Key Acquisition Highlights: -- Links world-class oil sands resources with Marathon's best-in-class U.S. downstream assets -- 20 percent interest in the Athabasca Oil Sands Project (AOSP), which includes the operating Muskeg River Mine and the Scotford Upgrader -- Immediate net production of approximately 31,000 barrels per day (bpd) of bitumen -- Net production increasing to more than 130,000 bpd of bitumen by 2020 -- Net proved mining reserves of 436 million barrels of bitumen -- Total net resource of approximately 2.6 billion barrels of combined mined bitumen and in-situ recovery
Commenting on this transaction, Clarence P. Cazalot, Jr., president and CEO of Marathon said, "The Athabasca Oil Sands Project is truly a world-class asset with multi-billion barrel, long-life resource potential. Marathon's strategically advantaged U.S. Midwest downstream business is well positioned to provide both near and long-term solutions to maximize the value of these substantial bitumen resources. We are joining an ongoing and expanding project with strong partners, and collectively, we will be able to apply our technical and commercial skills to maximize both the recovery and value of these resources."
The AOSP Joint Venture also includes Shell Canada (operator, 60 percent) and Chevron Canada (20 percent). The oil sands mining operation encompasses the Muskeg River Mine, located north of Fort McMurray, Alberta, and the Scotford Upgrader, located near Edmonton, Alberta. (For more details about the AOSP Joint Venture project, refer to the Web site at http://www.albiansands.ca.)
Upon completion of the transaction, Marathon will gain access to the oil sands in more than 300,000 gross acres, of which over 200,000 acres are expected to be developed by mining. Marathon will immediately add net bitumen production from the AOSP Muskeg River mine of approximately 31,000 bpd. Following the completion of Expansion 1 in 2010, production is expected to increase to an estimated 55,000 bpd of net bitumen production with growth to more than 130,000 net bpd by 2020, through four additional planned expansions. The net resource from the base mine and five expansions is estimated to be 1.5 billion barrels of bitumen with an additional 500 million barrels of resource expected to be recovered from other mining expansions on this acreage.
Marathon also will take ownership in both operated and non-operated in-situ leases. The Company will gain a 60 percent interest and operatorship in a 26,000 gross acre project along with a 20 percent working interest in 75,000 gross acres in the Chevron-operated Ells River project. Collectively, these in-situ leases will add an estimated 600 million barrels of net resource.
Based on the total 2.6 billion barrels of net mineable bitumen and in-situ resource described above, this USD$6.2 billion acquisition will add resources at a cost of approximately USD$2.38 per barrel. In addition to this more fully defined and significant resource, an Area of Mutual Interest (AMI) currently exists with the Joint Venture Owners around the AOSP and in-situ leases. Marathon will have the opportunity to participate in any future qualified leases acquired by the AMI Owners providing additional growth opportunities.
Bitumen production from the Muskeg River Mine is taken by pipeline to the Scotford Upgrader, which uses hydro-conversion technology to upgrade this bitumen into a range of high quality, synthetic crude oils. Two-thirds of the bitumen production, together with acquired feedstocks and blendstocks, is upgraded into Premium Albian Synthetic and Albian Heavy Synthetic crudes and marketed directly to refineries in North America. The remaining production is converted into Vacuum Gas Oil and sold under a long-term supply agreement. The Scotford Upgrader will be expanded to handle increased bitumen production through Expansion 1. Each of the Joint Venture Owners is currently working on its own upgrading solution for volumes produced from additional expansions.
A key attribute of this acquisition is the ability to link the oil sands production from the world-class AOSP developments with Heavy Oil Upgrade Projects at Marathon's refineries. As the fifth largest U.S. refiner and the largest Midwest refiner, Marathon is well positioned to take advantage of this fully integrated strategy. Progress continues on the previously announced front-end engineering and design (FEED) study at Marathon's Detroit refinery where the Company expects to increase the crude unit capacity to approximately 115,000 bpd, and construct a 28,000 bpd heavy oil coker and other associated process units. Marathon estimates the capital costs to refine an incremental 80,000 bpd of heavy sour crude at the Detroit refinery will be less than half the investment needed to build an equivalent capacity upgrader in Alberta. Marathon continues to evaluate the potential for similar heavy oil processing projects at the Company's St. Paul Park, Minn., Robinson, Ill., and Garyville, La. refineries.
Western shareholders who are tax residents in Canada will have the option to elect cash, Marathon common shares, exchangeable shares, or a combination thereof. Western shareholders who are not tax residents in Canada will have the option to elect cash or Marathon common shares. The consideration is subject to prorating, to achieve an overall split of 65 percent cash and 35 percent stock, with exchangeable shares limited to 30 percent of the overall consideration. Cash dividends will not be paid on exchangeable shares. Holders of exchangeable shares will have the right to receive additional Marathon shares to account for the cash dividends declared on the Marathon common shares on an economically equivalent basis; and they will have the option at any time to exchange their shares for Marathon shares. The exchangeable shares are subject to redemption by Marathon four years after closing and may be redeemed earlier if certain conditions occur. As of June 30, Western had approximately 165 million fully diluted shares outstanding, including 100 percent of employee and director options. The cash consideration will be CDN$35.50 per Western common share. The share exchange ratio will be 0.5932. The officers and directors of Western have signed agreements in support of the transaction.
Marathon's legal advisor for this transaction is Bennett Jones LLP, and its financial advisor is Deutsche Bank Securities Inc.
Marathon's Board also approved an additional stock buyback authorization of up to USD$2 billion. This is in addition to the previously announced stock buyback authorization of USD$3 billion (of which USD$2.5 billion in shares have already been repurchased). Marathon will use cash on hand, cash generated from operations, potential asset sales, or cash from available borrowing to acquire shares. This program may be changed based on the Company's financial condition or changes in market conditions and is subject to termination prior to completion. Any purchases under the program may be in either open market transactions, including block purchases, or in privately negotiated transactions. The repurchase program does not include specific price targets or timetables.
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