Marathon Oil (MRO) is focusing on deepwater operations in a big way. It recently delivered a proposal to the Norwegian Ministry of Petroleum and Energy for development of the Boyla field in the North Sea, which is 65% owned and operated by Marathon, with additional interests held by ConocoPhillips Scandinavia, a subsidiary of ConocoPhilips (COP) and Lundin Norway. It is estimated that the field holds 23 mboe in relatively shallow water depths of 120 meters.
Marathon is adding to its stakes in the Norwegian North Sea with its recent acquisition of Statoil's (STO) stake in the Vilje field. The current plan is for Marathon to take ownership on September 1, 2012, pending approval of the deal by the Norwegian Ministry of Petroleum and Energy. This deal certainly will help Marathon meet its goal of 150% or greater reserve replacement in 2012, and with less intensive drilling since Statoil reports that the field is producing using vertical drills, without stimulation or enhanced recovery methods.
North Sea Far From Exhausted
Though much of the North Sea can be considered mature fields, this play still has a lot of energy left. Statoil is actively producing from several mature fields, including the Statfjord, the Gullfaks, and the Asgard. Norway recently began providing generous tax incentives to early stage exploration in its North Sea waters, which I think has an influence on Marathon's recent group of Norwegian deals. I think Marathon might also be working on a solidification strategy, as 34% of Marathon's first quarter sales volumes derived from its production in Norway, compared to just 3% from the U.K.
At the same time Norway is encouraging development, the U.K. is enforcing more stringent financial arrangements, actively seeking back taxes while raising the marginal tax rate to between 62 and 81%. Peter Buchanan, CEO of U.K. based small player Valiant Petroleum, recently noted that "there's still a huge amount of oil and gas in the U.K., but it will be found in smaller fields, which are harder commercially." This makes the North Sea an ideal candidate for the larger players like Marathon, which can afford capital intensive exploration activities. Additionally, as new discoveries are trending to the far north and south, companies are finding it necessary to extend existing infrastructure to keep up. These kinds of capital intensive investments can only be done by firms with deep pockets like Marathon, BP (BP), and Royal Dutch Shell (RDS.A).
By positioning itself to encourage oil and gas development through tax rebates, Norway is looking much more attractive for exploration than the U.K. right now. BP is active on the Norway side, and recently announced an order for four support vessels specifically designed for its operations in the North Sea. Its enormous Clair field, in which it shares interests with ConocoPhillips, Chevron (NYSE: CVX) and Shell, is ramping up in the early stages of development with two new offshore oil platforms under construction. BP expects that production will begin in 2016, with a peak anticipated around 120,000 boe per day. This makes BP a major competitor for Marathon in the North Sea, and it will be interesting to compare these two companies' progress as development continues in the coming years.
It should be noted that as U.K. production from the North Sea drops, British gas prices are on a rising trend due to undersupply despite lower than average seasonal demand. If this trend continues, I think that operators will be eager to restart active exploration in the U.K. North Sea despite the higher tax rate, at least temporarily.
Looking to Acquire U.S. Shale Acreage
Marathon is expanding its position on the Eagle Ford shale with its recent acquisition of Paloma Partners II LLC, which adds 17,000 liquids rich net acres to Marathon's leasehold at a cost of $750 million, or $44,117 per acre. The deal is expected to close in the third quarter. According to its 2011 annual report, Marathon expects the Eagle Ford to be a major growth driver for the company, with expectations of 100,000 net boe per day production by 2016 from the play.
Marathon expects to spend $2.7 billion on shale play acquisition in 2012, so look for further news from Marathon in this sector. Marathon is participating in outside-operated Permian Basin plays using carbon dioxide flooding, and I think it is possible that the company could be interested in acquiring acreage from Chesapeake (CHK), which is marketing its Permian assets. It looks increasingly unlikely that Chesapeake will be able to close its much-needed asset sale by the third quarter as it previously predicted, considering that a month of the second quarter is already lost. From the beginning, though, Chesapeake's timeline was optimistic. This does not mean that the company will not be able to sell its Permian acreage; on the contrary, I think Chesapeake's competitors realize that the longer Chesapeake must wait for a buyer, the lower the per-acre price will slide, potentially making this an affordable deal for Marathon.
Marathon is currently trading around $24 with a price to book of 1.0 and a forward price to earnings of 5.9, which are attractive metrics for a company with Marathon's assets and growth potential. By comparison, competitor ConocoPhillips is trading around $52 with a price to book of 1.0 but a higher forward price to earnings of 6.9, and Chevron is trading around $96 with a price to book of 1.5 and a forward price to earnings of 7.1. BP is trading around $37 with a price to book of 1.0 and a forward price to earnings of 4.9, reflecting the fact that investors are still uncertain of what the near future contains for BP as settlements related to its Deepwater Horizon disaster continue.
I think that Marathon is taking advantage of a great opportunity with its recent moves in the North Sea, and is showing that it intends to continue its diversified asset base by also working on expanding its footprint in U.S. shale plays. I also like that Marathon is able to do this and maintain a low debt to equity ratio, currently standing at 0.3. The future looks bright for Marathon, and I think it's a solid buy.