Hold-rated Marathon Oil (MRO) offers unlevered appreciation potential of 9% to estimated net present value [NPV] of $62 a share, revised up from $55 a share, split-adjusted, on May 29 when we raised long-term oil price to $66 a barrel from $60.The surprise announcement of the acquisition of Canadian producer Western Oil Sands [WTO] accompanied the disclosure of second quarter results on July 31. Adding unlevered cash flow (Ebitda) from oil sands production restores a strategic balance with surging refining/marketing (Other) operations. Similarly, the proposed acquisition would keep oil production ahead of downstream by 47% to 42% in the composition of NPV. With no exploration risk and moderate political risk, oil sands value ought to continue rising along with oil price despite volatility of short-term quotes. More volatile refining margin has just completed a favorable cycle. We keep Marathon stock as a potential restoration to buy should there be an unforeseen period of stock price weakness.
$200,000 a Daily BarrelBig acquisitions require confidence in the industry outlook and Marathon’s latest is no exception. The purchase price of $6.2 billion buys 31,000 barrels daily of current production, implying a price of $200,000 a daily barrel. Western Oil Sands holds 20% of the Athabasca Oil Sands Project [AOSP] operated by Royal Dutch Shell (RDS.A) (60%) and with Chevron (CVX) as the remaining 20% partner. AOSP is the third major mine/upgrader venture after Suncor (SU) and Syncrude, whose largest owner at 37% is Canadian Oil Sands Trust (OTCQX:COSWF), the only pure publicly traded oil sands miner/upgrader. At latest stock price before the deal for Western was announced, COSWF had an enterprise value of $15.9 billion for 129,000 barrels daily of current production, implying a price of $123,000 a daily barrel. Estimated present value of COSWF is about $155,000 a daily barrel. Marathon may justify more because AOSP is at a lower percentage of ultimate capacity than Syncrude and the WTO properties include in situ oil sands leases in addition to mining leases. We like Marathon’s enthusiasm for oil sands.
Originally published on July 31, 2007.
MRO 1-yr chart: