Big oil companies will just keep getting bigger

Exxon Mobil and Chevron, the largest U.S. hydrocarbon producers, picked their targets last year. On Wednesday, the third-largest producer by market value—ConocoPhillips—had its latest turn, agreeing to buy Marathon Oil in a deal that values its stock and debt at $22.5 billion. Once the deal closes, Conoco’s market value will edge closer to that of the French oil major, TotalEnergies.

The price tag itself is unremarkable, representing a 15% premium to Marathon’s own closing share price before the announcement. That is neither overly generous nor too cheap: Exxon paid an 18% premium on Pioneer Natural Resources’ undisturbed stock price, while Chevron agreed to pay a 4.9% premium for Hess.

What does stand out about the deal is that, despite its size, it isn’t exactly transformative for Conoco. For one, it doesn’t lengthen inventory life as Exxon did by buying Pioneer. Marathon’s is shorter than Conoco’s own, according to Andrew Dittmar, principal analyst at Enverus Intelligence Research. Secondly, acquiring Marathon doesn’t give Conoco substantial exposure to new frontiers, as Chevron would with Hess’s Guyana reserves. Marathon’s assets mostly align with Conoco’s own footprint.

There is, however, a lot for cash-focused investors to like: Marathon’s more mature asset base means it requires a lower level of reinvestment, according to a report from Citi. This means the deal should give Conoco a substantial free cash flow boost. The deal is expected to be immediately accretive to Conoco’s earnings per share. Conoco plans to increase its dividend by a third late this year, independent of the deal. If it closes, it plans to increase share repurchases by 40% to $7 billion in the first full year after closing.

The one area that could attract antitrust scrutiny is the companies’ Eagle Ford position. The two are set to become the largest operator in the Eagle Ford basin, accounting for about 20% of production there based on their gross operated volumes in the fourth quarter of 2023, according to Dittmar. Marathon’s asset base, however, is relatively spread out between different basins, and both Conoco and Marathon spun off their respective refining businesses—a more consolidated industry than oil production—about a decade ago.

The deal is something of a blow to Devon Energy, which has now lost both of its potential acquisition targets—Marathon Oil and CrownRock—to competitors. Of the 10 largest U.S. oil-and-gas producers by market capitalization, only three—EOG, Devon and Coterra Energy—haven’t been involved in deals since the bonanza kicked off in October 2023. About a dozen tie-ups have been announced since October, according to data from Enverus.

What this could mean is that remaining buyers will have to settle for companies with exposure to higher cost of production. As it is, Marathon’s average cost of production was higher than those seen on earlier Permian deals, Dittmar notes. Companies with more mature asset bases include Chord Energy and Magnolia Oil & Gas. As long as larger companies command higher multiples and pay in stock, it’s “not inconceivable” that such energy giants as Exxon or Chevron—after digesting their acquisitions—could aim for big targets again, said Dan Pickering, chief investment officer of Pickering Energy Partners.

“You could see larger companies like EOG and Devon becoming targets, not acquirers,” he said. The energy sector isn’t exactly popular, and the remaining investors continue to be choosy, favoring scale. An oil-and-gas stock index that is heavily weighted toward Exxon, Chevron and other large producers still commands a healthy premium over an index that more heavily weights smaller producers.

This game of musical chairs is far from over.

Write to Jinjoo Lee at jinjoo.lee@wsj.com