Is ConocoPhillips a buy after a major acquisition?

A major merger of two major oil companies was announced on Tuesday. ConocoPhillips (NYSE:COP) has agreed to acquire Marathon Oil (NYSE:MRO) in an all-stock deal valued at $22.5 billion. The acquisition is currently awaiting shareholder and regulatory approval.

This is the third major acquisition in the oil industry in the past year, following ExxonMobil (NYSE:XOM)’s acquisition of Pioneer and Chevron’s (NYSE:CVX) acquisition of Hess in October.

Investors were somewhat wary of the move, as shares of ConocoPhillips fell 3.6% on Wednesday while Marathon shares rose nearly 9%.

“Highly complementary” acquisitions

The $22.5 billion deal includes $5.4 billion in Marathon debt. In return, Marathon shareholders will receive 0.2550 shares of ConocoPhillips common stock for each Marathon Oil common stock, which is a 14.7% premium to the closing price on May 28.

ConocoPhillips, the third-largest U.S. oil company after ExxonMobil and Chevron, sees several benefits from the deal. These benefits include “highly complementary acreage to ConocoPhillips’ existing U.S. onshore portfolio,” adding more than 2 billion barrels of resources across shale fields in Oklahoma, Texas, New Mexico and North Dakota.

“This acquisition of Marathon Oil further deepens our portfolio, fits our financial framework, and adds high-quality, low-cost supply inventory in a leading non-traditional location in the U.S.,” said Ryan Lance, Chairman and CEO of ConocoPhillips.

The company expects the acquisition to be “immediately accretive” to its revenue, operating cash, free cash flow and return on equity per share upon completion in the fourth quarter of 2024.

ConocoPhillips also expects to achieve cost and capital synergy savings of $500 million in the first year. Savings result from reduced general and administrative expenses, lower operating expenses, and improved capital efficiency.

What does this mean for investors?

Investors will see ConocoPhillips’ dividend increase as a result of this transaction. That’s because ConocoPhillips expects to raise its dividend by 34% to 78 cents per share after the deal closes. Lance also said the company will target “top quartile dividend growth relative to the S&P 500 going forward.”

The company also plans to repurchase $7 billion worth of stock in the first year after closing and $20 billion worth of stock over the first three years.

ConocoPhillips stock is up about 13% over the past year but is down about 3% year to date. Over the past 10 years, the stock has returned an average of 3.7% per year.

Analysts were optimistic about the company’s prospects before the deal. This is evidenced by the median price target of $143 per share, which is 24% higher than the current price. Some large Wall Street firms also participated Wednesday morning, including Citigroup Alastair Syme, according to MarketWatch.

“While others have targeted inventory and growth, this transaction appears to mature the assets of both companies, primarily based on cost and approach optimization in the Eagle Ford and Bakken shales,” Syme wrote in a research note.

The significant increase in free cash flow was also cited as a positive point.

With a reasonable valuation and expectations of a slight rise in oil prices in 2024, ConocoPhillips could be a solid play for some investors looking to diversify into energy stocks.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.