Marathon Oil Builds Stack Position Higher With PayRock Deal

Marathon Oil Corp. (NYSE: MRO) has expanded its position in the Stack Play to roughly 200,000 net surface acres following a deal to acquire acreage from EnCap’s PayRock Energy Holdings LLC.

Houston’s Marathon Oil said June 20 it signed a definitive agreement to acquire PayRock, which holds about 61,000 net Stack acres, for $888 million. The purchase comes just months after Marathon jettisoned nearly $1 billion worth of noncore assets.

Marathon’s Stack acquisition has an implied acreage value of $11,800 per acre adjusting for proved developed producing reserves, the company said.

PayRock’s acreage, located in the oil window of the Anadarko Basin Stack Play in Oklahoma, has current production of 9,000 net barrels of oil equivalent per day (boe/d). The properties have 700 MMboe total resource potential from increased well density in the Meramec and Woodford, as well as Osage development.

PayRock most recently said it was targeting Stack wells in Canadian and Kingfisher counties, Okla., according to its website. Payrock is headed by president and CEO Rick Kirby, formerly vice president of operations for SandRidge Energy Inc. Several members of the company also have ties to SandRidge.

EnCap has sponsored the company since 2012, when it began working to acquire and develop resources in Oklahoma and Kansas.

Marathon said completed well costs in the Meramec range between $4 million and $4.5 million and offer 60% to 80% internal rate of returns at $50 West Texas Intermediate before taxes.

Marathon gave no indication it would raise capex and expects its 2016 capital program on the acquired acreage to be “covered” within the company’s current $1.4 billion budget, said Lee Tillman, president and CEO.

Pro forma for the acquisition, Marathon Oil will hold about 200,000 net surface acres in the Stack Play with more than 1 Bboe 2P resource.

The company anticipates a minimum four-rig drilling program within its pro forma Stack position in 2017. Four rigs will achieve leasehold drilling requirements while accelerating delineation work, Tillman said.

The transaction is expected to close in third-quarter 2016, funded with cash on hand, subject to customary closing conditions.

“The recent moves we’ve taken to strengthen the company’s balance sheet, including the successful execution above the top end of our noncore asset divestiture target, have positioned us to be opportunistic to acquire what is an excellent strategic fit,” Tillman said in a statement.

In April, Marathon Oil announced sale agreements of certain noncore assets for $950 million, bringing the total to about $1.3 billion since 2015.

In the largest transaction, Merit Energy agreed to purchase Marathon’s Wyoming upstream and midstream assets for $870 million, excluding closing adjustments. The sale has an effective date of Jan. 1, and is expected to close mid-year 2016.

In separate transactions, the company signed agreements to sell its 10% working interest in the outside-operated Shenandoah discovery in the Gulf of Mexico, operated natural gas assets in the Piceance basin in Colorado and certain undeveloped acreage in West Texas for a combined total of about $80 million.

“As we move forward, while we're not providing a new target or timeline, our noncore asset sales program will continue to be an integral part of our business model. We will keep testing each and every asset for its fit and competitiveness within our portfolio,” Tillman said during a June 20 conference call.

Jefferies acted as sole financial adviser to PayRock Energy.

Emily Moser can be reached at emoser@hartenergy.com.

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