shodhganga thesis on merger and acquisition

ConocoPhillips And Marathon Oil Merger Is A Go... More Long-Term Value Creation

• Absorbing Marathon Oil Corporation into ConocoPhillips produces many operational synergies to improve profitability out of the Eagle Ford and Bakken basins. These basins hold significant refrac potential.
• Marathon investors got a slight bump in valuation through the acquisition but probably not enough to feel satisfied.
• Marathon investors will still benefit through increased dividends, increased share price stability and more efficient operations moving forward.
• The real value for Marathon investors is participation in ConocoPhillips' Willow Project.

JOmcreative/iStock via Getty Images

On August 29th, the acquisition of Marathon Oil Corporation ( NYSE: MRO ) by ConocoPhillips ( NYSE: COP ) was approved by shareholders . The vote cements what is a very attractive and operationally efficient deal for COP. I believe ConocoPhillips' larger size can help optimize MRO's refrac program to extract even more value.

MRO investors may feel like they did not get quite the premium they hoped for considering the historically low valuation of the company. These investors get a few smaller near-term boosts, but I believe the long-term potential lies in future ownership of COP's Willow Project.

The additional cash flows from the MRO assets allow COP to increase its annual share repurchase target from $5 billion to $7 billion. This allows COP to retire roughly 20% of the outstanding shares before the Willow Project enters operation. This project is expected to produce 180,000 barrels of oil per day and is roughly equivalent to the entire MRO portfolio.

I believe participation in this project allows Marathon Oil Corporation investors to realize more robust long-term gains.

Revisiting The Deal

Before we get too ahead of ourselves, let's refresh ourselves on the details of the deal.

This deal made a ton of sense from an operational standpoint. Two neighbors essentially joined forces to allow for more efficient operations in the Bakken and Eagle Ford basins. This significantly adds to COP's inventory depth in both basins, but only sparsely adds to COP's Permian footprint.

MRO + COP Operational Map (COP Investor Presentation)

Due to the lack of continuous acreage in the Delaware basin, management has indicated these new assets will most likely be used as trade chips to help bolster its core holdings in Reeve's county and southern New Mexico.

Andrew O'Brien - (COP) SVP Strategy - MRO Transaction Announcement

Marathon's acreage will also provide us more opportunities to core up for longer lateral development via swaps and trades, which is something that we do every day.

While operationally this deal appears to be an opportunity for both COP and MRO shareholders, the value of the deal has ruffled a few feathers in the MRO camp. MRO shareholder Martin Siegel filed a lawsuit on August 12th in an attempt to block the merger, claiming that the MRO valuation of $17 billion is significantly undervalued.

This thought process follows the thesis I outlined in my previous coverage of MRO in March, titled; Marathon Oil: The Price Is Right . In that article, I detailed how MRO was trading discounted to just about every other major oil company by multiple valuation metrics. So, I get where Mr. Siegel is coming from, as I felt the shares were improperly priced.

Since the merger announcement , the share price has appreciated up to the deal value, giving investors a 17% gain for those who bought in at that time of my previous analysis. This has allowed the company's EV-to-EBITDA ratio to creep up from 4.3x to 4.7x, partially closing the gap with its comparable market cap peers.

Do The MRO Investors Have A Valid Complaint?

The numbers don't lie, MRO is cheaper than a lot of the other investment options in the oil patch. However, this is mainly associated with its lack of Permian production. Production out of the Permian is what investors want and are willing to pay a premium for it.

In many ways, this is illogical. If company A and company B can make the same rates of returns in two different basins, they should be worth the same (at least in theory). However, we are all familiar that life isn't fair, and rarely do we all act logically. Thus, the cash generated by MRO is deemed to be of lesser quality than its Permian peers.

With its multi-basin approach, COP apparently does not have such restrictive views on the oil market and jumped at the opportunity to add MRO into the fold. The deal allegedly only took a few weeks to develop.

