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Summary

  • Marathon Oil is showing impressive growth in its US unconventional plays.
  • North Sea divestment proceeds to be used to repurchase share.
  • Growth story with focus on shareholder value should bode well for long term shareholders.

Marathon Oil (NYSE:MRO) gave an update to the market this week after opening its books for the first quarter of 2014.

This year will be focused on domestic unconventional oil production growth, while proceeds from the divestment of North Sea assets will be used to please investors.

First Quarter Headlines

Marathon reported first quarter revenues $3.53 billion, down 12.2% from the year before. The company reported net earnings of $1.15 billion, up from $383 million in the comparable period last year.

The jump in net earnings was largely explained by a gain of $576 million related to the sale of its Angola assets. Adjusted earnings came in at $613 million, up from $361 million last year.

Operational Review

Marathon Oil reported average production of 463,000 barrels of oil-equivalent per day, down from 523,000 last year. Adjusted for the troubles in Libya and asset sales production came in at 457,000 barrels, down from 476,000 barrels last year.

Of this production some 154,000 barrels of oil-equivalent were realized in the US, up 26% compared to the year before. Production growth was even held back a bit as a result of the harsh weather. Topline growth was also driven by higher realized prices, notably for natural gas liquids and natural gas.

Earnings were driven by a strong performance of the North American operations which posted a gain of $242 million versus a $59 million loss last year. International earnings were actually down, falling from $454 million to $331 million while oil sands earnings improved slightly to $64 million.

Divestments

Marathon has put its North Sea business for sale with bids being due in the second quarter. The blocks #31 and #32 have been sold in Angola yielding $2 billion in cash proceeds.

Marathon Oil can use the proceeds nicely to reduce leverage and finance its $5.9 billion annual capital expenditures budget for the year.

Valuation

Proceeds from recent investments have been used to return cash to shareholders through initiating and completing another $500 million share repurchase program. Even after this, Marathon holds $2.0 billion in cash and equivalents while debt stands at $6.5 billion, resulting in a $4.5 billion net debt position.

At $36 per share, Marathon Oil's equity is valued at about $25 billion. As the business is on track to reported adjusted earnings of about $2-$2.5 billion, the valuation is reasonably fair at around 11 times annual earnings.

Investors in Marathon Oil receive a quarterly dividend of $0.19 per share for an annual dividend yield of 2.1%.

Implications For Investors

Marathon has three major areas of focus for this year. This includes the ramp-up in production in US unconventional plays, the sale of the North Sea assets and the consequent share repurchases with the proceeds of that asset sale. Even after a recent $500 million share repurchase program the company still has $1.5 billion in repurchases being authorized.

Production growth from US unconventional plays is seen around 30% for 2014, implying that production should come in at around 180,000 barrels per day. At the Howard Weil presentation in March, Marathon updated investors with its capital expenditure budget. 60% of the nearly $6 billion capital expenditure budget will be focused on unconventional plays with an unprecedented $2.4 billion earmarked to the Eagle Ford.

What really struck me during the conference call is the focus on shareholder value on top of operational growth and the growing importance of share repurchases in the capital allocation decision making process.

Such a mindset by management is to be applauded by shareholders who could definitely see better days ahead given the strong fundamental growth prospects of the firm, the friendly shareholder policy and manageable debt position.

Source: Marathon Oil - Strong Domestic Unconventional Growth And Increased Shareholder Focus Drives Value