Marathon Oil Corp. has agreed to pay $3.5 billion to acquire the Eagle Ford Shale assets of Hilcorp Resources Holdings LP. Along with other transactions expected to close by the end of this year, Marathon's Eagle Ford position is expected to more than double to 285,000 net acres, the company said.
Hilcorp Resources Holdings is a partnership of affiliates of Hilcorp Energy Co. and Kohlberg Kravis Roberts & Co. LP (KKR).
During a conference call Wednesday to discuss the transaction, CEO Clarence P. Cazalot Jr. sought to assure investors that the acreage was well worth the price, which was estimated by some analysts to be as high as $25,000/acre.
The markets across the board closed down on Wednesday on weak economic data, and Marathon joined the crowd. The company shares traded down from Tuesday by about 2.75%, or $1.49/share, to end the day at $52.68.
"It's very difficult to simply take a price per acre in the play and attach relevance to it," Cazalot said. "We believe this acreage...has high liquids content and high pressure, which means higher recovery and returns."
The cash transaction, he noted, will enhance Marathon's "already strong North American position." The average price that Marathon has paid overall for Eagle Ford acreage is "less than $15,000/acre."
The previous high price paid for Eagle Ford acreage was in March when Korea National Oil Corp. agreed to pay $1.55 billion, or $16,000/acre, to Anadarko Petroleum Corp. to form a joint venture (see Shale Daily, March 22).
"Marathon has captured a top-five acreage position in the core of the premier resource play in the U.S. since first entering the Eagle Ford in November 2010 [see Shale Daily, Nov. 30, 2010]," said Cazalot. "This transaction enhances our already strong North America position focused on unconventional, liquids-rich resource plays that provide low-risk, scalable and profitable growth. This and other projects under development serve as a catalyst for Marathon to increase our projected upstream production growth to 5-7% on a compound average annual growth rate during the period 2010-2016."
Subject to customary approvals and conditions, the deal is expected to close Nov. 1 with an effective date of May 1, 2011.
Details of the transaction include:
"In addition to establishing our position in the highest-value oil and condensate core area of the Eagle Ford Shale, these assets will deliver immediate production and reserve additions, an active company-operated drilling program [and] significant resource potential, as well as solid economic returns and profitability that are immediately accretive to earnings and operating cash flow, and expected to be self-funding by 2014," Cazalot said.
Besides the six rigs under contract related to the acquisition and two in Marathon's other Eagle Ford acreage, the company has five rigs on order and said it expects to be operating at least 20 rigs in the Eagle Ford within 12 months of closing the Hilcorp acquisition.
As a result, Marathon expects to grow production from its total Eagle Ford acreage position to 100,000 net boe/d by 2016.
The Eagle Ford acreage being acquired is crude- and condensate-weighted, but there are about 23,000 net acres in the dry gas window, the company noted. Current takeaway arrangements include 28,000 b/d of liquids capacity to local refineries. In addition, Marathon would have 100,000 Mcf/d of gas capacity contracted or under way, with contracts structured to capture natural gas liquids.
By the second quarter of 2012 Marathon plans to have more than 600,000 b/d of added liquids capacity, as well as more than 500 MMcf/d of added gas capacity in the Eagle Ford.
Once completed the South Texas play would be Marathon's second-largest acreage holding in the United States but it would have the highest number of net drilling locations at 1,850. Marathon has an estimated 375,000 net acres in the Bakken Shale with an estimated 450 drilling locations.
Well costs in the Eagle Ford are averaging $5.5-8.1 million, Marathon noted. By comparison, Bakken wells are costing on average $7 million; Woodford Cana wells are averaging $7.5 million, and Niobrara wells cost about $4 million.
The Hilcorp acquisition brings Marathon's holdings to nearly one million net acres across North American liquids-rich resource plays in the Eagle Ford, North Dakota Bakken, Oklahoma Anadarko Woodford, the emerging Niobrara in Colorado and Wyoming, and an in-situ position in Alberta, the company said. Marathon plans to continue to grow acreage and increase drilling in each of the U.S. basins; this year it has budgeted up to $1 billion for U.S. shales (see Shale Daily, Feb. 3).
Within 12 months of closing the Hilcorp deal, Marathon expects to be operating 35-40 rigs across the United States. "This drilling activity, along with a potential phased development of the company's Birchwood in-situ acreage, provides a defined growth trajectory to achieve production from the company's unconventional portfolio of approximately 175,000 net boe/d in the 2016-2017 time frame," Marathon said.
Last June KKR and affiliates of Hilcorp Energy formed a partnership to acquire, own and develop oil and gas assets within the Eagle Ford (see Daily GPI, June 15, 2010). KKR made a $400 million initial capital commitment to the partnership to accelerate drilling and development activity across Hilcorp Resources' acreage position and in return received a 40% minority ownership interest in the company, subject to certain performance adjustments. KKR is expected to earn about $1.13 billion from the Hilcorp investment.
Since the formation of the partnership, Hilcorp Resources has made "tremendous progress" in developing its position in the Eagle Ford, KKR said. "Hilcorp Resources has become one of the top drillers in the basin, progressing from two horizontal rigs at the time of KKR's investment to six horizontal rigs today and drilling over 40 horizontal Eagle Ford wells during the same period," KKR said.
"Today, the assets of Hilcorp Resources represent the last large independent position in the core of the Eagle Ford Shale."
KKR two years ago made a $350 million bet on shale with an investment in East Resources Inc., one of the biggest producers in the Marcellus Shale (see Daily GPI, June 10, 2009). A unit of Royal Dutch Shell plc last year acquired East Resources' principal subsidiaries for $4.7 billion, and KKR's investment in one year's time returned about $1.5 billion (see Daily GPI, June 1, 2010).
Marathon said it will use cash on hand and cash generated from operations to fund the transaction. The company's upstream capital, investment and exploration spending for 2011 (excluding acquisitions) is not expected to increase materially as a result of the transaction, Marathon said.