Downstream Refining Helps Marathon Oil's Cash Flow

Hold-rated Marathon Oil (MRO) offers unlevered appreciation potential of 54% to a McDep Ratio of 1.0 and levered appreciation potential of 82% to Net Present Value (NPV) of $54 a share. During the first quarter, according to results released today, MRO generated cash from oil and gas production of about US$20 a barrel of oil equivalent as the difference between price of about US$40 and cash operating costs of about US$20. Unlevered cash flow (Ebitda) was better than our expectations from three months ago in downstream refining by more than enough to offset lower than projected Ebitda in upstream production.

Our valuation capitalizes the future year’s cash flow at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) for natural gas and oil, and to an industry multiple for downstream. By latest disclosures, oil and gas reserves, weighted by development, are concentrated 51% by heating value in Africa. African oil is concentrated in Libya and natural gas in West Africa. Pointing to expected oil price recovery, futures prices for the next six years averaged $66 a barrel recently.

Originally published on April 30, 2009.