The Wall Street Journal: Marathon Oil Seeks Canadian Deal

The Wall Street Journal: Marathon Oil Seeks Canadian Deal

By TINA PENG
August 1, 2007; Page A4

Marathon Oil Corp. offered to purchase Western Oil Sands Inc. for $5.45 billion, which would give the Houston company a foothold in Canada’s massive heavy-oil deposits and deepen the ties between the northern Alberta oil reserves and U.S. refineries.

The proposed deal is the latest example of growing production from Canada’s oil sands being sent by pipeline into the Midwest to be turned into gasoline for U.S. drivers.
 
It follows a deal last year between the U.S.’s ConocoPhillips and Canada’s EnCana Corp. to create a joint venture with oil sands and U.S. refining assets. Husky Energy Inc., based in Calgary, bought a refinery in Ohio earlier this year to turn gunky heavy oil into high-value transportation fuel.

Western Oil Sands’ primary asset is a 20% interest in the Athabasca Oil Sands Project, which is operated by Royal Dutch Shell PLC’s Canadian subsidiary. The Athabasca project is comprised of a facility outside Fort McMurray, Alberta, where oil-soaked sands are mined from the earth, and a processing unit near Edmonton.

Calgary-based Western Oil Sands generates about 31,000 barrels a day of crude oil, but that figure is expected to rise to more than 130,000 barrels a day by 2020 because of planned expansions. A subsidiary of Western Oil that operates in the Kurdish portion of Iraq will be spun off to current shareholders.

Marathon’s cash-and-stock offer represents a 4% premium for Western Oil Sands shareholders, based on the stock’s close Monday, potentially leaving the door open for other suitors.

Western shareholders will receive 3.8 billion Canadian dollars (US$3.6 billion) in cash and 34.3 million shares of Marathon common stock and securities. Marathon will assume Western’s debt, which was valued at $650 million at the end of June.

In 4 p.m. New York Stock Exchange composite trading, Marathon’s shares were down $1.80, or 3.2%, at $55.20. Western Oil Sands’ shares rose C$3.19, or 9.4%, on the Toronto Stock Exchange to C$37.32.

Analysts generally viewed the acquisition move favorably. “More companies are going to have to make additional acquisitions to replace their reserves and production or they’re going to have to shrink their companies dramatically,” said Ben Halliburton, chief investment officer of Tradition Capital Management in Summit, N.J.

Marathon said Western Oil owns about 2.6 billion barrels of crude in the ground, which, if mined at 2020 rates, would last almost 55 years.

Marathon also reported an 11.3% drop in second-quarter net income from a year earlier, when it recorded a large gain. Lower oil production, coupled with higher exploration costs and taxes, contributed to a 39% drop in exploration and production operating income to $400 million from $659 million.

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