Marathon Oil (MRO) has started out 2012 at a slower pace than in 2011, and the share price has under-performed many of its competitors. The company made some big changes in 2011 and is now focused on growing production results in the U.S. and and ramping up operations in Libya.
In June of 2011, Marathon spun off the company's midstream refining, transport and retail assets into a new company, Marathon Petroleum (MPC). Marathon Oil is now a focused exploration and production - E&P - company, whose fortunes rest on the company's ability to increase oil and gas production along with the prices the company receives for those energy products. The division of integrated oil companies into E&P and refining plus retail is a mini-trend. Later in May 2012, ConocoPhillips (COP) will complete its spin off with the refining and retail assets moving into the new Phillips 66 company.
Marathon Oil holds a diverse, global portfolio of production assets. In the U.S. the company is very active in shale oil plays, primarily Eagle Ford and the Bakken play. Marathon also has extensive production operations off the U.S. shore in the Gulf of Mexico. In Canada, Marathon is involved in oil sands production. International oil and gas operations are located in or offshore Norway, the United Kingdom, Poland, Libya, West Africa, Kurdistan Iraq and Indonesia.
The Poland exploration project is quite new and has potential for the production of high value natural gas for the European markets. In the first quarter of 2012, the U.S. and Norway each accounted for 34% of barrels of oil equivalent production. On an earnings level for the quarter, the U.S. accounted for 23% of total earnings and international production brought in 77%. Production in Libya resumed in the first quarter following the 2011 upheaval in that country.
The U.S. production areas are a focus for growth of production from Marathon. The company produced growth of 12% in the continental 48 in 2011 and the goal is 25% growth in 2012. The first quarter earnings overall results were hurt by lower Canadian oil sands profits and low natural gas prices. To start out 2012, Marathon reported first quarter adjusted net income of 67 cents per share, compared to earnings of 78 cents in the fourth quarter of 2011. The first quarter earnings were well below the Wall Street consensus estimate of 87 cents per share. For the full year 2011, earnings are estimated to be $3.73 per share, up from $3.21 in 2011. The growth drivers will be continued drilling and increased production in the U.S. and a recovery in production from Libya.
Since spinning off the midstream operations, Marathon has under-performed the major integrated oil companies. From July 1, 2011 through early May 2012, the Marathon share price is down 19%. In comparison, Chevron (CVX) and Exxon Mobil (XOM) share prices are at about break-even. Of the larger E&P companies, shares of Hess (HES) and Apache (APA) are off close to 30%. Occidental Petroleum (OXY)-- which owns midstream operations as well as upstream-- has performed very close to Marathon, with a stock value down 17%. Year-to-date in 2012, the pricing relationships are similar with the integrated oil companies near level and the E&P company shares down 8% to 10%.
Marathon Oil has several factors going for it which may appeal to investors. The company has one of the lowest cost per barrel of production in the industry. It is managing its capital expenditure plans to produce compounded 20% or better production growth out to at least 2015. The company has a nice balance between international production, which can often bring higher prices for the energy produced and stable U.S. asset plays.
Marathon's percentage of liquids vs. gas is one of the highest in the industry. The current prices for liquids - crude oil and natural gas liquids - are much higher than for dry natural gas, increasing overall profitability compared to other energy companies. The biggest negative for Marathon is the high level of taxes the company pays -- over 60%. The main reason is the very high tax rate on oil produced off Norway. Marathon currently has a dividend yield of 2.5%, an attractive level for a pure exploration and production energy company.
In summary, Marathon is a fairly new, dedicated exploration and production energy company with an attractive portfolio of assets and growth potential.