Chevron and Marathon Oil: A Match Made in Heaven?

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. 

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.



Read/Post Comments (0) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2999340, ~/Articles/ArticleHandler.aspx, 9/23/2014 12:39:14 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement