Marathon Oil Closes Oil Sands Deal

Trading under estimated net present value [NPV] of $62 a share, the stock of Hold-rated Marathon Oil (MRO) has further appreciation potential with oil price. Third quarter results reported today traced a high cash flow (Ebitda) margin on oil and gas production and a dip in downstream refining/marketing following a particularly strong previous quarter.

NPV remains amply supported by projected cash flow capitalized at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P). In a stroke of unfortunate timing, the Alberta government announced a tax increase just as Marathon was closing its $7 billion acquisition of Western Oil Sands. Yet the deal was initially priced at a time of lower oil price and the recent trend in price already implies the higher taxes will be passed on to consumers.

A renewed rise in oil price may take six-year futures to another double as was the case from the end of 2004 to mid 2006, subject to short declines from time to time. We keep Marathon stock as a potential restoration to buy should there be an unforeseen period of stock price weakness.

Originally published on November 1, 2007.