Marathon Outperforms in Third Quarter, Doubles Its Eagle Ford Footprint

Marathon (MRO) delivered 352 mboe/d in the third quarter, topping the high end of guidance. There was no change to the full-year volume outlook, though the budget was raised by $100 million to account for ongoing inflationary pressures (unlike most peers, Marathon did not raise the budget after the second quarter, so the increase now is not too surprising). We intend to incorporate the firm’s results shortly, but after this first look, our fair value estimate is unchanged.

The firm also announced the acquisition of the assets of Ensign Natural Resources, which will almost double its Eagle Ford acreage, increasing its footprint to 290,000 net acres from 160,000. The high working interest of the Ensign assets will raise Marathon’s average Eagle Ford stake to 80% from about 70% previously. The acquired assets will also add about 67 mboe/d to Marathon’s current Eagle Ford output of 86 mboe/d, starting in the fourth quarter (the effective date is Oct. 1). And it will add about 600 potential drilling opportunities to the firm’s inventory queue, although the acquired acreage is located southeast of Marathon’s current holdings, where the gas mix is considerably higher. Management will prioritize the condensate-rich locations first. The total consideration was $3 billion, all cash, and partially funded by issuing new debt. We estimate the 67 mboe/d production stream is worth about $1.4 billion, which theoretically leaves $1.6 billion for the incremental drilling opportunities (over $2 million per drilling location, which strikes us as rich for gas and condensate acreage). The firm also highlighted refracking opportunities related to the existing wells, which were mainly drilled prior to 2016.