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ConocoPhillips's $22.5 billion deal for Marathon Oil highlights energy M&A wave

ConocoPhillips's (COP) plans to acquire independent oil and gas producer Marathon Oil (MRO) in an all-stock deal for $22.5 billion including debt continues a recent string of deals in the energy space.

Marathon Oil shares jumped roughly 8% in Wednesday's trading while ConocoPhillips dropped more than 3%.

The merger follows a wave of consolidation over the past year as oil giants flush with cash look for ways to put it to use. ExxonMobil (XOM) recently closed on its $59.5 billion acquisition of Pioneer Natural Resources, expanding its access in the lucrative Permian Basin region. And on Tuesday, Hess (HES) shareholders voted in favor of a $53 billion buyout by Chevron (CVX). The deal includes Hess's valuable stake in Guyana.

Other deals announced over the past year include Occidental Petroleum's (OXY) $12 billion buyout of privately held oil and gas producer CrownRock and Diamondback Energy's (FANG) $26 billion acquisition of Endeavor Energy.

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"They're all the same underpinnings. It's buying acreage, it's buying inventory," Matt Willer, managing director of capital markets and partner at Phoenix Capital, told Yahoo Finance.

Willer says the massive consolidation in the energy space comes after more than a decade of underinvestment by companies amid political and regulatory uncertainty over the oil and gas landscape.

"Now recognizing that oil and gas isn't going anywhere likely during our lifetime, they have to make up for lost time," Willer said.

Citi analysts noted differences between the ConocoPhillips-Marathon deal and other major mergers among oil and gas companies.

“While others have targeted inventory and growth, this transaction looks largely based around optimization of cost and approach,” wrote Alastair Syme and his team on Wednesday.

ConocoPhillips noted it expects to achieve $500 million of cost and capital efficiencies within the first full year of the completed merger.

The deal would allow ConocoPhillips to diversify its domestic assets, with Marathon's production largely centered in Texas and North Dakota.

"The deal, expected to close in Q4, would boost COP's production by 31% (based on Q1 2024 levels)," CFRA equity research analyst Stewart Glickman wrote immediately following the announcement. The analyst maintains a Hold rating on ConocoPhillips, with a $125 price target on the stock.

The agreement is unlikely to face antitrust issues, said Ed Hirs, senior fellow at the University of Houston.

“The two companies together are still smaller than the majors,” he noted. "They are both independent oil companies without any downstream assets for refining, distribution, and retail."

ConocoPhillips, which spun off its downstream business in 2012, has a market cap of $134 billion compared to Chevron's $291 billion and ExxonMobil's $511 billion.

Bartlesville, Oklahoma, USA - June 25, 2023: Afternoon sunlight shines on the welcome sign to the ConocoPhillips headquarters.
Afternoon sunlight shines on the welcome sign to the ConocoPhillips headquarters. (MattGush via Getty Images) (MattGush via Getty Images)

While recent deals are expected to close from a regulatory standpoint, Chevron's Hess transaction has an additional hurdle to pass.

Earlier this year, ExxonMobil filed for arbitration over the merger, claiming it has right of first refusal for Hess's asset in Guyana, per a joint operating agreement.

"The deal will likely fall apart if Chevron cannot acquire the Guyana interest along with Hess’ other assets," Carin Dehne-Kiley, Director, S&P Global Ratings, said in a recent note.

She added, "Guyana is the crown jewel in Hess’ portfolio, with current gross production of around 580,000 barrels per day and nearly doubling by 2026."

Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre.

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