FuelFix Q&A: Marathon says Eagle Ford purchase worth the price

Houston-based Marathon Oil said this morning it will pay $3.5 billion to buy Hilcorp Resources’ Eagle Ford shale holdings, an investment that comes to nearly $25,000 per acre.

That may seem like a pretty steep price, but Marathon Chairman and CEO Clarence Cazalot says it’s not when you look more closely at the acreage. Cazalot, CFO Janet Clark and Executive Vice President of Upstream Dave Robert took a few minutes to talk to us this morning about the deal.

FuelFix: One would think Eagle Ford acres like those held by Hilcorp/KKR would be something many people were lined up for. How did Marathon get in on this deal?

Clarence Cazalot: We certainly have been on the lookout for opportunities in our key basins that we felt were a bit under the radar screen. The privately held companies in many cases hold those kinds of opportunities.

So it was recognized that Hilcorp had this very attractive position, and we began a dialogue with them some time ago. That evolved to our evaluation of the asset.

At some point in time other parties were brought into the process so they could be assured that indeed it was a competitive process. And in the end we prevailed.

So it really was proactive identification of the opportunity and then through relationships and dialog we were able to bring it to fruition.

FuelFix: The price tag seems to be a bit steep to some observers. KKR nearly tripled it $400 million investment in the partnership in just one year. How do you justify that to investors?

Cazalot: You’re exactly right about how KKR’s investment has grown since they came in, but we’ve seen several things happen since then.

A great deal of drilling has occurred since they entered and the play is much more significantly de-risked. There’s additional production history now in how these reservoirs perform.

We’ve seen oil prices at a higher level then when they entered as well . So I think there is much more comfort with the tremendous potential that the Eagle Ford has.

I would say that people who are opining on whether it’s pricy or not just because of a certain dollar price per acre, are taking a very naïve perspective. Not all acres out here are created equal. There’s a black oil trend, a volatile oil trend, a gas condensate trend, a dry gas trend. And every one of those has a very different set of economic results for the wells that are drilled. It is our belief that our acreage lies in the core of this trend where the economics are much better than other areas in part because of the higher liquids and higher pressures that lead to better recovery.

I’d also note that in the heart of trend in December there was a publicly traded company that was already a partner in all of this that made an additional investment in about 5,000 undeveloped acres at about $24,000 an acre. So it’s not unheard of. The people that know this area and know the trend see the value.

FuelFix: What have you seen in well results from adjacent leases to support the price?

Dave Roberts: Beyond that, I would say there’s this  7,000 barrels per day of production from the assets that we just acquired. So we have a history of 45 to 50 wells that have been drilled on the asset in these core areas. So we have a very strong confidence have brought into the most significant value portion of this play.

FuelFix: Do you have the needed rigs, frac crews and other services assets in place to meet your plans to ramp up activity?

Roberts: Along with the assets we bring in six drilling rigs that Hilcorp has contracted and, more importantly, two dedicated hydraulic fracturing crews. We currently have rigs in the play on our legacy acres, but expect that within 12 months of closing will have 20 rigs and probably an increase in the number or pressure pumping crews.

FuelFix: Does this deal affect the closing on the planned spin-off of the refining buisness from Marathon?

Cazalot: The spin-off is expected to occur on June 30. So with the closing of this in the fourth quarter, Nov. 1, there is no impact on the spin.

FuelFix: Marathon recently got out of the Marcellus Shale and seems to be shuffling its assets a bit. Does this deal mean the Eagle Ford will become your signature asset?

Roberts: First of all, we have been and will continue to be focused on liquid hydrocarbons. Seventy percent of our portfolio is oil. We’ve been bearish on gas, particularly in North America, for some time, and as a result have moved away from some of the positions like the one you talked about.

I will say we’ve retained gas upsides in our portfolio in some of the basins. And our significant position in Equatorial Guinea. But we are a liquids player.

To the other point, we do believe the Eagle Ford is the premiere unconventional play in the Uunited States. This will be the cornerstone asset we have in North America, but this in no way detracts from the outstanding assets we believe we have in the Bakken, in the Anadarko-Woodford in Oklahoma, an emerging play we have in Niobrara, and we certainly can’t forget our very strong position in the oil sands and the in situ plays in Canada.