Why ConocoPhillips' $17B Marathon Oil deal is 'a surprise'

ConocoPhillips (COP) is set to acquire Marathon Oil (MRO) in an all-stock deal valued at $17.1 billion. Tortoise Portfolio Manager Rob Thummel joins the Morning Brief to explain why this acquisition has come as "a surprise."

Thummel commends Marathon Oil's management team, stating that they "have really done a great job of being capital disciplined." This disciplined approach has resulted in a high free cash flow yield, which Thummel believes will be one of the most significant benefits to ConocoPhillips through this acquisition. However, Thummel describes Marathon Oil's actual assets as "good, not great."

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This post was written by Angel Smith

Video transcript

All right, another transaction we're tracking here this morning, Anglo American officially rejecting BHPS request to extend the deadline for talks on its $49 billion takeover offer here.

I mean, just wanna get your reaction on this rejection here and what the signal is next.

Yeah, I'm not familiar with that transaction but, but I can tell you there's a lot of transactions going in the mineral space, in the, in the oil and gas space.

Uh and, and, and obviously, valuation is always probably the biggest hurdle when it, when it comes to a lot of these transactions.

So, so that's probably the biggest driver of, of, of what what's causing this, the uh potential disruption of this transaction.

All right, let's talk about Conocophillips because that's the other big deal that we're talking about within the space.

Conocophillips and uh Marathon Petroleum, the merger there.

Talk to me just about one, what this is going to do to Conocophillips business here and then two just what this tells us just about further consolidation, kind of go on what you were just talking about there before, but further consolidation within this space and the likelihood that this might remain a theme here for at least a quarters to come.

Yeah.

So this is a bit of a surprise.

And, uh, and I would say the reason and what I mean by that is, I don't think anybody probably had marathon oil being acquired by Conocophillips.

Um, and, but, but when you look at it, uh, it does make some sense.

So if you look at the marathon oil assets, they're good.

They're not great.

But the management has really done a great job of the capital discipline and what that's resulted in a is in a really high free cash flow yield from marathon oil.

So marathon oil actually has one of the highest free cash flow yields in the oil and gas space.

Um So that's a bit attractive or that is attractive to somebody and, and obviously, Conco Phillis is, is, has found it the most attractive at this point.

So when you merge these assets together, what, what Conocophillips gets is some good assets in, in uh you know, across the Bakken in North Dakota, across the Permian and the Eagle Ford in, in, in Texas.

But it gets a lot of free cash flow that it, that then uh can redeploy.

And I think what, what kind of has done to Ryan Lance and the management have done?

They've been really, really good at allocating capital.

And so now they're just getting more cash to allocate whether that's to shareholders or, or to future acquisitions.

Um, they, they've done a really, really good job of allocating capital and this just gives them more capital to allocate in the future.

Is this likely to, uh, receive much regulatory scrutiny?

Do you think?

I think these all, all, all of these do?

Right.

But I, but I do think obviously less, it'll, it's a less, uh, less notoriety than a pioneer transaction or even a transaction.

But yes, it will go through the same process and uh and, and I, and I'm sure we'll, we'll go through the same uh rigor that all of these transactions have gone through at the FTC.

Really over the last three or four years, Rob Del Torres portfolio manager and managing director.

Thanks so much for taking the time here this morning, Rob.

I appreciate it.

Thank you.