Shares of ConocoPhillips (COP +0.11%) tumbled this morning and were trading 3.5% lower as of 11:30 a.m. ET on Wednesday.
With several of its peers on a buying spree in recent months, today's big announcement from ConocoPhillips shouldn't have surprised investors. The oil and gas company is acquiring a peer in a multibillion-dollar deal and expects the acquisition to create long-term value for shareholders.
ConocoPhillips will acquire Marathon and announce a big dividend hike
ConocoPhillips will acquire Marathon Oil (MRO +0.00%) in an all-stock deal valued at $22.5 billion, including $5.4 billion of net debt. Marathon investors will receive 0.2550 shares of ConocoPhillips for each share they hold, representing a 14.7% premium to Marathon's closing price yesterday.
Management expects the acquisition to add more than two billion barrels to its inventory and significantly expand its footprint in key regions, including the Eagle Ford, Bakken, Delaware, and Permian basins.
Thanks to the two companies' overlapping operating regions, ConocoPhillips thinks it will save $500 million in costs within the first full year of the acquisition. It also expects the deal to be immediately accretive to its earnings and cash flows, boosting shareholder returns.
Management has consistently paid dividends and repurchased shares to boost shareholder returns. After the acquisition, it expects to raise its share repurchase program to more than $7 billion in the first full year, up from its previous target of $5 billion. The company further expects to repurchase stock worth $20 billion in the first three years after the acquisition.
It also plans to increase its dividend by 34% in the fourth quarter of 2024, a big raise compared to its 14% dividend increase in the 2023 fourth quarter. The stock currently yields 2.7%.
Is today's drop an opportunity to buy ConocoPhillips?
Marathon Oil has a strong portfolio of assets, has been a solid cash-flow generator, and has consistently paid dividends and repurchased shares over the years.
Investors in ConocoPhillips might be wary about the premium the company is paying and the debt it will acquire, but management typically acquires low-cost assets. Of late, it has also consistently stated how it will target acquisitions that fit with and improve its 10-year plan outlined last year.
That plan is focused on cash flows, with a target price of only around $35 per barrel to be breakeven on free cash flow. The Marathon acquisition should likely add value to ConocoPhillips and drive its share price higher in the long term.
