CNOOC Ltd. (CEO), China's largest oil and gas exploration firm, has made an offer to buy Nexen (NXY) for $15.1 billion in equity and $4.3 billion in debt. Nexen's board of directors has accepted the offer and it now goes to the Canadian government for approval. Nexen has a diversified portfolio of oil and gas assets including shale gas in the Horn River Basin in British Columbia, oil sands in Alberta, shale gas in Poland, and offshore deepwater oil and gas exploration off the coast of West Africa, in the Gulf of Mexico, and in the North Sea off the British Coast. CNOOC is willing to pay 3 times trailing 12 month revenue and 5 times trailing EBITDA for Nexen. It is also paying 1.7 times book value for Nexen.
The company with a similar diversified asset portfolio is Marathon Oil (MRO). Marathon has shale assets in both the Eagle Ford and the Bakken. The company has a significant stake in the Athabasca Oil Sands Project and in in-situ oil sands leases in Alberta. It also has deepwater offshore assets off the coast of Angola in West Africa, in the Gulf of Mexico, off the coast of Indonesia, and in the North Sea off the coast of England and Norway. Marathon is also small enough to be acquired by another major oil company.
Marathon has a current equity valuation of $18.3 billion and long term debt of $4.7 billion for a total valuation of $23 billion. The company has trailing 12 month revenue of $14.8 billion. A similar valuation of 3 times revenue that CNOOC is willing to pay for Nexen would value Marathon at $44.4 billion. Marathon has a 12 month trailing EBITDA of $7 billion. A similar valuation to the Nexen acquisition of 5 times EBITDA would value Marathon at $35 billion. Finally, Marathon has a book value of $25 per share. A valuation of 1.7 times book value would value Marathon at $42.5 billion. Combining the three metrics would provide a potential takeover price for Marathon at a total valuation of $40.8 billion. This would equate to a per share stock price of $51 per share.
CNOOC was turned down in 2005 by the U.S. government in its unsuccessful attempt to acquire Unocal. Therefore the Chinese company may not want to bid for another American company in the near term. It is not clear that other major oil companies are willing to be as aggressive as CNOOC. And Nexen is willing to be acquired and there is no current indication Marathon is open to being acquired. Marathon was undervalued compared to Nexen before the CNOOC acquisition, now it is very undervalued compared to Nexen.