Chevron and Marathon Oil: A Match Made in Heaven?

Chevron could snap up Marathon for a quick boost in production.

Jun 18, 2014 at 2:43PM

Chevron (NYSE:CVX) and Marathon Oil (NYSE:MRO) sit at different ends of the market. Chevron is an oil behemoth, struggling to drive output growth and replace falling production. Marathon, on the other hand, is a U.S.-focused producer ramping up production from domestic shale assets.

Nevertheless, the two companies have many similar qualities, and a merger between the two could be the answer to Chevron's prayers.

Domestic dominance
Chevron is the largest liquids producer and one of the largest hydrocarbon producers in the United States. In 2013, we produced an average of 657,000 barrels of net oil-equivalent per day, or about one-fourth of the corporation's worldwide total.

Around half of this total however, came from offshore Gulf of Mexico operations, and around 30% was gas.

Still, at 177,000 barrels per day in 2013, Chevron is California's largest producer in net oil equivalent. Net daily production in 2013 averaged 162,000 barrels of crude oil, 69 million cubic feet of natural gas. Meanwhile, over in the Delaware Basin, Chevron is the largest acreage holder, with approximately 1.3 million total acres in West Texas and southeast New Mexico, although it only began drilling horizontal wells in 2012 and had three rigs running at the end of 2013.

In the Midland Basin, Chevron has more than 480,000 total acres at Wolfcamp, a tight oil development that is using vertical drilling and multistage fracture stimulation. These holdings included more than 1,300 wells that produce an average net daily oil equivalent of more than 20,000 barrels. Further, Chevron is a significant leaseholder in the Marcellus Shale and the Utica Shale; during 2013, Chevron's net daily production in these areas averaged approximately 220 million cubic feet of natural gas, and 70 development wells were drilled during the year. Seven exploratory wells were drilled across 345,000 total acres in the Utica Shale during 2013.

Chevron's Midcontinent production averaged 96,000 barrels of crude oil and 610 million cubic feet of natural gas during 2013. So, it cant's be said that Chevron doesn't have a position within the domestic market. However, Marathon's domestic assets would not only compliment Chevron's existing position within the U.S., but the additional acreage would allow Chevron to slash costs and achieve sector-leading margins. 

Better positioned
Marathon has several positions where Chevron has little or no exposure. The company's key U.S. plays are the Bakken, Oklahoma, and the Eagle Ford. In total, Marathon has 2.4 billion barrels of resources available to it and 4,500 well locations. 

But it's not just the location of these wells that is attractive. Marathon's experience within the region is among the highest. During 2013 the company was the U.S.' second fastest driller in terms of feet per day across all regions and the company's oil output is expected to have grown 30% by the end of 2014, from the level reported at the end of 2013. Additionally, the company's engineers have worked out that Marathon's internal rate of return for its wells located within the Eagle Ford will be in the region of 70%. 

The internal rate of return is the discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. A IRR of 70% suggests a payback period of only a year or two. 

Further, Marathon has multiple international assets, including offshore Africa, the Gulf of Mexico, and Iraqi Kurdistan. However, after the recent disposal of the company's North Sea assets, around 60% of the company's production is domestic, which essentially makes the company a domestic play. 

Foolish summary
With production reported at 483,000 barrels of oil equivalent per day at the end of 2013, if Chevron acquired Marathon, Chevron's production would rise just under 20%. But this is not the only plus point. With a current market cap of only $26.5 billion, Chevron could offer an almost 50% premium for Marathon and still be spending less than its yearly capex.

Nevertheless, I must say that this is only speculation and while Marathon and Chevron would make a cute (as well as profitable) couple, the two are not in negotiations at this point. 

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Rupert Hargreaves owns shares of Chevron. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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