In a US$3.5 billion deal to buy Hilcorp Resources Eagle Ford acreage Marathon reaffirms the critically important role of onshore North American operations in the future growth plans of the International Oil Companies (IOCs). The transaction will add 141,000 net acres to Marathon's position in the play. The company reported that it will operate 90% of the acreage and will hold, on average, a 65% working interest.
As is true for all of the IOCs shifting capital into the North American unconventional plays, Marathon's growth targets from the new acreage are aggressive: increase net production from 7 Mboe/d currently to 80 Mboe/d by 2016. Current output is 80% liquids and the company reports that the majority of the acreage is in the liquids-weighted windows (29% in the Condensate window and almost 55% in the oil window).
Reflecting competitive pressures confronting companies looking to build in the play and the high liquids content of potential reserves, Marathon has paid dearly for the acreage (US$24,823 per acre). The per acre cost of the Marathon/Hilcorp deal is shown in the attached chart along with 16 other deals:
Based on GES model results, Marathon requires a mid-cycle price environment roughly equivalent to our mid-case of $50 WTI and $6.50 Henry Hub to yield an after-tax return consistent with 10%. Marathon reported that it expects the assets to be self-funding by 2014 -- a result that appears to be based on $95 WTI and $5 Henry Hub pricing. This, again, is consistent with GES model results under our mid-case price scenario.
The very high price paid for this acreage reflects intense competition driven by high oil prices and the pressures that are building due to the broad-based consensus IOC strategy to re-enter North American upstream through unconventional plays and very large amount of IOC capital that is consequently being shifted into these plays. The risk should be clear. The price being paid for acreage and the rush by a very large number of companies in North American unconventional plays reflects a growing belief that oil prices will remain high (if not increase further) and a risky reality: sustained high oil prices are necessary if the deals are to make sense.
The big winner in the Marathon/Hilcorp deal is Kohlberg Kravis Roberts & Co. (KKR). In mid-June 2010 KKR bought into Hilcorp's Eagle Ford acreage in a US$400 million deal that gave KKR a 40% interest in a partnership holding 100,000 net acres (US$4,000 per acre). The goal of this partnership was to exploit Hilcorp's acreage and to look for opportunities to expand on the initial position. As part of the Marathon deal KKR will exit its investment in Hilcorp, receiving a hefty US$1.13 billion return on its brief investment.