"We estimate the transaction will dilute earnings per share by around 2 percent," Citigroup analyst Doug Leggate said in a note to investors Tuesday. "However, this deal is not about near-term earnings, but securing long-term growth."
In the deal, Marathon will give Western Oil Sands shareholders $3.6 billion in cash and 34.2 million shares of Marathon stock valued at $1.9 billion based on Marathon's closing share price on Monday of $57. Marathon also will assume $650 million in Western Oil Sands debt at closing, scheduled for the fourth quarter this year.
Marathon announced the acquisition alongside its second-quarter results, which showed net income of $1.55 billion, or $2.25 a share, down from $1.75 billion, or $2.40 a share in the same period of 2006. However, results exceeded year-ago net income of $1.52 billion, or $2.08 per share, excluding Marathon's one-time gain from its June 2006 sale of the company's Russian exploration and production businesses.
Either way, Marathon's results exceeded Wall Street expectations of $2.12 per share. Revenue fell to $16.9 billion from $18.3 billion.
Marathon shares fell $1.80, or 3 percent, to close at $55.20 Tuesday on the New York Stock Exchange.
Shell is the operator.
The project includes a mine that produces more than 155,000 barrels a day of bitumen, or oil-soaked sand. Bitumen turns into a sludgelike liquid after injected steam melts it. Then it can be pumped to the surface, diluted with water or synthetic oil, and transported via pipeline.
Also, Marathon will gain Western's stakes in two other oil sands projects in Alberta, including a 20 percent interest in a Chevron Canada-run Ells River operation. Combined, the three assets give Marathon a total net resource of 2.6 billion barrels of oil, the company said.
"This will increase our reserve production life from nine to 12 years," Clarence Cazalot, Marathon's president and CEO, told analysts Tuesday.
"This has been part of our strategy for a long time, an integrated approach around the Canadian oil sands," he said.
It also gives Marathon access to resources in a friendly country. While some nations are tightening foreign access to their resources, Canada is open to partners and acquisitions, said Fadel Gheit, an oil analyst with Oppenheimer & Co.
Second to Saudi Arabia
"The oil sands have been there forever," Gheit said. "What made them more attractive now is that there aren't too many huge resources accessible to oil companies."
In addition to Shell and Chevron, other international oil companies with oil sands operations include Exxon Mobil Corp., ConocoPhillips and Total.
The acquisition is contingent upon Western shareholder approval and regulatory approvals. Upon closing, Marathon will immediately get 31,000 barrels a day of bitumen that will increase to 130,000 barrels a day by 2020.
The project's production is taken by pipeline to an upgrader in Edmonton, Alberta, which converts it into a range of synthetic crudes, two-thirds of which is sold to North American refineries.
Marathon plans to construct a 28,000-barrel-a-day heavy oil coker and other process units at its Detroit refinery. The company is evaluating similar heavy oil processing projects at its refineries in St. Paul Park, Minn., Robinson, Ill., and Garyville, La.
Marathon is the nation's fifth-largest refiner and the largest refiner in the Midwest. Western Oil Sands has agreed to pay Marathon $200 million if the deal falls apart.
Marathon won't acquire Western's Kurdistan subsidiary, WesternZagros. Instead, Western will spin it off into a new company, WesternZagros Resources.
Marathon's deal differs from larger rival ConocoPhillips' entrance into the oil sands last year in that it's an outright acquisition. ConocoPhillips has two partnerships with Canada's EnCana Corp. that combined EnCana's oil sands production expertise with ConocoPhillips' refining capability.
In its quarterly earnings report, Marathon said exploration and production segment income was $400 million compared with $659 million in the year-ago period. Production available for sale fell about 2 percent to an average of 345,000 barrels of oil equivalent per day.
However, refining and marketing income was $1.2 billion, up from $917 million a year ago because of higher margins. The company refined an average of 1 million barrels of crude per day, up 34,000 barrels from the previous period.