Big oil shareholders could get a lot richer

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Big oil just got bigger, and shareholders could soon be getting richer.

ConocoPhillips said on Wednesday that it would buy Marathon Oil in a whopping all-stock deal worth $22.5 billion, including about $5.4 billion of debt.

That’s a big number, and about a 15% premium over what Marathon’s (MRO) stock was worth when it closed on Tuesday at $26.45.

Shares of Marathon surged on the news, and closed nearly 8.5% higher on Wednesday. ConocoPhillips (COP), meanwhile, fell by about 3%.

Still, some analysts say that ConocoPhillips investors could end up ahead.

What’s happening: As part of the deal, ConocoPhillips announced that it would buy out Marathon shareholders, giving them about 0.255 of COP common stock for every share of Marathon.

That $17 billion (without the debt) sounds like a big number, Stewart Glickman, senior equity analyst at CFRA, told Before the Bell. “But in the grand scheme of things,” he said, “it’s really not that huge.”

Overall, there will be about 152 million new shares of ConocoPhillips issued, which amounts to about 13% of the company’s existing share base.

If the purchase did nothing for the ConocoPhillips’ bottom line, it would dilute their earnings, but that’s highly unlikely. The company said in a release that it expects the merger to immediately boost earnings, cash flow and return of capital per share.

The deal would also send the company’s crude production higher by 31%, based on first-quarter levels, said Stewart.

ConocoPhillips said it was targeting savings worth $500 million within the first full year of the transaction closing, which is expected in the fourth quarter of 2024 pending the approval of Marathon shareholders and regulators.

The company also expects to repurchase $7 billion in shares in the first full year, and over $20 billion in the first three years. That would more than offset the new shares to be issued in the deal.

Separately, ConocoPhillips said it plans to increase its quarterly dividend by 34% in the last quarter of 2024.

An environment for deals: Wednesday’s announcement follows a wave of consolidation in the energy sector.

The merger follows ExxonMobil’s (XOM) $60 billion purchase of Pioneer earlier this month and Chevron’s (CVX) takeover of Hess for $53 billion, which was approved by shareholders this week. It also comes after Occidental’s purchase of CrownRock last December and Diamondback Energy’s acquiring of Endeavor Energy Partners this March in multibillion-dollar cash-and-stock deals.

This slew of mergers and acquisitions, said Stewart, are happening because energy companies aren’t interested in spending loads of money to grow organically.

It’s cheaper to buy someone else’s portfolio than to spend money on exploring and drilling on new land.

“Investors are not fond of that at the moment… everybody has gotten accustomed to buybacks and dividends as a great destination for operating cash flow,” said Stewart.

He estimates big oil companies are spending about half of what they were 10 years ago on capital expenditures. That means that companies are growing by “buying out somebody else and using share capital to make that purchase.”

This merger, he said, is emblematic of just that – an appeal to shareholders.

McDonald’s: Our prices haven’t risen as much as you think

McDonald’s has a message for America: Rumors of Big Mac inflation are greatly exaggerated.

“Recently, we have seen viral social posts and poorly sourced reports that McDonald’s has raised prices significantly beyond inflationary rates. This is inaccurate,” Joe Erlinger, president of McDonald’s USA, wrote in an open letter posted to the company’s website on Wednesday.

“The average price of a Big Mac in the U.S. was $4.39 in 2019,” he said. “Despite a global pandemic and historic rises in supply chain costs, wages and other inflationary pressures in the years that followed, the average cost is now $5.29. That’s an increase of 21% (not 100%).”

What Erlinger wants customers to know is not that high-priced McDonald’s burgers don’t exist at all. He just wants them to know that the burgers that have been cited as proof of radically higher prices are not the norm, reports my colleague Danielle Wiener-Bronner.

“It frustrates and worries me, and many of our franchisees, when I hear about an $18 Big Mac meal being sold — even if it was at one location in the U.S. out of more than 13,700,” he said. “More worrying, though, is when people believe that this is the rule and not the exception, or when folks start to suggest that the prices of a Big Mac have risen 100% since 2019.”

Online, people have been airing their fast food price grievances. But they’re not just griping: Customers are pulling back on spending, too. Diners, frustrated by higher prices, are not going out to eat as often and spending less when they do, causing fast food sales to slow and traffic to dip.

Erlinger is fighting back because McDonald’s pricey burgers have become something of a symbol of elevated fast food prices. And being seen as overpriced could hamper sales and reputation, especially at McDonald’s.

“It’s imperative that we continue to keep affordability at the forefront for our customers,” McDonald’s CEO Chris Kempczinski said during an April 30 analyst call. “We literally wrote the playbook on value, and we are committed to upholding our leadership within the industry.”

Read more here.

Dollar Tree is moving into 99 Cents Only stores

Goodbye 99 Cents Only. Hello Dollar Tree.

Dollar Tree announced Wednesday it acquired leases for 170 of 99 Cents Only’s stores out of bankruptcy in Arizona, California, Nevada and Texas. Dollar Tree will reopen these stores with its own products under its brand beginning in the fall, reports my colleague Nathaniel Meyersohn.

99 Cents Only had filed for bankruptcy in April and closed all of its 370 locations.

The two chains are very different, and the announcement is a sign of consolidation in the retail industry.

99 Cents Only was a regional chain and sold groceries. Dollar Tree, a national company with mostly suburban locations, primarily offers discretionary merchandise like party supplies and home goods. Dollar Tree was the last dollar store chain to sell everything for $1 before raising prices in 2021 to $1.25 and above.

Dollar Tree also owns Family Dollar, based mostly in cities. Family Dollar has underperformed Dollar Tree and other discount chains in recent years, and it’s closing 975 stores.

The acquisition of 99 Cents Only leases out of bankruptcy gives Dollar Tree a cheaper way to grow rather than building new stores and helps the Virginia-based chain extend its reach on the West Coast.

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