Marthan Oil (MRO) and Occidental Petroleum Corporation (OXY) recently announced their Q4 results with both companies reporting a decline in earnings. Marathon's earnings dropped by 41%, while Occidental reported a whopping 79% decline in its earnings. Both companies wrote down assets during the quarter so much of these are balance sheet, not operational losses. Occidental Petroleum wrote-down some of its mid-continental U.S. assets as its bottom line was hit by falling prices for oil and natural gas. Marathon Oil recorded high oil and gas sales but still fell short of the analysts estimates because of higher taxes and increases in exploration costs.
Marathon Oil created Marathon Petroleum Corporation (MPC) in 2011 to optimize its petroleum assets, with the aim to drill in oil wealthy fields of the United States. In the previous quarter, Marathon Oil's revenues increased by 11.2% to $4.24 billion as its production increased by 32% to 487,000 boepd. Wall Street was expecting revenues of $3.93 billion. However, the company's income in exploration and production fell by nearly 10% to $501 million, compared to the same period last year as the increased production volumes were offset by increasing costs that went up by 70% to $238 million. Out of the total expenses that the company faced, about $85 million were reported at the Innsbruck well in the Gulf of Mexico, which turned out to be a dry hole. Similarly a dry well in Iraqi Kurdistan region is also being abandoned.
Marathon Oil also ended up paying taxes that were much higher than anticipated as it doubled its provision for income taxes to $1.3 billion. The company took a $17 million write off its Ozona assets in the Gulf of Mexico.
Income through oil sands mining went down by 70% to reach $19 million due to an outage at a heavy oil facility, while income from integrated gas increased by 75% to reach $35 million. The company's quarterly profits dropped from $549 million in the previous year to $322 million or $0.45 per share. The business adjusted earnings were $0.55 per share, significantly lower than analysts' estimate of $0.68 per share.
Similarly, Occidental Petroleum's income was also hit by write-downs, although the impact here was much more significant. The recent increase in production has come from California, Texas and the Midcontinent region but was however overshadowed by falling oil and gas prices. Profit plummeted from $1.63 billion to just $336 million as it performed a record write down of $1.1 billion of its mid-continental U.S. gas assets. While total revenue rose by 2.3% to reach $6.17 billion output increased by 4.1% to 779,000 boepd.
Occidental's oil and gas segment saw a 79% decline in profit as its sales increased by 1.9% while profit from its chemical segment rose by 25% on a 4.3% increase in sales. Like other oil and gas producers, Occidental was also hit by pressure or prices as realized prices for crude, natural gas liquids and domestic gas dropped by 3.4%, 18% and 14% respectively.
Both Occidental and Marathon faced trouble with increased costs to replace lost reserves and maintain production. Marathon announced in Q4 that it will be increasing its capital, investment and exploration budget by $0.2 billion, to $5.2 billion to increase its shale gas production by 6-8% this year.
While Occidental has been looking to reduce its costs it failed to reduce its capital expenditure in Q4 which remained flat from last year at $2.5 billion. For the full fiscal year, Occidental's capital expenditure increased by 36% to $10.2 billion. For 2013, the company has set itself an ambitious target to increase its production by 10% while reducing its capex to $9.6 billion simultaneously. How feasible that target will be is, in my opinion, a function of energy and raw materials costs. Unit labor costs in the U.S. are falling as structurally-high unemployment is finally putting pressure on workers to accept whatever work is available.
Despite poor asset management and sticky costs structures Occidental's board is looking to lure investors with a stout rise to the company's dividend in the hope of protecting its share price. Both firms are trading at multiples far above that of the majors like Exxon-Mobil (XOM) or Statoil (STO), both of whom have far better portfolios of assets and better track records of performance and return on assets. Both Marathon and Occidental look lost as to how to cope with the glut of oil and gas being produced in the U.S. at the moment. So from an investor's perspective I'm more enticed by producers supplying markets where pricing leverage is still available, like Statoil's moves into Europe or Exxon-Mobil's re-balancing to generate more revenue from refining.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.