Is ConocoPhillips a mega-acquisition purchase?

The mega-merger of two major oil companies, as., was announced on Tuesday ConocoPhillips (NYSE:COP) has agreed to acquire Marathon Oil (NYSE:MRO) in an all-stock transaction valued at $22.5 billion. The acquisition is currently pending shareholder and regulatory approval.

This is the third major acquisition in the oil industry in the past year, as ExxonMobil (NYSE:XOM) bought Pioneer in October and Chevron (NYSE:CVX) acquired Hess.

Investors were somewhat cautious about the move, as ConocoPhillips shares fell 3.6% on Wednesday and Marathon shares rose nearly 9%.

‘Highly complementary’ acquisition.

The $22.5 billion deal includes $5.4 billion of Marathon debt. In return, Marathon shareholders will receive 0.2550 shares of ConocoPhillips common stock for each share of Marathon Oil common stock, representing a 14.7% premium over the May 28 closing price.

ConocoPhillips, the third-largest U.S. oil company after ExxonMobil and Chevron, sees a number of benefits from this deal. These benefits include “largely complementary acreage to ConocoPhillips’ existing onshore U.S. portfolio” – adding more than 2 billion barrels of resources in shale oil fields in Oklahoma, Texas, New Mexico and North Dakota.

“This acquisition of Marathon Oil further deepens our portfolio and fits our financial framework by adding high-quality, low-cost supplies adjacent to our leading position in the U.S. unconventional industry,” said Ryan Lance, president and CEO of ConocoPhillips.

The company expects the purchase to be “immediately accretive” to earnings, cash from operations, free cash flow and return of capital per share upon closing in the fourth quarter of 2024.

ConocoPhillips also anticipates savings of $500 million in cost and capital synergies in the first full year. Savings will result from lower general and administrative costs, lower operating costs and increased capital efficiency.

What does this mean for investors?

Investors will see ConocoPhillips’ dividend increase as a result of this deal, as the oil giant expects to increase its dividend by 34% to 78 cents per share once the deal closes. Lance also said that going forward, the company would aim for “top quartile dividend growth relative to the S&P 500 Index.”

The company also plans to repurchase $7 billion of stock in the first full year after the deal closes and $20 billion of stock in the first three years.

ConocoPhillips shares are down about 3% year to date, although they are up about 13% over the past year. Over the past 10 years, the company’s stock has posted an average annual return of just 3.7%.

Pre-deal analysts were optimistic about the company’s prospects, as evidenced by the median price target of $143 per share, which is 24% higher than the current price. Some big Wall Street firms also weighed in on Wednesday morning, including Citigroup Alastair Syme, according to MarketWatch.

“While other companies have focused on stocks and growth, this transaction is largely based on optimizing costs and approaches to the Eagle Ford and Bakken plays, maturing assets for both companies,” Syme wrote in a research note.

He also cited a significant increase in free cash flow as a plus.

At a reasonable valuation and expectations for a slight increase in oil prices in 2024, ConocoPhillips could be a solid play for some investors looking to diversify into energy stocks.

Reservation: All investments involve risk. This article should in no way be considered investment advice or constitute liability for investment profits or losses. The information contained in this report should not be used as a basis for making investment decisions. All investors must exercise due diligence and consult their investment advisors when making trading decisions.