Marathon to snap up Oklahoma driller for $888 million

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Marathon Oil Corp. is planning to spend nearly $1 billion on a company with a foothold in what analysts believe is the hottest new U.S. play for horizontal drilling.

The Houston oil company’s $888 million deal for a private equity-backed firm is a grab for land in Oklahoma’s Stack play, where another Houston area company, Newfield Exploration, last month agreed bought land for $470 million.

“It’s getting attacked for the first time from a horizontal perspective and it has surprised the hack out of everyone with how productive it has been,” said Mike Kelly, an analyst at Seaport Global Securities. “They’ve amassed enough data to get comfortable in that acreage.”

The purchase is also part of another industry trend. Oil companies are trying to get bigger to maximize profits as crude prices rise. Range Resources’ recent $3.3 billion purchase of Houston’s Memorial Resource Development Corp is another example.

Marathon CEO Lee Tillman told investors the company would ratchet up drilling activity if crude prices held above $50 a barrel for a while, and the Oklahoma oil region is profitable enough that it can compete for capital against Marathon’s other oil plays.

“We see very compelling economics,” Tillman said in a conference call Monday.

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The Houston oil producer is paying for PayRock Energy Holdings, owned by Houston private equity firm EnCap Investments, with cash on hand, and believes it could run four rigs in the region by 2017.

The vast majority of the land tied up in the deal is in the oil window of Oklahoma’s Sooner Trend Anadarko Basin Canadian and Kingfisher Counties, or STACK play. It is producing 9,000 barrels of oil equivalent a day, more than doubling Marathon’s output in the region.

All told, Marathon will hold more than 200,000 acres in the Oklahoma play and more than 1 billion barrels of oil equivalent locked underground. It’s about $11,800 an acre.

RELATED: EIA revises Oklahoma oil production up 100,000 barrels a day