This $22.5 billion oil company takeover could pay big dividends for investors

The wave of consolidation continues to wash over the oil patch. ExxonMobil kicked off the current M&A boom last year with its recently closed $60 billion deal for Pioneer Natural Resources.

Compete Chevron then the takeover happened Hess, what he hopes for close in the coming months. There have been several smaller deals in the sector, with oil companies teaming up to strengthen their position and reduce costs.

We will see the latest industry tie-up ConocoPhillips (NYSE: COP) acquire Marathon oil (NYSE:MRO) in a $22.5 billion all-stock transaction (which includes the assumption of $5.4 billion of Marathon’s net debt). The deal will create a world on a much larger scale and at lower costs oil and gas producer. The combined company will generate more free cash flow, which it hopes will return to investors in the form of a rapidly growing and significant dividend share repurchase program.

Digging into the contract

ConocoPhillips’ acquisition of Marathon Oil will significantly improve its position as a low-cost resource in the US. The transaction will add approximately 940,000 complementary acres to ConocoPhillips’ existing U.S. onshore position:

As this slide shows, much of the Marathon site is adjacent to ConocoPhillips’ existing position on three With the best American shale deposits. This will enable cost and capital synergies, creating savings of $500 million in the first year after the transaction.

It is estimated that the area contains over 2 billion barrels of resources cost of delivery below $30 a barrel. ConocoPhillips believes there are approximately 2,000 future drilling locations in the area and the possibility of using refraction in over 1,000 existing wells.

Marathon Oil produces approximately 390,000 barrels of oil and gas equivalent per day. This will increase ConocoPhillips’ production rate to approximately 2.3 million BOE/d, strengthening its position as the third largest producer in the US.

Low supply costs, cost savings and high production margins reinforce ConocoPhillips’ belief that the acquisition will have an immediate impact on its earnings, cash flow from operations, free cash flow and return of capital per share to investors.

Increasing the ability to return cash to shareholders

The highly dynamic nature of this acquisition should enable ConocoPhillips to return more cash to investors. It plans to provide shareholders with at least 30% of growing operating cash flow in the form of dividends and buybacks.

Management expects to increase its regular base dividend by 34% in the fourth quarter (even if it does not complete the Marathon transaction). It also aims to provide dividend increases for 25% of the world’s largest companies S&P500.

The story continues

Since resetting its dividend in 2016, ConocoPhillips has increased its payout by 132%. Growth in the fourth quarter will increase the dividend growth rate by over 200% since the reset. The higher rate gives ConocoPhillips a deemed forward dividend rate by 2.6%. That’s roughly double the S&P 500’s yield of 1.3%.

The company also says it intends to prioritize post-acquisition share repurchases, with plans to repurchase more than $7 billion in stock in the first full year after the deal (compared to more than $5 billion as a stand-alone company). It intends to repurchase more than $20 billion worth of stock in the first three years after the deal (if commodity prices cooperate).

This should allow it to redeem a number of shares equivalent to those it will issue to acquire Marathon over the next two to three years (it is paying approximately $17.5 billion in shares for the transaction).

Growth connection cash flow per share, top dividend growth and steady decline in share value issued shares should help drive long-term shareholder value.

Value-enhancing acquisition

This acquisition meets all the criteria: it is very dynamic, strengthens the company’s already strong position in the US and will generate value for shareholders. All of this makes ConocoPhillips an attractive oil resource that can be held for the long term.

Is it worth investing $1,000 in ConocoPhillips now?

Before you buy ConocoPhillips stock, consider the following:

The Motley Fool Stock Advisor a team of analysts have just identified what they think it is 10 best stocks for investors who could buy now… and ConocoPhillips wasn’t one of them. 10 stocks that made a cut could deliver monster returns in the coming years.

Consider when Nvidia created this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you would have $697,878!*

Stock advisor provides investors with an easy-to-follow blueprint for success, including portfolio-building tips, regular updates from analysts, and a selection of two new stocks each month. The Stock advisor the service has more than four times return of the S&P 500 since 2002*.

See 10 stocks »

*Stock Advisor returns from May 28, 2024

Matt DiLallo holds positions at Chevron and ConocoPhillips. The Motley Fool covers and recommends Chevron. The Motley Fool has a disclosure policy.

This $22.5 Billion Oil Company Acquisition Could Pay Big Dividends for Investors Originally published by The Motley Fool