In the end, I think COP got a fantastic deal. MRO investors only got a small boost in value for their position as well as a slightly better dividend in the short term. However, I think COP's larger size will help unlock the value of MRO's acreage at an accelerated rate.

Now let's flip our perspective by sitting at the COP side of the table.

Refracs, Refracs, and More Refracs

Based on the operational maps provided earlier, it's pretty easy to conclude that COP did not buy MRO for its Permian acreage. Its land is too small and sparse to efficiently operate multiple rigs and frac crews.

The upside from MRO's portfolio is its potential for refracs in both the Bakken and Eagle Ford. Both of these basins participated in the original wave of the shale revolution and were mainly developed a decade ago. Since then, completion designs and technology have advanced significantly allowing operators the optionality to go back into older wells, re-stimulate and boost production.

Ryan Lance, COP CEO, gave a description of his vision of refracs in the MRO portfolio during the merger conference call .

we're heading into a period of what I'd call, kind of shale 2.0, which -- it's more about using technology and efficiencies, data analytics and some of the refrac potential that we can get into I'm sure on the call in a little bit, that we see that allows us to extend some Tier 1 inventory, both in the Eagle Ford and the Bakken

Given the sheer size of COP compared to MRO, there should be significantly larger financial resources to invest in refrac R&D to make this technique even more effective over the long run.

Nicholas Olds, COP, EVP of Lower 48, outlined the historical performance of COP's existing refrac program:

we have a long history, as you're aware of, with doing refracs, specifically in Eagle Ford, over 5-plus years and where we see roughly a 60% uplift in expected ultimate recovery. And then we continue to test newer refrac techniques and expand that across the entire Eagle Ford portfolio. And what that is leading to, Roger, is expanding that inventory in our own company. We see very promising opportunity to expand that to Marathon.

Andrew O'Brien, COP, SVP of Strategy also indicated the sheer inventory of refrac candidates in the Marathon portfolio.

In fact, based on our detailed analysis, we believe that Marathon has over 1,000 refrac locations in this Eagle Ford acreage. All totaled, we see over a decade of runway in the Eagle Ford.

ConocoPhillips Is The Bigger Version of MRO

MRO investors may still be feeling a little miffed. However, the existing state of affairs doesn't really change after becoming a COP shareholder. COP trades at a steep discount to its larger peers Exxon Mobil Corporation ( XOM ) and Chevron Corporation ( CVX ).

COP also returns cash to shareholders similarly to MRO. Investors will get a small boost in yield as COP's dividend yields about 2.75%, however, the main form of return is share buybacks. Before the merger, COP committed to buying back $5 billion in stock during 2024. This enables the company to monetize the cheaper valuation of COP's stock.

The major difference for MRO investors is that they will enjoy improved share price stability. COP's beta since the beginning of 2022 has averaged 0.372 which points to trading behaviors that are largely uninfluenced by the day-to-day fluctuations in the market. This is less than half of MRO's beta during the same period.

To me, COP suffers from some of the same reasons why MRO was treated with a lower valuation than many other companies.

1. It's not a household name in the same way that Exxon Mobil and Chevron are.

2. Its domestic portfolio is not 100% focused on the Permian.

3. It lacks any big splash offshore projects like Guyana.

This causes COP to trade more in line with smaller companies, often not recognizing the benefits of COP's scale.

As a result of this undervaluation, the bulk of the company's cash returns to shareholders is in the form of stock buybacks. When the MRO transaction closes in the 4th quarter, the company plans to increase its annual stock repurchase budget from $5 million to $7 million. This supports the company's goal to retire the newly issued shares for the merger in just three years.

In the near term, COP will be accelerating its share repurchase program through the end of 2024 to meet its stated goals. COP has been restricted from buying back shares since May 29th, until the shareholder vote was completed. Now that this covenant has been lifted, I expect the rapid increase in buyback frequency will provide near-term support for the stock.

In the Q2 conference call the CFO provided the following guidance for buybacks through the end of the year.

