Marathon's US$700 million Delaware bolt-on acquisition

On March 21, Marathon bought 21,000 net acres in the Delaware Basin for US$700 million from Black Mountain Oil & Gas and other private sellers. The deal comes soon after Marathon entered the Permian through a US$1.1 billion deal with BC Operating. Our analysis examine the deal and weigh the potential risks and benefits of expanding Marathon's acreage. 

We value the deal at US$549 million, a 22% discount to the consideration. The US$32,500 per acre price tag is also higher than other recent deals in the area. However, when combined with the BC Operating transaction, the aggregate cost to Marathon is US$22,000 per acre. This is on par with other deals in Eddy and Lea counties, namely ExxonMobil's recent acquisition, which was priced at roughly US$20,000 per acre.

Although the deal is expensive relative to other northern Delaware acquisitions, this is a sound, strategic move that helps Marathon build scale in the basin and bring some continuity to a fragmented acreage position. With the acquisition, Marathon will increase its position to 91,000 net acres in the Permian Basin, including 21,000 net acres spread across Eddy and Lea counties, New Mexico. The acreage is currently prospective for six shale intervals in the Wolfcamp Western Frontier and Bone Spring Western Fairway sub-plays, which have the lowest breakevens in the northern Delaware Basin. We also expect the number of potential long lateral locations to increase to 50%. 

The deal will ensure that Marathon's Permian position has adequate scale in the Northern Delaware, though the company expects incremental growth via additional trades and grassroots leasing. Marathon estimates it now holds almost 600 million boe of risked resource, and near 1.5 billion boe of total resource in the Permian.

However, building greater scale in the Delaware Basin does include risk, especially concerning service cost inflation. With the additional acreage and need for another rig, Marathon may be challenged to keep operating costs down as activity ramps up in the basin.

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