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Summary

  • To streamline its portfolio of assets, Marathon Oil is divesting its overseas activities and is focusing more on domestic activities.
  • The Oklahoma resource play is one of the promising unconventional plays, which will provide an upside to the company's total production.
  • The longer lateral wells in the company's SCOOP formation and lower initial decline rate will help the company to sustain its long-term production performance.
  • The addition of working interest in the Rift basin could be beneficial for strengthening its financial performance.

Divesting overseas activities

Marathon Oil (NYSE:MRO) is selling its Norwegian business for more than $2 billion in cash to Det Norske. The deal is expected to be completed by this year-end. This step is latest in a string of divestments for Marathon, which has shed $6.2 billion in assets since 2011 to refocus on its domestic business. The cash from the Norway deal will be used to promote organic growth of the company and to fund its share buybacks. Earlier, the company completed the $1 billion share buyback tied to the Angola Block 31 sale along with an additional $500 million share repurchase. There is the possibility of a further $1 billion or $2 billion share buyback following the disposal of the North Sea assets. Seeing in context with Marathon's current $26.66 billion market cap, these buybacks are attractive.

According to Marathon Chief Executive Lee M. Tillman:

"The sale of our Norway assets advances one of our key 2014 priorities and further demonstrates our commitment to rigorous portfolio management to simplify and concentrate our business."

Big name in domestic market

The escalation in the U.S. energy production has been a boon to domestic players, especially names like Marathon Oil, which has land-based as well as off-shore operations. After the recent shedding of the company's North Sea assets, nearly 60% of Marathon's production is domestic; this prominently makes the company a big name in domestic play.

Marathon's key shale plays in domestic region are within Bakken, Eagle Ford, and Oklahoma Resource Basins. It is expected that production from these regions will jump 30% during the period of 2013-2014. Overall, Marathon has 2.4 billion barrels of resources and 4,500 well locations.

Expanding its reach in the Oklahoma resource basin

Marathon Oil is focusing more on developing unconventional resource plays to increase its production opportunity. This year Marathon plans to spend $3.6 billion out of its total budget of around $6 billion on unconventional plays. The Oklahoma resource basin is an unconventional play in the company's North American asset base and a promising growth destination for sustaining long-term financial performance. After achieving a successful year-over-year increased production of around 68% from this play last year, the company decided to increase its footprint in the play this year. The company holds 209,000 net acres in the basin, of which around 147,000 acres are held for production. The total acreage in this basin spreads to Anadarko Woodford shale, the southern Mississippi trend, and the Granite wash, and has total net proved and probable reserves of around 800 million barrels of oil equivalent.

The company's Anadarko Woodford play in Oklahoma is the key area of its exploration and development for this year. Marathon's Oklahoma resource basin sales were primarily attributed to the Woodford shale. Last year, Woodford contributed an average production rate of 14,000 barrels of oil equivalent per day, or boepd, which consists of 2,000 barrels of crude oil and condensate, 4,000 barrels per day of natural gas liquids and 48 million cubic feet per day of natural gas. The company brought nine gross operated wells to sales and reached to a total depth of 10 gross operated wells last year. While looking at year-over-year production growth in this play, the company anticipates drilling around 20 to 25 gross company-operated wells this year and will invest around $250 million on further development and exploration. Moreover, the company plans to increase its rig activity by 100% in Woodford shale and move to a four-rig program to accomplish efficient drilling and completion activity in this play.

While strengthening its position in the Oklahoma Woodford shale, Marathon has also focused on the efficient South Central Oklahoma Oil Province, or SCOOP. This portion of the Woodford shale play is considered as a liquid-rich area, which contains 70 billion barrels of oil as estimated. It has multiple pay zones of NGLs and oil, which could help the company to improve its production performance. Marathon holds more than 100,000 acres in this portion and continues improving its SCOOP well performance with efficient drilling and completion techniques. During the fourth quarter of 2013, it had three operated wells in the SCOOP portion of the Woodford shale and plans to drill another 20 gross operated SCOOP wells in the formation this year. As the Woodford shale lies at a deeper depth than any other unconventional resource play, it needs longer lateral length to acquire resources. Marathon, while focusing on well completion for a long sustainable production rate, increased its lateral length stages per mile. During 2013, it increased frac stages from 12 to 14 per mile and extended the lateral length to more than one mile. The longer lateral length and increasing frac stages are considered the primary factors for improving a well's performance. So it is expected that Marathon will improve production from its Woodford shale, which in turn will strengthen its top line.