Once the Marathon shareholder votes complete, you should expect us to be leaning into buybacks. And we think that's really important because we've consistently been one of our largest buyers of stock every quarter. And you can run the math on that. It's pretty straightforward. That's at least $3 billion of buybacks that you should expect in the -- through the third and fourth quarter.

Should MRO Investors Stay On Board?

The COP transaction is not a monumental shift for long-time MRO investors. The move modestly improves the yield by about 1% and also provides for a more stable investment. Over the long haul, COP has the financial resources to accelerate the development of the current MRO acreage.

MRO investors also get the opportunity to participate in COP's Willow Project in Alaska, which is projected to produce 180,000 barrels of oil at peak production. This project's capacity is nearly equivalent to the entire production of the current MRO portfolio and is a significant needle mover for COP. However, this project will not be complete until 2029.

The heavy share repurchase activity projected by COP stands to meaningfully reduce the total share count by the time this project enters service. Therefore, I believe MRO investors will be rewarded for their continued long-term patience. At the state's pace of $7 billion in annual share repurchases, roughly 20% of the outstanding shares (including those to be issued to MRO) could be retired before Willow entered service.

At that time, production (and profitability) should show a step change upward against a declining share count.

COP Alaskan Operational Map (ConocoPhillips)

As with any energy company, the stock's performance and risks are closely tied to commodity prices. However, I believe COP's size helps dampen some extreme price swings that MRO investors have experienced in the past. This is shown by the difference in the two companies' beta performance.

The flip side to COP's size advantage is the capital risk associated with large projects such as Willow. With a total capital budget of $11-$11.5 billion located in the National Petroleum Reserve, political and governmental changes could severely affect the timeline and budget of this project.

I also expect that COP will find difficulty developing multiple expansion until this project is closer to completion and develops more certainty.

Key Takeaways

1. Absorbing MRO into COP produces many operational synergies to improve profitability out of the Eagle Ford and Bakken basins.

2. MRO investors got a slight bump in valuation through the acquisition but probably not enough to feel satisfied.

3. MRO investors will still benefit through increased dividends, increased share price stability, and more efficient operations moving forward.

4. COP's Willow Project provides large upside for those that are willing to wait for the project to come online. The target rate of $7 billion in annual share repurchases stands to retire roughly 20% of the outstanding shares before Willow comes online.

This article was written by

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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A Dissertation Report On Merger and Acquisition in India

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Ikechukwu Acha

Azeem ahmad khan

In this paper, the researcher studies the Impact of Mergers on Shareholders Wealth in the Indian banking industry. The sample comprised of five mergers in the Indian banking sector; the mergers taking place from 20, Nov 2002 to 19 May 2010. All the Targets and Acquiring banks are traded on the BSE 500. In order to find out the impact of Mergers on the shareholder's wealth the researchers used the Standard Risk Adjusted Event Methodology. After testing, the study showed that the expectations of shareholders of Target and Bidder banks to avail the excess return could not be realized with public information and they were unable to earn abnormal return neither before nor after the announcement of M&A's. The announcement of merger for both the bidder and the target is statistically insignificant and economically relevant.

Sony Parackal

Consolidation of banks through mergers and acquisitions is an important force of change taking place in the Indian banking sector. The present work investigates the fairness of valuation in bank merger deals occurred in the post-liberalization India. In contrast to the firm valuation which gives an absolute value, merger valuation is a relative valuation which is very important for both bidder and target banks. In other words, the exchange ratios fixed in the deals are very crucial as it will have a major impact on the future prospects of the acquiring bank. To check the authenticity or fairness of valuation, the study uses contribution analysis in two different ways. When the absolute ratios are considered, the deals appear more favourable to the targets as the deal values were very higher to their market capitalization. However, the study finds that target banks got underpaid and the significant increase in the share prices of target banks around the merger announcement cannot be attributed to the valuation aspects. The study is completely based on the financials of banks at the time of merger and other factors including the strategic benefits to both bidder and target banks are ignored.

International Journal of Financial Services Management

Rudra Sensarma

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