Marathon Oil (MRO) is an international energy company with a focus on exploration and production, oil sands and integrated gas. Prior to mid-2011, Marathon also included a refining, marketing and transportation business that was spun off to shareholders and now trades as Marathon Petroleum (MPC).
Marathon has operations in the U.S., Angola, Canada, Equatorial Guinea, Indonesia, the Iraqi Kurdistan Region, Libya, Norway, Poland and the U.K. As of the end of 2013, Marathon had reserves of 2.2 billion barrels of oil equivalent with a focus on liquid hydrocarbon reserves production worldwide and significant acreage positions in the Eagle Ford, Bakken and Oklahoma resource basins.
Marathon’s 2014 strategic goals are to:
- Accelerate Eagle Ford and Bakken rig activity by 20% each and increase rig activity in the Oklahoma Woodford acreage by 100%
- Optimize Marathon’s asset portfolio by selling its North Sea Business consisting of assets in the U.K. and Norway
- Increase share repurchases to $2.5 billion that includes a $500 million in share repurchases after the divesture of Marathon’s Angola Block 31 assets.
At its purest, Marathon’s business model is simple: find oil rich shale, set up a drill rig and dig a hole, dissemble the rig, frack the well to extract the hydrocarbons, repeat.
MRO – Earnings Summary
Marathon started out 2014 in the dumpster with fourth quarter 2013 revenue falling 22% to $3.29 billion. Marathon was able to squeeze out a profit for the quarter posting a profit of $375 million, up from $322 million a year earlier on fewer income tax provisions. In the first quarter of 2014, revenue continued to disappoint decreasing 12% to $3.53 billion, but profits increased to $1.15 billion, or $1.65 per share, an increase from $383 million or 54 cents per share a year earlier. Marathon also reported adjusted profits of 88 cents per share, up from 51 cents per share the year prior.
In June, Marathon announced that it had made significant strides in achieving one of it three 2014 primary objectives by selling its Norway Business to Det norske oljeselskap ASA for $2.7 billion, netting $2.1 billion in the transaction. After not receiving bids deemed sufficient, Marathon chose to retain its U.K. business.
In the second quarter, revenue continued to decrease with a 2% to $2.94 billion and exploration expenses grew by 16%. Marathon reported a profit of $540 million, or 80 cents per share, up from $426 million, or 60 cents per share a year earlier.
Marathon Stock Has Upside but With Risk
Fracking stocks are hot, but as Marathon continuous to tinker with its portfolio allocation it has produced uneven earnings and a series of net sales declines.
Starting in Aug., Marathon has seen several analyst downgrades as there is overall concern that oil prices will decline through 2015, hurting Marathon’s earnings. On the flip side, the U.S. government show signs of easing its ban on the export of oil that it has held since 1970, which would significantly benefit Marathon’s assets.
Marathon’s stock is closely tied to the price of oil and as expectations for lower oil prices continue to weigh on the market, the effects are reflective in Marathon’s stock price. Analysts 12-month consensus stock price of $45 a share would provide a nice premium to today’s trading levels and Marathon stock currently offers a 2.5% dividend yield to make it worth holding to see that happen.
Marathon offers an attractive price to earnings ratio of 12.2 compared to an industry average of 28.7. Marathon has also done a good job of using asset divesture to shore up liquidity with Marathon’s current ratio piercing 1 as of last quarter, which Marathon has been unable to do on an annual basis since 2010.
Overall, investing in Marathon holds both company risk, in that the continued execution of its portfolio reallocation and the growth of new rigs within its current footprint are relatively uncertain, and uncontrollable energy market risk that that can provide both earnings windfalls and deserts. Marathon stock remains a hold in my book with continued uncertainty on both those fronts.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
