Marathon Oil Corporation (MRO) inked a $10 million deal with a private company, Denali Oil & Gas, by which the former will entry into the Eagle Ford Shale of South Texas. This deal is a part of Marathon’s strategy of expanding its asset base.

As per the terms of the agreement, Marathon will acquire approximately 17,000 net acres of land in the Eagle Ford Shale formation in Wilson and Atascosa counties from Houston-based Denali. Marathon has also agreed to drill and complete four wells.

In addition to the above transaction, there is an option under which Marathon can buy the remaining 58,000 net acres of Denali in the Eagle Ford Shale in the aforesaid two counties. This brings the total cost of 75,000 net acres of land to $209 million or approximately $2,800 per acre. The option is valid through October 31, 2011.

However, in a situation where Marathon fails to exercise its option, Denali can divest the remaining 58,000 acres to Marathon for $92 million or approximately $1,225 per acre. Denali has time until November 15, 2011, or 15 days after the completion of the final well drilled by Marathon, whichever is later, to exercise this option.

Eagle Ford Shale is an arena holding large quantities of abundant oil and natural gas reserves and currently represents the hottest destination for several energy companies. Oil giants such as ConocoPhillips (COP), BP Plc (BP) and EOG Resources (EOG) have taken positions in this region.

Leading integrated oil and gas company, Marathon has a large and geographically-diverse reserve base along with an array of strong development projects, targeting a high production growth in the coming years.

Considering the unstable commodity price outlook and an unfavorable macro backdrop, we expect the company to perform in line with its peers. We maintain our long-term Neutral rating on the stock.

Marathon currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

 
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