Marathon Oil Corp. is waving goodbye to Canada and picking up acreage in New Mexico's Permian Basin in a mega-deal announced Thursday.
Marathon's Canadian subsidiary, which holds a 20% stake in the Athabasca Oil Sands Project (AOSP), is being sold to a unit of Royal Dutch Shell plc and Canadian Natural Resources Ltd. for $2.5 billion. In turn, the Houston-based operator agreed to pay BC Operating Inc. and other entities $1.1 billion for 70,000 net acres in the Permian, including 51,500 acres in the Northern Delaware sub-basin of New Mexico with current output of 5,000 boe/d net.
"Divesting of our oilsands mining business at an attractive value while also acquiring 70,000 net acres in the world-class Permian Basin are transformative milestones that will further align our portfolio with our strategy," CEO Lee Tillman said. "Historically, our interest in the Canadian oilsands has represented about a third of our company's other operating and production expenses, yet only about 12% of our production volumes.
"The Northern Delaware basin features outstanding well economics that compete at the top of our organic portfolio and is experiencing a positive rate of change in well performance unrivaled in U.S. unconventional basins. This deal expands the quality and depth of our already robust inventory while securing a foundational footprint in the Delaware basin with 5,000 feet of oil-rich stacked pay."
According to Marathon, the Permian transaction, expected to be completed by the end of June, has a total implied acreage cost of $13,900/acre, adjusted for existing output. One rig now is working the leasehold, and Marathon plans to add a second rig by mid-year.
Marathon's base case assumes up to six target benches in the Permian leasehold, with Wolfcamp and Bone Spring the primary targets. The company said up to 10 target benches exist within 5,000 feet of stacked pay. Growth opportunities also exist from acquired acreage in the Permian's Northwest Shelf, "as well as further bolt-on acquisitions."
Marathon sold some Permian carbon dioxide and waterflood assets in West Texas last fall for $235 million.
The Canadian divestiture, which is set to close by mid-year, would give Marathon $1.75 billion at closing with the remaining proceeds paid in early 2018.
Marathon said the oilsands transaction "simplifies and concentrates" the portfolio "to the lower cost, higher margin U.S. resource plays," the company said. Among other things, the sale would reduce 2017 production and operating expenses by almost 25%, based on the expected closing dates.
Marathon's synthetic crude oil output from Canada averaged 48,000 b/d net in 2016, with year-end proved reserves of 692 million bbl.
Shell's Undeveloped Oilsands Portfolio Sold
Shell now owns a 60% stake in AOSP and is the operator. By splitting the Marathon purchase equally with Canadian Natural, Shell added another 10% interest in AOSP. But in a mega-deal with Canadian Natural that complements the Marathon transaction, Shell is selling nearly all of its undeveloped in-situ and oilsands holdings to Canadian Natural for $8.5 billion (C$11.1 billion). The move follows a writedown announced last month by ExxonMobil Corp. of its entire 3.5 billion bbl of proved undeveloped reserves at the Kearl oilsands development in Western Canada.
Included in the sale is Shell's current 60% interest in AOSP, as well as the 100% interest in the Peace River Complex in-situ assets, including Carmon Creek, and several undeveloped oilsands leases in Alberta. Shell still would hold a 10% interest in AOSP and continue as operator of the Scotford upgrader and the related Quest carbon capture and storage (CCS) project.
The deal would pay Shell $5.4 billion in cash and give it about 98 million shares of Canadian Natural currently valued at $3.1 billion. Including the Marathon purchase, the transactions once completed would hand Shell $7.25 billion. The transactions with Canadian Natural are expected to close by mid-year.
"This announcement is a significant step in reshaping Shell's portfolio in line with ourlong-term strategy," Shell CEO Ben van Beurden said. "We are strengthening Shell's world-class investment case by focusing on free cash flow and higher returns on capital, and prioritizing businesses where we have global scale and a competitive advantage such as integrated Gas and deepwater. The proceeds will accelerate free cash flow and reduce gearing and make a meaningful contribution to Shell's $30 billion divestment program."
The assets "are an excellent fit for Canadian Natural, a highly experienced oilsands developer," said Shell Canada President Michael Crothers. "Shell has been in Canada for more than 100 years, and we plan to continue our presence as one of the country's largest integrated energy companies.
"We are enhancing returns in our important downstream business and leveraging our world-class manufacturing capabilities through the integration opportunities that come with continuing to operate the Scotford upgrader and Quest CCS project, located next to the Shell Scotford refinery and chemicals plants."
In addition to the cash proceeds and Canadian Natural shares, the divestment includes intellectual property agreements valued at up to $285 million and a long-term supply agreement for the Scotford refinery.