Marathon A Steal At $25

Jun.18.12 | About: Marathon Oil (MRO)

Capital One Southcoast picked up Marathon Oil (NYSE:MRO) for equities coverage on June 12, starting the coverage with an "add" rating and a price target of $36. Analyst Eliot Javanmardi noted Marathon's potential for "low-risk liquids growth via U.S. onshore plays," as Marathon continues to reposition its upstream operations for unconventional drilling. According to its website, Marathon believes that assets such as its "Bakken and Eagle Ford plays are indicative of our steady growth and the exciting opportunities that are yet to come."

Though Marathon's international operations are world class and hedge its bets on unconventional production, it is staking its future on U.S. shale, which plays on a competitive edge for Marathon. Marathon has more technology and experience at its disposal than many of the U.S. independents with which it is now competing, which means that anyone bullish on U.S. focused shale needs to think about Marathon seriously.

Pushed (or Pulled) on Canadian Development by Partner Shell

Marathon's competitor and joint venture partner Shell (NYSE:RDS.A) is taking a very aggressive position on Canadian oil and gas development. Shell recently pushed forward with placing a builder for a planned $4 billion pipeline to carry Canadian produced gas to the coast of British Columbia, where Shell is building a massive liquid natural gas processing plant with its international partners. This move allows the Shell consortium to pull ahead of the Kitimat LNG project led by Apache (NYSE:APA) with partners EOG Resources (NYSE:EOG) and Encana (NYSE:ECA). In recent comments, Lorraine Mitchelmore, President of Shell subsidiary Shell Canada Ltd, said that Canada is now "complacent" with its oil and gas development, which allows the U.S. to corner Canada's "market in natural gas, and in oil, a similar thing is happening."

To counter the trend, Shell wants to expand production at the Athabasca Oil Sands Project, in which Marathon and Chevron (NYSE:CVX) are partners. The expansion could add as much as 90,000 barrels per day to the current production of 255,000 barrels per day. Depending on which way you look at it, this could be a good or a bad move for Marathon.

Betting on the Bakken and Eagle Ford

A recent report by consultants at Wood MacKenzie indicated that growth in the Bakken formation is competing directly with Canadian oil, which with Marathon's focus on the Bakken and participation in Canadian oil sands puts Marathon in the position of competing heavily with itself.

David E. Roberts, Executive Vice President and CEO of Marathon, recently presented regarding Marathon's Bakken production at the 20th Williston Basin Petroleum Conference. In his remarks, he called the Bakken "a critically important part of our business," noting that more oil is now produced from North Dakota than is produced from Alaska. Net sales from Bakken production made up over 20% of Marathon's net liquid hydrocarbons sales in the U.S. in 2011, and with Marathon's focus on this play the percentage is only set to grow. Roberts also pointed to Marathon's early arrival on the Bakken as the experience that is allowing Marathon to grow its activities on other U.S. shale plays, as the company prepares "to enter a new era of oil and gas energy supply."

Marathon currently claims 416,000 net acres on the Bakken, and estimates its net resources on these acres at some 350 mmboe. However, this is with 420 to 640 acre average well spacing. With competitors like EOG successfully downspacing as far as 320 acre intervals (with plans to test 160 acre spacing in the near future), Marathon's actual recoverable could be much higher. With two dedicated frac crews and eight rigs on the play, it's clear that Marathon is standing fully behind its idea of a "new era," not just repeating industry optimism.

Norway Hedge Falters

Marathon is suffering a setback in its offshore Norway operations, as over a hundred workers at oilfield service company Baker Hughes Incorporated (NYSE:BHI) are participating in a limited strike. The strike is not expected to have a large impact on production, but if continued it will delay drilling of further exploration and production wells. Several of Marathon's largest competitors in the area are also impacted, including Statoil (NYSE:STO), Exxon Mobil (NYSE:XOM), and Shell.

Statoil largely prompted the strike by ending an early pension plan for workers, setting in motion arbitration proceedings with Norway's National Mediator. If the arbitration is not resolved by June 23, a far more widespread strike is expected that could halt production on Norway's offshore rigs completely. Workers are "reassuring" oil companies that a strike will not be enacted until operations on effected rigs are shut down "in a safe manner," but a full lockout would reduce the amount of oil reaching global markets by 3.8 mboe per day. The shutdown would be a blow to Marathon, as its net liquid hydrocarbon sales from Norway averaged 80 mboepd in 2011, and a total shutdown would prevent Marathon from moving on its plans to continue exploration in its recently acquired leaseholds in the North Sea. The only upside to the threatened strike is that it would also bring down production and revenues for most of Marathon's major competitors.


Marathon expects that its U.S. onshore production will reach just over 125 mboe per day by the fourth quarter of 2012, up from 100 mboe per day in the first quarter of 2012 and about 90 mboe per day in the fourth quarter of 2011. Marathon's expected capital allocation over the next four years indicates that it is staking much of its future growth on the Bakken and on Eagle Ford, with Eagle Ford capturing 43% of Marathon's growth allocation. After years of negative revenue growth (-42% on a three year average at present), this type of growth is what Marathon needs to see growth in its stock price. Currently trading around $25 per share, Marathon has a price to book of 1.0 and a forward price to earnings of 6.0, which is about as cheap as this value stock is going to get.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.