Marathon Oil Corp will buy oil and gas properties in Texas' Eagle Ford shale field for $3.5 billion from private equity firm KKR & Co and Hilcorp Resources Holdings LP, the companies said on Wednesday.

Shares of Marathon fell nearly 3% as investors fretted about the deal's high price tag. KKR nearly tripled the investment it made just a year ago with the sale.

"Strategically I like to see deals like this," said Raymond James analyst Pavel Molchanov. "The Eagle Ford is a fantastic, very profitable resource play, but the acquisition is being done at a significant premium."

Wall Street analysts pegged the deal's value above $20,000 per acre, topping Anadarko Petroleum Co's deal with Korea National Oil Corp in March that was done at $16,000 per acre.

The deal for the 140,000 acres in the Eagle Ford shale is the latest in a frenzy by energy producers to snap up oil and gas properties that were too difficult to tap into only a decade ago. Eagle Ford has emerged as the hottest of those North American shale fields, since much of its output is oil, which remains above $100 per barrel, rather than natural gas, which flows from fields such as the Marcellus shale.

Marathon Chief Executive Officer Clarence Cazalot defended the value of the deal, which he characterized as "transformational" for the company.

"We believe that we're paying a fair market value for these assets," Cazalot told Reuters, noting that the purchased acreage is located in areas where wells are most economical. Analysts at Credit Suisse estimated Marathon could earn a return of 15% on the assets, based on an oil price of $90 per barrel.

Private Equity Profit Gusher
Private equity firms have successfully tapped into energy industry's ravenous appetite for shale assets, entering partnerships with private companies.
KKR's stake in Hilcorp is now valued at $1.13 billion, nearly triple the $400 million the firm invested in the company a year ago. In April, Blackstone Group announced it would invest up to $1 billion in a partnership with shale gas developer Alta Resources to form Alta Energy Partners.

Marc Lipschultz, a partner at KKR and Global Head of Energy and Infrastructure said private equity has replaced in part the interest of large foreign companies like Reliance Industries and Mitsui & Co, who bought into joint ventures in U.S. shale regions in recent years.

"You've seen an acceleration of interest by financial investors (in shale) ... but the tide has gone out on what was one of the big sources of very low cost capital, which was foreign capital joint ventures," Lipschultz said. "It is a very competitive world out there."

With Wednesday's agreement, Marathon's overall holdings in the Eagle Ford will total more than 285,000 acres by the end of the year, it said, giving it potentially 100 million barrels of oil equivalent in proved reserves.

Marathon is a currently an integrated oil company like larger peers Exxon Mobil and Chevron Corp, owning both oil and gas production assets and refineries. But the company plans to spin off its refining assets at the end of June.

The Hilcorp properties, which are located primarily in Atascosa, Karnes, Gonzales and DeWitt counties, had 36 producing wells at the beginning of May, with an output of 7,000 net barrels of oil equivalent per day.

Production is expected to be 12,000 net BOE per day at year end and is likely to rise to 80,000 by 2016. Marathon will use cash on hand to pay for the assets, which will immediately contribute to earnings and are expected to be self-funding by 2014, it said.