Marathon to become top U.S. refiner with $23 billion Andeavor buy

(Reuters) – Marathon Petroleum Corp (MPC.N) agreed to buy rival Andeavor (ANDV.N) for more than $23 billion in the largest-ever tie-up between U.S. refiners, giving the combined company a nationwide presence and increased access to growing export markets.

The deal gives Marathon more exposure to the booming U.S. shale oil sector, thanks to Andeavor’s existing logistics and terminal operations in Texas and North Dakota shale regions. Rising output from west Texas’s Permian has driven U.S. crude production to an all-time record above 10.5 million barrels per day (bpd).

“The combination of the two companies allows us to go after and find ways to create a bigger presence in the Permian,” said Marathon Chief Executive Gary Heminger, who will lead the combined companies.

The company would leapfrog Valero Energy Corp (VLO.N) to become the largest U.S. refiner, with the capacity to process 3.1 million bpd of crude oil into gasoline, diesel and other fuels.

The deal also gives Marathon a line into fast-growing Mexican fuel markets. Andeavor is expanding its network of filling stations in the country. Mexico’s dilapidated refineries cannot meet the growing population’s demand for gasoline and other products. U.S. fuel exports to Mexico had risen to 1.4 million bpd as of January, up more than 85 percent from two years ago.

The deal values Andeavor, formerly known as Tesoro, at about $152 per share, or about 24 percent more than Friday’s closing price of $122.38.

“We view this as pretty full value for Andeavor,” Scotia Howard Weil analysts said in a note. “Not many saw this one coming.”

Shares of Ohio-based Marathon fell $3.76, or 4.6 percent, to $77.71 a share, even after the board approved an additional $5 billion share buyback. It also missed Wall Street forecasts for quarterly profit by a wide margin on Monday as expenses rose.

Shares of Andeavor, based in San Antonio, were up around 16 percent at $141.30.

Including Andeavor’s debt, Marathon is paying $35.6 billion to hold 66 percent of a combined company worth some $58 billion at Friday’s close.

Andeavor operates 10 refineries in the United States, largely in the western part of the country. It has pipeline, trucking and terminal operations in the Permian, along with North Dakota’s Bakken region, the second-most prolific state for oil production in the country after Texas.

Marathon’s six refineries are largely in the Midwest, with one locale in Texas City, Texas. Analysts at Tudor Pickering Holt said they expected the location of the two companies’ operations to allow them to avoid antitrust hurdles.

“Despite the size of Marathon-Andeavor, we do not foresee any regulatory problems,” they wrote in a note.

Operations that have capacity to refine light crude, such as Andeavor, will be better positioned to take advantage of the production boom.

Andeavor is expanding a retail network of motor fuel stations in the Mexican states of Baja California and Sonora under its ARCO brand.

U.S. Gulf Coast refiners are becoming more integrated in the region’s energy industry, filling shortages created by underinvestment in refining across Latin America.

“There’s no question the new company has greater resource capability going forward into Mexico,” Andeavor Chief Executive Gregory Goff said on a conference call with analysts.

The companies did not spell out Goff’s role, but the Andeavor executive said he would likely be involved in operations and technology.

The deal is expected to close in the second half of this year.