Merrill Lynch and Credit Suisse analysts provide their two cents on Marathon Oil Corporation (NYSE:MRO) following its acquisition of Payrock Energy’s oil well assets. While one analyst remains on the sidelines, claiming investors need more data regarding acreage, the other recommends buying shares, believing the acquisition increases the company’s overall value.
Merrill Lynch – Neutral
Merrill Lynch analyst Doug Leggate weighed in on Marathon Oil Corp following news that the company acquired Payrock Energy, a private oil company with assets in an area of counties in Oklahoma known as the STACK, for $888 million. As part of the deal, the company will acquire an additional 61,000 net surface acres in the STACK, which produce 9,000 net barrels of oil per day. The deal values each acre at around $11,800.
The analyst believes the acquisition is a step in the right direction for Marathon. He states, “Strategically, the deal fits with MRO’s existing footprint and provides depth to its US resource inventory.” Leggate notes that wells in the specific location of the acreage, mostly in the Kingfisher and Canadian County, have an oil cut of 50-90%.
The analyst compares the per acre value ($11,800), to similar deals by other companies. He believes the acquisition “compares favorably” to NFX’s $470 million acquisition of CHK, where NFK paid $10,000 per acre for a total of 42k stack acres. However, he believes MRO’s views of optimal wells will change with time. He explains, “Given the early development stage of the play, MRO’s comparison of PayRock wells compares well with all wells drilled to date; but with the industry seemingly moving to longer laterals, we suspect MRO’s view of optimal wells will evolve.”
The analyst believes this deal implies MRO’s view that oil prices will rebound. He states that since the “downturn” of oil prices, the company has been actively trying repair its balance sheet through asset sales in order to protect liquidity. However, in light of credit rating firm Moody’s recent increase of its 2018 price per barrel estimate from $43 to $50, the analyst believes that “immediate credit risk across the industry has eased”, implying the transaction is well-timed. He also notes that the company does not plan on issuing additional equity to fund the acquisition.
While the analyst believes that the “transaction is positive” for the company, he believes the market is waiting for more data on the Canadian county acreage before any meaningful long term upside to shares. He explains, “Going forward the increased operated STACK position provides options for MRO, although more data on Canadian county acreage that appears to dominate the acquired footprint is likely a pre-requisite before the market can fully assess the longer-term impact.”
The analyst maintains his Neutral rating on shares with a $20 price target. He states, “For now we continue to view MRO as a levered option on an improving oil price environment; but on the margin, we view this deal as a step forward in improving drilling options in a recovery.”
Credit Suisse – Buy
In addition, Credit Suisse analyst Edward Westlake provided his insights on Marathon Oil Corporation following its announcement that it would acquire PayRock for $888 million. PayRock’s assets will result in an additional 9,000 barrels of oil produced per day for MRO, a key positive according to Westlake.
The analyst reiterates an Outperform rating on the company and raises his price target slightly from $18 to $18.50.
He explains, “MRO’s shift of capital from Wyoming (sold earlier this year) to the STACK is accretive. The well results in the core of this PayRock acreage (which lies to the east of the more established play) do support decent IRR’s and a value uplift versus the price paid. Our EUR is more conservative than the type curve in today’s MRO presentation (decline rate). In general, there is room for type curves to improve versus our NAV models for the Permian and STACK (see our recent deep dive here). There are also well results required for MRO to de-risk the southeast part of the acquired acreage, a potential upside. The share price move today seems stronger than the initial risked value created from the deal, but reflects the fact that MRO shares were undervalued to start with, and perhaps reflects fears that MRO would overpay.”
Edward Westlake has a 54% success rate recommending stocks with a 7.6% average return per recommendation on TipRanks.
According to TipRanks, out of all the analysts who have rated the company in the past 3 months, 62% gave a Buy rating while 38% remain on the sidelines. The average 12-month price target for the stock is $17.56, marking a 19% upside from where shares last closed.