Comparison among three major formations

Source: Drillinginfo

Moreover, the company's drilling and development in the SCOOP could be more favorable to the production cycle. As shown in the chart above, the average initial 12 months decline rate in this play is lower than that of Eagle Ford and Bakken. So, Marathon's plans for more new wells in this formation will enable the company to increase total production with a lower decline rate in each well.

Opportunity in Rift basin

In March, 2014 the Ethiopian government approved the farmout agreement between Africa Oil and Marathon Oil. As per the agreement, Marathon will acquire 50% interest in the Rift Basin through its subsidiary Marathon Ethiopia Limited B.V. Under this joint venture Marathon will pay $3 million to Africa Oil as an entry fee and will invest $15 million in this asset development and exploration. Africa Oil will continue as the operator of this block; however, Marathon will take the lead if Africa Oil makes any profitable discovery.

Recently, Africa Oil has made a gas discovery at the Sala Prospect in Block 9 of onshore Kenya. Africa Oil is the operator of Block 9 and has a 50% stake, with Marathon Oil holding the remaining 50%. Both firms are currently evaluating an appraisal plan to follow-up the discovery, in consultation with the Kenyan Government.

Marathon, together with Africa Oil, is set to complete more than 20 wells this year through an exploration and appraisal program. Currently, seven rigs are working under the development of the Rift basin and post mid-year only six rigs will be working in this area. The total resources discovered in this area are more than 500 million barrels of oil. With the huge reserve base and strong exploration plan, Marathon could ramp up production from this basin and strengthen its Ethiopian production operation.

Competitors at a glance

Continental Resources (NYSE:CLR) is a major player in the Woodford shale play. The SCOOP portion of Woodford play was discovered by this company in October 2012. Since then, it continues delivering consistent and improved results through its efficient drilling. It has 400,000 acres of leasehold in this play and has a working interest in around 155 wells. During its first-quarter earnings for 2014, average net production was 29,363 boepd, up by 24% quarter over quarter. The company operated 20 rigs in the play in first quarter and plans to operate an average rig count of 21 throughout 2014. These rigs will be directed towards drilling of long lateral wells. Earlier, this company drilled standard wells with a one-mile lateral length; however, it has shifted its focus to two-mile-long lateral length wells. Continental plans to invest $900 million in the SCOOP for development and exploration this year.

In the Eagle Ford region, Marathon's biggest competitor is Devon Energy (NYSE:DVN). Its first-quarter oil production jumped 21% from year-ago quarter to an average of 176,000 barrels per day. During May, Devon's production was 64,000 boepd. The company is on track to average 70,000 to 80,000 boepd throughout the rest of the year. Devon will spend around $1.3 billion this year whereas Marathon has a $2.3 billion Eagle Ford capital spending budget for this year.

Conclusion

Marathon's ongoing exploration in unconventional plays will affect its long-term production opportunity.

The strategy to streamline its domestic business is proving beneficial to the company. The cash from the Norway deal will facilitate the organic growth of the company and will also support share buybacks. Marathon's development and drilling in the Oklahoma Woodford play is promising and will provide an improved production opportunity. Moreover, the company's longer lateral wells in the SCOOP portion will help it to ramp up production this year. Apart from this, the newly acquired working interest in Ethiopian Rift basin will provide a tailwind to the company's growth prospects. Thus, Marathon should report a strong financial result this year. In my opinion, Marathon Oil looks good for long-term growth.

Source: Marathon Oil: Focusing More On Unconventional Plays