In an historic moment for the integrated oil producer, management of buy-recommended Marathon Oil (NYSE:MRO) declared it would create a new entity, Marathon Petroleum Company (MPC), to be an independent refiner/marketer. Marathon Oil would become an independent producer. Marathon would potentially boost its unlevered Enterprise Value by 27% and levered stock price by 37%. That is the difference implied by a median McDep Ratio of 0.85 for U.S. Independents compared to 0.68 for U.S. Integrated companies. The timing for the change looks good as the premium for pure plays can widen further in a rising stock market. Total unlevered appreciation potential is 44% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $68 a share. Subject to financial details for the separate pieces to be disclosed shortly, NPV might divide into $54 for independent MRO and $14 for MPC.
Business Improving Upstream and Downstream
Independent MRO will keep the upstream business of natural gas and oil production worth about $47 billion in our framework, recently revised upward for $100 oil. Independent MPC will have the downstream refining/marketing business we peg at $13 billion. At the same time, the company has been doing better lately than our cash flow (Ebitda) estimate for 2011 suggests. In the upstream Exploration and Production activity, it looks like Ebitda margin for 2010 may be 63% compared to our estimate of 58% for 2011. In the downstream “Other” activity, estimated Ebitda does not reflect industry conditions as robust as the sharp increase in the N.Y. Harbor crack spread to $13.41 a barrel now indicated by futures prices for 2011 compared to $9.15 measured for 2010.
Finally, After Thirty Years!
The powerful value-creating potential of a spinoff was part of our enthusiasm for Marathon three decades ago. Liking the stock through the 1970s, we were disappointed that MRO stock declined so much in 1981 considering how valuable we thought the company’s oil reserves were. As a result, as diplomatically as a brash young analyst could, we wrote that Marathon needed to make a restructuring change like a spinoff or someone else would do it for them. Three months later, Mobil Oil bid to acquire Marathon. That drove the company into the arms of white knight U.S. Steel, renamed USX (NYSE:X). After a decade, Carl Icahn, with our analytical help, urged USX to divest Marathon, which it did eventually. Now we have come full circle to the original spinoff idea with management not only embracing it, but timing the process for optimal rewards to stockholders. Congratulations to Chief Executive Clarence Cazalot and his team!
Originally published on January 18, 2011.