In order to take advantage of the booming shale oil production, Marathon Petroleum Corp (MPC Quick QuoteMPC - Free Report) has agreed to buy rival oil refiner Andeavor for $23.3 billion in a cash and stock or $35.6 billion including debt.

Inside The Deal

ANDV shareholders will have the option to choose 1.87 shares of MPC stock, or $152.27 in cash subject to a proration mechanism that will result in 15% of ANDV`s fully diluted shares receiving cash consideration. This represents a premium of 24.4% to ANDV`s closing price on Apr 27. MPC and ANDV shareholders will own approximately 66% and 34% of the combined company, respectively.

The combination will diversify the refining portfolio into attractive markets as Andeavor`s refineries in California, the Mid-Continent and the Pacific Northwest complement MPC`s existing Gulf Coast and Midwest refining footprint.

Additionally, it enhances the midstream footprint in the Permian basin and Bakken regions, thereby opening doors to further growth opportunities. The deal will combine Marathon Petroleum’s strength east of the Mississippi with Andeavor’s strong presence in the West, creating a nationwide retail and marketing portfolio with increased customer engagement, substantial revenue enhancement, and cost saving opportunities (read: 6 Reasons to Buy These Energy ETFs and Stocks Now).

As a result, the combined company will be the largest independent U.S. refiner by capacity, leapfrogging Valero Energy Corp (VLO Quick QuoteVLO - Free Report) and a top-five refiner globally with throughput capacity of over 3 million barrels per day. Marathon Petroleum is the third-largest U.S. refiner by market capitalization, valued at about $38.6 billion, according to data compiled by Bloomberg while Andeavor is the fourth largest, worth $18.7 billion in value.

The transaction would be meaningfully accretive for shareholders, generating approximately $1 billion of tangible annual run-rate synergies within the first three years and significantly enhancing the long-term cash flow generation profile. The deal is expected to close in the second half of 2018 and is subject to approval from shareholders of both companies and anti-trust regulatory approvals.

Market Impact

Following the announcement of the deal, shares of Andeavor climbed 13% to close the day and crushed its average volume as nearly 14.8 million shares moved hands compared with 2.1 million on average. Meanwhile, shares of Marathon was down 8% (see: all the Energy ETFs here).

The news has put the spotlight on a number of energy ETFs that could be the best ways for investors to tap the opportunity arising from the MPC-ANDV deal. Investors should keep a close eye on the movement of these ETFs over the coming weeks:

First Trust Nasdaq Oil & Gas ETF (FTXN Quick QuoteFTXN - Free Report)

This fund measures the performance of the most liquid oil and gas securities from the NASDAQ US Benchmark Index screened through volatility, value and growth. This approach results in a basket of 50 stocks, with MPC taking the top spot at 8.3% and ANDV occupying the seventh position at 4.4%. Exploration & production takes the largest share at 60% while integrated oil & gas makes up for 27.4% of assets. FTXN is overlooked by investors with AUM of just $4.5 million and average daily volume of around 5,000 shares. Expense ratio comes in at 0.60%. The fund has a Zacks ETF Rank #3 (Hold) (read: Energy ETF Hits New 52-Week High).

VanEck Vectors Oil Refiners ETF (CRAK Quick QuoteCRAK - Free Report)

This is a one-stop shop for investors to play the oil refining market and follows the MVIS Global Oil Refiners Index. The benchmark measures the performance of the largest and most liquid companies in the global oil refining segment, which includes gasoline, diesel, jet fuel, fuel oil, naphtha and other petrochemicals. Holding 26 stocks in its basket, Marathon and Andeavor are among the top 10 holdings accounting for 7% and 5.7%, respectively. The product has accumulated $25.7 million in its asset base and trades in a volume of 16,000 shares a day on average. It charges 59 bps on an annual basis.

iShares U.S. Oil & Gas Exploration & Production ETF (IEO Quick QuoteIEO - Free Report)

This ETF follows the Dow Jones U.S. Select Oil Exploration & Production Index and holds 63 securities in its basket. Marathon and Andeavor are among the top 10 holdings accounting for 5.8% and 2.7%, respectively. The product has been able to manage assets worth $415.4 million and trades in a moderate volume of about 86,000 shares per day. The ETF charges 44 bps in fees and expenses and has a Zacks ETF Rank #3 (read: Why These Sector ETFs Are Winning Picks Now).

PowerShares Dynamic Energy Exploration & Production Portfolio (PXE Quick QuotePXE - Free Report)

This product follows the Dynamic Energy Exploration & Production Intellidex Index, which thoroughly evaluates companies based on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value. It holds 30 stocks in its basket with Marathon Petroleum occupying the third spot at 5.2% share while Andeavor accounts for 3.1% of assets. PXE is an expensive choice in the energy space, with 0.80% in expense ratio. The fund has AUM of $494 million and trades in a volume of 13,000 shares a day on average. It has a Zacks ETF Rank #3.

iShares Edge MSCI Multifactor Energy ETF

This ETF tracks the MSCI USA Energy Diversified Multiple-Factor Capped Index and targets companies, with the potential to outperform the broad U.S. energy sector. Holding 22 stocks in its basket, MPC and ANDV are among the top 10 firms with 5.2% and 3.3% allocation, respectively. The product has accumulated $2.9 million in its asset base and trades in a paltry volume of 1,000 shares per day on average. It charges 35 bps in annual fees.

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