Marathon Capitalizes on Domestic Oil Volumes and Higher Oil Prices

Feb.16.11 | About: Marathon Oil (MRO)

Marathon Oil Corp. (NYSE:MRO) is an oil and gas exploration and production company. They operate in four segments:

1. Exploration and Production
2. Oil Sands Mining
3. Integrated Gas
4. Refining, Marketing and Transportation

Marathon has a large base reserve of hydrocarbons. On average this base is 66% liquids. It has approximately 380 million BOED. 2011 capex will be approximately $1.5 billion per year. Marathon generates substantial cash flow.

Marathon's production has been growing 25% CAGR. It is expected that this year will be 72% liquids. When looking at Marathon's cap ex, it is reasonable to say this company is changing its product mix. In 2007, Marathon spent $1.4 million on cap ex and 60% was for liquids. In 2011, capex is 92% liquids. Marathon's 2007 production mix was 44% liquids and production for 2011 will be 58% liquid. Marathon like many companies is doing a great job of switching a gassy portfolio for an oily one. Marathon's liquids rich portfolio is in these locations:

Bakken-391000 net acres
Niobrara-177000 net acres (DJ Basin)
Anadarko-88000 net acres
Eagle Ford-75000 net acres
In-situ-50000 net acres (will be appraised this year)

Bakken-$6 to $7 million
Niobrara-$4 million
Anadarko-$7.5 million
Eagle Ford-$5.5 million

Bakken-280 to 500
Niobrara-250 to 300
Anadarko-750 to 1000
Eagle Ford-250 to 400

Bakken-250 to 600
Niobrara-200 to 300
Anadarko-600 to 900
Eagle Ford-350 to 400

Eagle Ford-350

Looking at Marathon's Bakken shale locations, average annual net production has increased steadily since 2008. In 2008, this production was 6 MBOED. By 2009, this increased to 10 MBOED, and 2010 was 13 MBOED. Estimated 2013 average annual net production will increase to 22. This number seems a little conservative based on exited production of 15 MBOED last year.

The Anadarko Woodford shale has seen an increased program activity, with 3 rigs running and a total of 8 rigs by the end of the year. An additional 50 to 60 net wells will be added per year by 2013. This area has very high returns with respect to domestic resource plays. Exited 2010 production was 1500 BOED. The estimated peak rate for this area is 30000 BOED by 2015, which shows why Marathon is excited about the Anadarko. It should also be noted, the operating costs ($2-$3/BOE) and net development costs ($10-$15/BOE) are much lower at this location.

The Eagle Ford has Marathon's working interest at 94%. It has an option to acquire an additional 75000 acres. Marathon is planning to drill and complete four wells this year. At this point an evaluation will be made and the decision to acquire the additional acreage will be made. Two rigs are currently running at this location, and a total of 6 rigs are estimated by 2013. Estimated peak rate of 15000 BOED is possible at the Eagle Ford.

The Niobrara location seems very interesting, as there has not been as much output compared to locations like the Bakken. Even so, I am skeptically optimistic this area could be a big opportunity for players like Marathon. Marathon has the ability to acquire an additional 200000 acres in the Niobrara. It is in the process of acquiring 3D-Seismic. Marathon is planning to drill and complete exploration wells. A rig will be delivered in April and will have a total of 8 to 12 wells this year.

Marathon also engaged in shallow and deep sea drilling and exploration. It is targeting 10 wells per year for the foreseeable future. The areas Marathon is interested in are the Gulf of Mexico, Kurdistan in Iraq, Poland, and Indonesia. It has 21 prospects with net unrisked of 1 BBOE.

Marathon has an onshore play in Kurdistan, Iraq. It states this is a world class oil play that is under explored. Marathon is planning on starting production soon. Kurdistan has 3 BBOE of gross unrisked potential. It has stacked pay, with 4 way surface anticlines. Two wells are being drilled. In a different location they are planning the 3D-seismic sometime this year, with drilling next year. This area is over 600000 gross acres.

Marathon is also in Poland working shale gas. This area has much higher natural gas rates then the United States. Better margins in an area that has been purchasing natural gas from Russia. Marathon has 2.3 million net acres. By the fourth quarter of this year they will acquire seismic and drill one or two wells. In 2012 Marathon plans to drill 7-8 wells.

Marathon is also well positioned based on refineries, terminals, pipelines, coastal water terminals, inland water terminals, along with retail locations. Retail locations include over 1350 Speedway c-store. Speedway has two million customers per day. The Marathon retail adds another 5100 branded locations.

Marathon's Midwest refined products logistics system allows logistics and processing flexibility. Feedstocks are able to be changed quickly as the pricing environment changes. This gives Marathon the ability to capitalize on changes in the system. Marathon is optimistic the increased flow from Canadian oil sands will continue to pad its balance sheet. Marathon's expansion at Garyville will improve overall cash cost per barrel by 20%.

The Detroit refinery upgrade also capitalizes on increase Canadian oil sand flow. Heavy oil capacity has been increased an additional 80000 barrels per day. Crude capacity increased 15000 per day. A 28000 barrels per day delayed coker and 36000 barrels per day distillate hydrotreater upgrades. Completion should occur sometime in 2012. This is a massive $2.2 billion project, with $1.3 billion capitalized last year.

Refining and marketing continue to be the main drivers of segment income from operations. In 2009, refining and marketing contributed 54%, and as of September of 2010, this number increased to 58%.

In summary, Marathon is a huge company that is difficult to cover in one sitting. It is safe to say that its oil exploration and production services will continue to do well as the price of oil gets ever closer to $100 per barrel. Marathon's large natural gas reserves can also be tapped as pricing increases. The other area of interest is its refining capabilities. The refining sector is recovering from one of the biggest slowdowns in recent memory. Although I am bullish oil drillers, I am even more bullish the refining names.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.