Marathon Oil - Spicing Up Its Portfolio

Jul.31.14 | About: Marathon Oil (MRO)


With the sale of its Norwegian assets, Marathon Oil will be spending a majority of its time and resources on its most lucrative assets.

The company expects to invest approximately $3.6 billion of its $5.9 billion capital budget on its U.S. resources.

The higher capital expenditure will result in an increase in Marathon's production by 20% in the coming years.

The Bakken region is expected to deliver 15-20 years of inventory at its current rig levels. Marathon increased its rig activity in the Bakken region by 20 percent.

The company is making an effort to restructure its portfolio by selling high political-risk assets abroad and concentrating more on its North American properties.

Marathon Oil (NYSE:MRO) has been detaching itself from its international assets, which will result in increased domestic production. Marathon has recently announced the sale of its North Sea oil business to a local Norwegian business for as much as $2.7 billion. The transaction is comprised of selling a floating production, storage and offloading vessel; 10 company-operated licenses; and several non-operated licenses on the Norwegian Continental Shelf in the North Sea. Traditionally, the North Sea is a high-cost production region. Divesting these assets will help to improve margins.

The transaction is expected to close in Q4 FY 2014, and is still subject to regulatory approvals. However, after making adjustments for debt and interest, the estimates are that the deal will generate $2.1 billion for Marathon Oil in cash. The deal will pave the way for Marathon to further reorganize its portfolio by selling assets abroad and concentrating more on North American properties. Currently, Marathon Oil is ranked among the lowest-cost drillers and producers within the U.S. So, with the completion of the transaction and domestic economies of scale, the company will be able to further lower its costs.

The proceeds from the Norwegian sale are expected to be spent on onshore domestic energy production. By reducing international operations, Marathon Oil is positioned to focus its efforts on areas where costs are more predictable and operating margins are stronger. Let's discuss the outlook of the company's position in these oil plays.

U.S. Onshore Assets

Marathon Oil has been enjoying oil producing acreage within the lucrative oil plays of the Bakken, Eagle Ford, and Oklahoma Resource Basins. These assets are far more efficient than many of Marathon's international assets. In addition, the contribution of these assets to the total production has also increased from 3% to 45% during 2010 to 2013. Overall, these assets constitute around 2.4 billion barrels of resources and 4500 well locations. Going forward, the company expects production from the unconventional plays in North America to jump by more than 30% during 2013-2014, as can be seen in the figure below.

Click to enlarge

Source: Investor Presentation

Accelerated rig activity in these assets will be the primary diver of increased production. However, the increased activity is supplemented by a higher spending budget. The company has also allocated more than 60 percent of its 2014 capital and exploration budget ($3.6 billion) to these resource plays.

Moreover, Marathon is also testing out the Austin Chalk formation just above the Eagle Ford. Marathon was able to display the potential of the Austin Chalk by bringing the Children Weston 4H appraisal well on-line, as the well had a stellar production curve. The property was able to record a 30-day initial production rate of 1,600 BOE/d, with 76% liquids in output. The Austin Chalk wells are expected to be operational in the latter part of 2014.

Bakken Field

Marathon increased the rig activity in the Bakken field by 20 percent. During the first three quarters, the company increased its average net production by 16 percent compared to the average net production achieved during the same period in the previous year. The Bakken field continuously increases production by 15000 to 20000 barrels per day. The increase seems to be sustainable in the long term.

Going forward, the Bakken field is expected to deliver 15-20 year inventory at its current rig count. Currently, there are 10,000 producing wells in North Dakota; however, the state mentioned the potential for 40,000 more development wells.

Concluding Remarks

The recent steps taken by the company to improve its performance, such as expansion of activities in the unconventional plays in the U.S., are expected to bring bright prospects for the company in the coming years. The company is putting efforts into improving its financial position by reducing its assets situated in politically risky areas abroad. This will result in enhanced focus on its core acreage. As it has been rightly observed by analyst Thomas R. Driscoll, "the sale will likely add several percentage points to company's long-term growth prospects. We forecast long-term production growth rates of 8%-10%, in line with MRO's guidance."

It will also enable the company to have more cash to invest in its assets in the U.S. The company is also considering returning more cash to its shareholders in the form of buybacks. Given the increased production, growth forms a major factor in judging the performance and outlook of players in the oil and gas industry. With many optimistic prospects for the growth in the company's production, Marathon Oil seems to be an attractive investment opportunity.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.