Marathon pushes into oil sands with C$6.5B bid

Marathon Oil Corp., Houston, (NYSE: MRO) plans to acquire Western Oil Sands Inc., Calgary, (Toronto: WTO) in a deal valued at approximately C$6.5 billion (US$6.2 billion).

Western shareholders will receive C$35.50 per share for a total C$3.8 billion (US$3.6 billion) in cash and 34.3 million Marathon shares (and exchangeable securities) valued at C$2 billion (US$1.9 billion). Marathon will also assume C$700 million (US$650 million) of Western debt.

The price values the assets at US$2.38 per net bbl. of mineable bitumen and in-situ resource, according to Marathon.

The upstream assets feature a 20% interest in the 300,000-gross-acre Athabasca oil-sands project (AOSP) in Alberta, which includes the operating Muskeg River mine and the Scotford upgrader. Net production is approximately 31,000 bbl. of bitumen per day, increasing to 130,000 by 2020. Net proved reserves are 436 million bbl. of bitumen and a total net resource of approximately 2.6 billion bbl. of combined mined bitumen and in-situ recovery.

Marathon also will take ownership in both operated and nonoperated in-situ leases. The company will gain a 60% interest and operatorship in a 26,000-gross-acre project along with 20% working interest in 75,000 gross acres in the Ells River project operated by Chevron Corp., San Ramon, Calif. (NYSE: CVX). Collectively, these in-situ leases will add an estimated 600 million bbl. of net resources.

The AOSP joint venture also includes Shell Canada (operator, 60%) and Chevron Canada (20%).

The oil-sands mining operation encompasses the Muskeg River mine north of Fort McMurray, Alberta, and the Scotford upgrader near Edmonton, Alberta. The bitumen is then marketed to North American refineries or converted into vacuum-gas oil and sold under a long-term supply agreement.

The deal is contingent on Western spinning off its Kurdistan-based subsidiary WesternZagros prior to closing.

Marathon president and chief executive Clarence P. Cazalot Jr. says, "Marathon's strategically advantaged U.S. Midwest downstream business is well positioned to provide both near- and long-term solutions to maximize the value of these substantial bitumen resources. We are joining an ongoing and expanding project with strong partners, and collectively, we will be able to apply our technical and commercial skills to maximize both the recovery and value of these resources."

Deutsche Bank Securities Inc. is financial advisor to Marathon. The deal is expected to close in the fourth quarter.

Standard & Poor's Ratings Services has affirmed Marathon's BBB+ corporate credit rating. S&P credit analyst Ben Tsocanos says, "The ratings on Marathon reflect its satisfactory business-risk profile as an integrated oil and gas company with a large, geographically diverse reserve base of about 1.3 billion BOE-54% oil; 28% North American; nine-year reserve life at year-end 2006-a competitive refining and marketing business, and an intermediate financial profile."

He adds that the ratings also reflect the "highly volatile and cyclical nature of the oil and natural gas industry, operational inconsistency in Marathon's upstream operations in recent years, and management's tolerance for political and operating risk."

The stable outlook incorporates S&P's expectation that the company will maintain prudent capitalization (with debt to capitalization below 30%) while contending with large capital spending plans and share repurchases, he adds.