Marathon Oil (MRO) may still be suffering from the spin-off that saw the creation of Marathon Oil and Marathon Petroleum (MPC) and may not yet be gearing up to get out of bearish territory. You will remember that the spin-off was designed to leave the exploration and production of oil to Marathon Oil while Marathon Petroleum is left with the refinement process. However, what its management failed to factor into its calculations was the high international tax rates.
However, the fact remains that contrary to what some analysts might lead you to believe, there is practically nothing that can be done to arrest the high international tax rates. The mere fact that Marathon Oil does most of its international business in high tax nations means that it has signed a long deal to pay high taxes. The only thing that can be done to lighten the load is to increase production and ultimately increase revenue so that there will be a substantial amount left after taxation.
This may probably be the reason behind the decision of Marathon Oil in reaching an agreement to purchase Paloma partners for $750 million in cash. The purchase will see it taking ownership of the 17,000 acres of land that the Texas-based Paloma has in Karnes and Live Oak countries. News has it that the acreage has a combined production capacity of 7,000 barrels and there are estimates that the acreage has potential of recoverable resources of about 10 billion barrels.
However, the deal is not yet concluded as it is still awaiting approvals and agreement to some conditions by September 1. Yet, if the deal should scale through, it would give Marathon Oil the expansion that it needs to compete more favorably for the benefits of its shareholders.
In another development, Marathon Oil and Scot-based Cairn Energy have teamed up in a joint venture to bid for Cyprus oil and gas exploration rights. The joint-venture bid, submitted this year, awaits the decision by the Cyprus Ministry of Commerce Industry and Tourism toward the end of the year. However, news has it that the announcement of the discovering of deposits of natural gas the offshore waters of Cyprus has made the big fishes in the oil and gas industry like Enersis (ENI) and Total (TOT) focus their searchlights on the region and that they have also submitted bids.
Thus, it is doubtful that a relatively smaller player like Marathon Oil will be able to win the rights. However, if it manages to secure the winning bid, it will still need to contend with the international tensions that have resurfaced on the divided island with the announcement of the discovery of the deposit. You will remember that the island is divided into two separate entities, namely the Republic of Cyprus, a sovereign state that has international recognition and the Republic of Northern Cyprus, which is under Turkey. Thus, Marathon Oil and its partner may find themselves in the middle of an international conflict, if the dispute should escalate to such levels.
On another note, Statoil (STO) recently announced that it had transferred the operatorship of the Vilje field in the North Sea to Marathon Oil. The agreement is expected to take effect on September 1, this year, will not change any of the stakes in the production license and is still awaiting the ratification of the Ministry of Petroleum and Energy. This development is further testimony to my assertion that the only way forward for Marathon Oil is to increase production in order to increase revenue. If the Statoil deal goes through, Marathon Oil can expect an increase in production to the tune of 27,000 barrels per day.
Another interesting piece of news is that fact that Exxon Mobil (XOM) has now restarted its hydrocracking unit in Beaumont, Texas, that was taken out of operation last week on Thursday. While the malfunctioning of the hydrocracking unit may have slowed operations down toward the end of last week, ExxonMobil had been quick to find a solution to the problem. ExxonMobil is also working toward restarting a compressor on its coking unit. The point is that the functioning of the hydrocracking unit will see the Beaumont production average about 344,500 barrels per day. The company is surely glad to see its unit back up, and welcomes back the stable production.
In another development, news of Chesapeake Energy (CHK) and its embattled management took an interesting turn when a group of its investors filed a plea with a judge for the postponement of its annual shareholders' meeting in order for them to gain more insight into its former CEO's compensation. You may remember that a Reuter's investigation blew the lid on the fact that McClendon had taken up to $1.1 billion in compensations despite the fact that the company's finances were a mess. The future of its stock and its strength as a Marathon competitor are still unknown.
Another competitor newspiece is that Chevron (CVX) has been linked with a move that will see it holding a prominent position to supply the demand for liquefied natural gas in Japan. You will remember that Japan had made the decision to end the use of nuclear energy after the Fukushima disaster last year. It was reported that Chevron is already in a contract with Tohuku Electric Power, an indigenous utility company in Japan, for the supply of Liquefied Natural Gas to the tune of about 1,000,000 tons. This should help Chevron remain a formidable competitor for the future.
Marathon should be taking note of Chevron's move and working toward securing large international contracts like this one, even if the tax rates might be high. With the company still reeling from the fact that its spin-off has been so successful, it should be trying hard to increase production and earn more profit. There's no reason to run toward Marathon quite yet. Until it can prove it is on to something, there are better oil companies to back right now.