Marathon Oil said Tuesday it agreed to buy Canada's Western Oil Sands for about $5.56 billion, giving the U.S. oil company a foothold in one of the world's most promising streams of new crude oil.
Houston-based Marathon -- which also posted a higher-than-expected second quarter profit -- has been looking for a partner in the Canadian oil sands for two years.
The deal initially gives Marathon only a modest stake in the oil sands region, but the company would become more of a substantial player as it steps up production.
Still, analysts said the deal is relatively cheap for Houston-based Marathon and other bidders may emerge.
"They paid a reasonable rate to get their name up there," said James Halloran, energy analyst with National City Private Client Group, which manages about $35 billion in assets.
"It gives them an entree into one of the last frontiers on the globe for the oil business. (Canada) has reduced political risk and it's a place where in the long run the major oil companies have got to be," he said.
The oil sands region of northern Alberta contains an estimated 174 billion barrels of recoverable oil, a resource second only to Saudi Arabia.
Working in the oil sands, is expensive and requires special equipment to turn the tar-like sludge -- called bitumen -- into usable fuel. But technical advances and high oil prices have lured a host of major companies to the region, and well more than $100 billion in projects are planned.
Marathon has plans to link the Canadian fields with its refining operations in the United States, many of which it is considering upgrading to run heavy, Canadian crude oil.
Chief Executive Clarence Cazalot said the company would be able to squeeze value out of the project from production through refining.
Marathon will pay about $3.6 billion in cash plus 34.3 million shares or securities exchangeable for shares. It will also assume about $650 million of debt.
The deal also requires Western to spin-off its subsidiary with interests in Iraq's Kurdistan region -- WesternZagros -- before the deal closes, Marathon said.
More Bidders Could Emerge
Western has a 20 percent stake in the massive Athabasca Oil Sands Project that is 60 percent owned by Royal Dutch Shell . Chevron owns the remaining stake.
They plan to boost output from the Northern Alberta operations to 770,000 barrels a day over the next several years, nearly quadrupling the current capacity of about 200,000 barrels a day.
Analysts had considered the other partners to be potential bidders for Western, which put itself up for sale in November as shareholders pressured the company due to its flagging stock price.
Mark Friesen, an analyst with FirstEnergy Capital, said another bidder may still emerge for the company. He had initially valued the firm to be worth about C$40 per share.
Marathon is paying around C$35.50 per Western share in the deal.
"There's a possibility of another bid," he said "It's not a done deal yet."
Andrew Potter, an analyst with UBS Securities wrote in a note that the break fee, amounting to a relatively light C$1.23 a share, may also encourage a rival offer.
Marathon said it would get access to proved mining reserves of 436 million barrels of bitumen through the deal and a total net resource of 2.6 billion barrels of bitumen that can be recovered through mining or "in situ" processing, which uses heat or solvents to remove the bitumen.
It would have immediate net production of 31,000 barrels per day of bitumen.
Western also owns a 20 percent stake in a property where Chevron is mulling a steam-driven oil sands project, and is exploring another steam project on lands it controls.
Between its share of AOSP's expected production and its other projects, the company said in a recent presentation that it expects to produce 200,000 barrels a day in about 15 years.
Currently only two oil sands producers, Syncrude Canada and Suncor Energy Inc. produce more than 200,000 bpd but a number of new projects planned for the region will produce at higher levels still.
Marathon earned $2.25 a share in the second quarter, beating out the average forecast of Wall Street analysts on strong profits from its refineries. Analysts had expected about $2.13 a share, according to Reuters Estimates.
The company said it would raise its capital spending budget, excluding acquisitions, to about $4.68 billion from $4.24 billion, mostly due to increased costs at its Alvheim/Vilje project in Norway, expansion at its Garyville refinery and cost inflation.
It is also boosting its stock buyback program by up to $2 billion.
Shares of Marathon Oil fell about 1.8 percent to $55.99 in afternoon trading on the New York Stock Exchange, while Western Oil Sands shares rose C$3.26 to C$37.39.