Houston-based Marathon Oil Corp. (NYSE: MRO) plans to double its position in the South Texas Eagle Ford shale with the acquisition of assets from Hilcorp Resources Holdings LP for $3.5 billion in cash. Hilcorp Resources is a partnership between privately-held Hilcorp Energy Co., Houston, and private-equity company Kohlberg Kravis Roberts & Co. LP.

Marathon will acquire approximately 141,000 net acres (217,000 gross) primarily in Atascosa, Karnes, Gonzales and DeWitt counties in Texas, encompassing all three commodity windows, with the opportunity to acquire an additional 14,000 net acres through tag-along rights and other leasing. The assets are 90% operated with an average 65% working interest. Production is 7,000 net barrels of oil equivalent (17,000 gross; 80% liquids). Total net-risked resource potential is 400- to 500 million BOE with upside potential from additional downspacing and other stacked pay potential. Marathon reports the potential to book up to 100 million BOE of proved reserves by the end of 2011.

"Marathon has captured a top-five acreage position in the core of the premier resource play in the U.S. since first entering the Eagle Ford in November 2010. This transaction enhances our already strong North America position focused on unconventional, liquids-rich resource plays that provide low-risk, scalable and profitable growth," says Clarence P. Cazalot Jr., Marathon president and CEO. "This acquisition is consistent with our overall strategic shift to low-cost, repeatable projects."

In June 2010, KKR invested $400 million for a 40% interest in 100,000 Eagle Ford acres contributed by Hilcorp. Led by CEO, Jeff Hildebrand, Hilcorp is the largest producer of conventional oil in South Texas.

Pro forma and including other transactions set to close by year end, Marathon's Eagle Ford acreage position is expected to more than double to 285,000 net acres.

Ten additional wells have been drilled and are waiting on completion. Year-end production is estimated at 12,000 BOE per day net, going to 80,000 net BOE per day by 2016. Six rigs are currently operating on the assets with two dedicated hydraulic fracturing crews. The company estimates some 1,230 drilling locations, excluding dry-gas opportunities.

"This and other projects under development serve as a catalyst for Marathon to increase our projected upstream production growth to 5% to 7% on a compound average annual growth rate during the period 2010 to 2016," Cazalot adds.

Closing is expected by Nov. 1. The effective date is May 1.

Barclays Capital is financial advisor to Marathon. Baker Botts is legal advisor. Jefferies & Co. Inc. is financial advisor to Hilcorp Resources Holdings. Andrews Kurth LLP is legal advisor to Hilcorp. Simpson, Thacher & Bartlett LLP is legal advisor to KKR.

KeyBanc Capital Markets analyst Jack Aydin estimates, applying a value of $75,000 BOE per day to the 7,000 per day of production, the acreage value works out to approximately $21,100 per acre. "Either way, we think the value of this transaction is toward the high end of the market's expectations and considerably higher than other recent transactions in the play. We estimate the average price per net acre for 14 Eagle Ford transactions to be $12,772 per net acre."

Contact the editor, Steve Toon, at stoon@hartenergy.com.