As a volatile year for the oil and gas industry winds down, Marathon Oil's (MRO) performance stands out. It has a stake in three of the most attractive resource plays in the U.S. - North Dakota's Bakken, Texas' Eagle Ford and Oklahoma's Woodford, but so do a number of integrated oil and gas majors, yet they are reporting losses. Marathon Oil is benefiting from being a shale pure play, following the spinoff of its refining business into Marathon Petroleum (MPC) in 2011. Why is this leaner player doing better?
The whole concept behind integrated oil and gas is diversification across vertical upstream and downstream businesses. The slimmed down Marathon Oil, on the other hand, prides itself in its scalability. In a market in which U.S. natural gas prices have almost halved in a year, agility is a valued skill. The company can more easily adapt to changes in commodity prices and costs. This year, its value optimization strategy has been to shift its focus to crude, liquids and condensate and lower production in natural gas and natural gas liquids (NGLS). Are the oil majors too sluggish to opportunistically pivot among growth markets in today's more volatile energy markets?
With a boost from its oil business, Marathon has grown revenue 11% year-over-year. Chevron (CVX) and Exxon Mobil (XOM), in contrast, have seen revenues down a negative 10% and negative 0.08%, respectively. The major oil and gas majors are producing alongside Marathon in the Bakken and Eagle Ford shale deposits, but they also have large stakes in international energy producing assets that cannot easily be switched on and off as demand and prices fluctuate.
On slowing global oil demand due to oversupply, Exxon Mobil saw profits drop in the third quarter. Domestically, not as agile as Marathon to pivot away from the North American natural gas oversupply, its profits fell to $9.57 billion from $10.3 billion in the year-ago period. The integrated major is getting some help from its profitable refining business but not enough to offset losses in the upstream business. The oil major has gone on an acquisition spree to combat the production decline. Based on the diversified expansion opportunities it is taking advantage of, it is poised to emerge in a stronger position as the global economy improves in 2013. The energy major has invested about $5 billion in shale assets in the Western United States and Canada over the last few months. It is investing in its higher margin refinery business and building gas export terminals to capture the spread between higher gas prices in Asia.
The same global supply and demand situation contributed to a 33% decline in earnings to $5.25 billion for Chevron in the third quarter, and a 33% earnings tumble for ConocoPhillips (COP) to $1.8 billion. Both likewise experienced a decline in global oil production and were hit by the fall in natural gas prices to $2.63 mmbtu from $4.14 mmbtu a year ago. Chevron's performance was further skewed by Hurricane's in the Gulf of Mexico, oil spills in Brazil and a fire at a refinery in California, which curtailed production by 118,000 barrels of oil a day (boepd). Like Exxon Mobil it is investing more in unconventional resources. It plans to increase production at Eagle Ford in the coming quarter.
Marathon is not only benefiting from a sharper focus on productive shale assets but it also has improved operating efficiency since the spinoff. Operating as a shale pure play, Marathon's operating margin is currently up from 35.8% a year ago to 43.1%. Exxon Mobil's operating margins have changed little at 14% while Chevron's have fallen 3% to 17%, with likely some impact from hurricanes and other unexpected events. Notably, operating margins for ConocoPhillips, which like Marathon Oil spun off its refinery operations last year, rose 167% to 26.3%. When the economy improves next year, even Marathon Oil recognizes that increases in oil and gas demand will benefit the integrated majors.
Marathon's domestic house is in good order as its current growth comes from non-conventional energy assets. Its revenues were up nicely across all three business segments. Following its pivot to focus on more profitable assets, its current production mix is about 65% oil and 17% NGLs. In the E&P segment, with a push from the US resource plays, U.S. E&P earnings were up 57% and operating profit was up 17%. E&P production available for sale grew 24% with an increase in liquid hydrocarbons and natural gas sales. In liquid hydrocarbons, sales have increased 26,000 per day over the year-ago period.
Marathon is not simply riding profits higher on the increase in oil prices, it has improved operational efficiency. Costs are down per barrel of oil by $0.34, excluding exploration expenses. The E&P segment in general is benefiting from lower exploration expenses and operating costs. With stronger production in the lower 48 offshore production for the fourth quarter has been upped 25,000 to 30,000 boepd. The acquisition of Eagle Ford is helping production growth. In the oil sands mining segment, synthetic crude oil sales were up $14 million and benefiting from higher prices.
To seize global growth opportunities, Marathon Oil has been acquiring businesses over the last six months. It recently paid $50 million for a 20% stake in the South Omo project in Ethiopia. Following political and civil unrest, gas sales from the Waha project in Libya have started to flow again, adding 23 Mmcfd in the third quarter. Marathon has tagged $500 million for further international exploration.
Marathon has somewhat less agility in its capital structure to fund economic growth. Although its current ratio at .74 is a little high it is well below that of the oil majors, such as Chevron's 1.64. In 2011, it paid HilCorp Resources $3.5 billion for Eagle Ford, upping its acreage there to 225,000 after a few divestitures. It has $2.8 billion in cash flow from operations, halved from a year ago, but a number of divestitures ahead of it in 2013. In 2013, production growth of 6% to 8% is expected, with a growth rate of 5 to 7% to 2017.
How is the market valuing pure plays versus the integrated oil and gas majors? Marathon's earnings per share are $2.55 versus $12.19 and $9.46 for Exxon and Chevron, respectively, indicating higher earnings forecasts for the oil majors. A look at price to earnings growth tells a different story at $6.32 for Marathon Oil versus a negative $4.27 and $1.75 for the diversified players.
Marathon plans to do more spin-offs in 2013 while expanding investments in Eagle Ford, for which capital expenditures are pegged between $1.5 billion and $2 billion. It will be competing with the oil majors for shale assets as they continue to expand into unconventional oil. Royal Dutch Shell (RDS.A) is getting ready to pump 50,000 boepd from Eagle Ford. Watch for the sale of Marathon's Alaska Cook Inlet assets, valued at $375 million.