.

The scale and quality of Marathon’s Eagle Ford inventory compared to the potentially depleted nature of ConocoPhillips’ suggests that this is likely a major strategic factor in the decision to acquire Marathon and will help to replenish its position in South Texas.

Like other recent deals, the acquisition could invite antitrust scrutiny from the US Federal Trade Commission (FTC).

The FTC recently approved ExxonMobil’s purchase of Pioneer but prohibited Pioneer CEO Scott Sheffield from taking a seat on the ExxonMobil board, citing accused collusion with OPEC on oil price fixing.

The diversified nature of Marathon’s assets across multiple basins, as well as both operators’ continued focus on shareholder returns over production growth, could invite extra scrutiny.

Still, the focus of the deal in more mature basins, such as the Bakken and Eagle Ford, with limited inventory and future growth prospects, could dampen the chances for success of any significant challenges to the deal.