Marathon Oil Corp. and its Canadian subsidiary sold their entire upstream interests in Western Canada to Husky Oil late last month for $588 million, or about $8.50/boe. The deal was part of Marathon’s strategy announced earlier this year to sell off more than $700 million in non-core, low return assets in order to pay down debt, strengthen its balance sheet and acquire assets with higher returns and better cash flow.

Marathon’s Western Canada assets include booked reserves of 69 million boe and average net production of 21,000 boe/d. The sale to Husky is expected to close early in the fourth quarter. It does not include Marathon’s exploration interests in Eastern Canada.

Husky, which is controlled by Hong Kong tycoon Li Ka-shing, also said it had agreed to sell some of the Marathon properties to EOG Resources for $320 million. Under the EOG deal, Husky said it will retain properties in Alberta and northeastern British Columbia producing 19,500 boe/d, including 90 MMcf/d of gas. EOG will receive the natural gas properties in the Wintering Hills, Drumheller East and Twining areas of southeast Alberta. The properties are essentially adjacent to existing EOG operations or are properties in which EOG already has a working interest.

EOG CEO Mark G. Papa called the assets a “natural fit” because they allow EOG to continue expanding its Canadian program by adding a significant number of shallow gas drilling locations. “The acquisition gives us at least 600 infill drilling locations and 380 recompletions,” he said. EOG will operate the properties, consisting of 34 MMcf/d of current gas production and 275 Bcfe of proved reserves.

In contrast to EOG’s strong interest in Canada, Marathon sees its future elsewhere in places such as Russia, Equatorial Guinea and the Gulf of Mexico and in liquefied natural gas trade. Marathon CEO Clarence P. Cazalot Jr. said the sale is part of the company’s effort to “high grade Marathon’s asset portfolio” by selling assets that “no longer provide a strategic fit, reinvesting in new core areas with near and long-term growth potential and strengthening our balance sheet.”

According to Fahnestock & Co. producer analyst Fadel Gheit, Marathon got a good price for assets that really have never paid off. “[Cazalot] has been trying for the last three years to rearrange the deck of cards he was dealt when he came over,” said Gheit. “He swapped assets. He sold assets. He made targeted acquisitions. He’s growing in Equatorial Guinea and in Russia. He wants to be in areas where he can ramp up cash flow and hopefully generate earnings and improve Marathon’s exploration track record.

“They haven’t had a lot of success in Canada. The Tarragon acquisition several years ago was a disaster,” said Gheit. “They put a billion dollars in it, and it just went down the drain. That was before Cazalot came on board.”

In January, Cazalot said he planned to sell $700 million in assets, but so far the company has significantly surpassed that total. “It’s a sellers market, and Cazalot is taking advantage of that,” said Gheit. “He wants to keep his powder dry because he has his eyes on LNG and a lot of other things that, given the company’s size and financial flexibility, would be a stretch. Nobody knows where natural gas prices will be six months from now. He wants to make sure he has enough money and financial flexibility so that his plan won’t be derailed by [falling] oil and gas prices.

“They still have a lot of work to do in the Gulf of Mexico. They need a lot of money and they probably feel the Gulf is a higher priority than Western Canada,” Gheit added. “Cazalot really doesn’t think there is any growth potential in the Lower 48; only the Gulf of Mexico, Equatorial Guinea and Russia. Those are the mainstays of the company going forward.”

In fact, Gheit noted, that has been the trend among the large independents and the majors. “That’s why the smaller independents are keeping their powder dry because they know the food chain will give them a chance to acquire assets at a reasonable price. ChevronTexaco in the next six months is going to sell a lot of assets; I’m talking about several billion dollars in assets.”

Marathon’s other asset sales this year include interest in CLAM Petroleum BV in the Netherlands for $100 million. Upon closing of the sale of the Western Canada interests, Marathon will have sold more than 95 million boe in proved reserves and average daily production of 30,000 boe, generating upstream proceeds of more than $745 million. In addition, Marathon Ashland Petroleum LLC (MAP), in which Marathon holds a 62% interest, completed the sale of 190 Speedway SuperAmerica LLC retail sites in the Southeast United States for $140 million, and MAP has also sold other selected downstream assets for $23 million.

Marathon said it now anticipates that these and other potential asset sales could exceed $1 billion, which is far greater than its previous sale expectations for the year. Proceeds from the sales will be used to strengthen Marathon’s balance sheet and invest in other high-potential business opportunities, including its proposed liquefied natural gas import terminals and the recent acquisition of Khanty Mansiysk Oil Corp. for $282 million (including debt). KMOC is located in western Siberia and has 250 million barrels of proved and probable oil reserves and total potential resource of 900 million bbl of oil.

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