Marathon Oil (MRO) recently reported fourth quarter and annual 2012 earnings. The earnings report was mixed. Fourth quarter revenues were $4.23 billion, which was an increase from the $3.8 billion in revenues that it reported in the fourth quarter of 2011. Net income was $1.58 billion, which was an 86% decrease from the $2.94 billion that it reported in the fourth quarter of 2011. It was a positive that Marathon's revenues were higher, but I predict that its stock price will be flat or slightly lower for at least the next two quarters.
Marathon's current position
The good news that came out of Marathon's fourth quarter earnings report was that revenues were higher by 11% due to a higher volume in liquid hydrocarbon sales. The higher volume came from the company's holdings in the Eagle Ford Shale field in Texas, the Oklahoma Resource Basins, and the Bakken Field in North Dakota and Montana. Thanks to these oil-rich properties and efficient new drilling technologies, Marathon is succeeding with its stated strategy of increasing its crude oil production. In the fourth quarter, net output available for sales rose 12% to an average of 463,000 barrels of equivalent (BOE) per day. The "2012 third to fourth quarter growth alone was 17%", according to Marathon CEO, Clarence P. Cazalot. The company also increased its total oil reserves by 316 million barrels resulting in a total liquids reserve replacement ratio of 268%. These increases are a reflection of Marathon's success in developing its U.S. resources. It also bodes well for Marathon's long-term prospects. The company guidance for the first quarter was for output of from 415,000 to 430,000 BOE per day and for 395,000 and 420,000 BOE per day for the full year.
The bad news that came out of the fourth quarter earnings report was that the increased revenues were more than offset by higher depreciation, depletion amortization, and exploration cost. Fourth quarter exploration cost rose by 70% to $238 million. While the exploration cost reduced fourth quarter net income, it will be recovered in the form of increased output in subsequent quarters.
Looking to the future
While Marathon has succeeded in increasing its U.S. oil production, the company has other problems that have slowed its earnings. The company's fourth quarter earnings were down 25% on a year-over-year basis, and 40% from the third quarter. On an annual basis from 2011 to 2012 earnings were down by 86% from $2.94 billion to $1.58 billion.
Marathon's earnings are down partly because of increased exploration cost. However the primary reason for the earnings reduction is because of lower natural gas and crude oil prices. Natural gas prices have increased over the past year, but at around $3.66 per thousand square feet, they are still near multi-year lows. WTI crude oil prices in the U.S. are currently around $92 per barrel compared to around $105 at this time last year. The price of gas and oil is a problem that Marathon cannot fix, but it is a reality that it must face. What is frightening about the problem is that it could last for quite a while. With the new fracking and horizontal drilling techniques U.S. gas and crude oil production has increased dramatically. There is already a glut of natural gas, which is the reason for the near record low gas prices.
As a result of the low gas prices energy exploration companies, such as Anadarko Petroleum (APC), Apache (APA), Devon Energy (DVN), and Chesapeake Energy (CHK), all changed their focus from drilling for gas to drilling for oil. For instance, in the fourth quarter Anadarko increased its U.S. crude oil production by 8.5%. Chesapeake Energy increased its fourth quarter oil production by 15%. The additional oil production for both of these companies came from their holdings in South Texas. With so many other companies devoting their resources to the production of oil, Marathon faces the real possibility that increased oil production in Texas, Oklahoma, Colorado, Pennsylvania, and other newly-developed oil fields could cause an oil glut, which would further push down WTI crude oil prices.
The slowing U.S. economy
In addition to the increase in the production of crude oil, Marathon, like its competitors, must now deal with a slowing U.S. economy. On February 1st the Bureau of Economic Analysis announced that the U.S. gross domestic product (GDP) increased at an annualized rate of 0.1% in the fourth quarter of 2012. In the third quarter, the GDP increased by a rate of 3.1%, so the news that the economy had contracted was quite a shock. A slowing economy reduces demand, and that could be terrible news for energy companies whose earnings are closely linked to the health of the economy. The good news that came out of the Bureau's report is that the contraction may have been a one-time event caused by fear of falling over the fiscal cliff.
Marathon faces a number of problems such as low commodity prices caused by oversupply, intense competition, and an anemic economy. It is unlikely that any of these problems will go away any anytime soon or that Marathon's earnings will show any significant increase in the next few quarters.
Marathon's stock price has rallied by 48% since its June low. The rally was largely due to the stock price hovering around $23-the stock was undervalued. With a stock price of close to $34 and a price to earnings ratio of 15, Marathon stock is fully valued. After such a strong rally and with no earnings catalyst, I do not expect that Marathon's stock price will move higher for at least another two quarters.