Fitch Ratings recently affirmed Marathon Oil's (MRO) BBB default rating, noting Marathon's "manageable" liabilities despite Fitch's belief that Marathon paid a premium on its acquisition of Hilcorp. Marathon paid for the acquisition from cash in hand and operating cash flow, for which it received a leading position on the Eagle Ford shale. CapitalOne Southcoast is taking a more bullish approach, awarding Marathon with an add rating and a price target of $36 per share, largely based on the fact that Marathon is not losing market value as steeply as its industry peers.
Even if Fitch is not excited about the Eagle Ford acquisition, Marathon and its shareholders are. Marathon earmarked 43% of its U.S. capital expenditures for this play alone, nearly twice as much as it plans to contribute to its next largest U.S. play, the Bakken. With four dedicated frac crews and 18 rigs operating on the Eagle Ford Marathon is looking to bring high production to its newest U.S. play, for which it should see high revenues given that it has an average 80% working interest on its wells here. Based on a heavy drilling schedule, Marathon anticipates its Eagle Ford production will reach 100 mboe per day by 2016, compared to 30 mboe per day currently. Like competitor EOG Resources (EOG), Marathon is experimenting with downspacing wells on this play, to as low as 40 acre intervals. It anticipates fully analyzing test results early in 2013.
International Operations: Wins and Losses
Marathon recently announced recommencement of its exploration activities in Gabon, in partnership with Total Gabon, a subsidiary of Total S.A. (TOT) together with Cobalt International Energy (CIE) and the Republic of Gabon. The partners plan to start drilling in the first quarter of 2013 after interpretation of 3-D seismic data acquired in 2011 is complete. Total is the operator and majority interest holder in the project, and badly needs a new discovery in this area to prop up its steadily declining Gabonese production.
Marathon is not in as much of a pinch here as Total. Total is the largest operator in Gabon and owns roughly 44% of the Sogara Refinery in Gabon, while Marathon has never relied on Gabon for substantial revenues. The firm is, however, building its positions off the shores of Africa. Marathon is working in several development areas off the coast of Angola, with a 10% working interest in the two blocks where these are located. Its holdings in Equatorial Guinea are more substantial, where it counts its developments as part of its long-term liquid natural gas strategy. Offshore African fields hold a great deal of reserves, as Anadarko Petroleum (APC) can attest, but it seems Marathon is wary of pushing development due to the civil unrest plaguing much of the continent. However, executives at BP (BP) recently pointed out that despite supply disruptions in Libya and elsewhere in 2011, producers were able to push an offsetting increase from other countries including Saudi Arabia, leading BP to sum up the year thus: "Nothing in the aggregate data indicates anything out of the ordinary...with seemingly normal growth and in line with long-term structural changes."
In Norway, Marathon is doing the best it can in the face of an ongoing oil worker strike. It just announced awarding a major contract to French oil servicing company Technip, under which Technip will undertake "all activities necessary" to complete subsea Boyla field development, including construction of a connection to Marathon's Alvheim facilities. Norway's Labor Minister Hanne Bjurstroem indicated on June 27 that the government of Norway has no current plans to intervene in the strike, though it is reserving the option should the strike escalate or have "large consequences for society." At its current scale, it is estimated the strike is reducing Norway's oil production by 11% and natural gas production by 4%, though the true numbers could be twice as high.
The oil and gas workers' unions are deliberately maneuvering to keep the strike at a scale small enough to prevent government intervention but large enough to convince oil companies to reach a settlement over pensions and retirement age. Since oil and gas production makes up more than 20% of Norway's gross domestic product, the Norwegian government reserves the authority to intervene in strikes that impact the sector. A meeting between the multiple workers' unions to discuss possible escalation of the strike is scheduled for June 29. The producers that employ these workers also have the option of declaring a lockout, which is under consideration. Statoil (STO) already shut in several of its oil platforms in response to the strike.
As Royal Dutch Shell (RDS.A) and Apache (APA) make headway on exporting liquid natural gas from British Columbia to Asian markets, Marathon might be regretting its decision to pull out of its partnership in the Kenai, Alaska liquid natural gas plant with ConocoPhillips (COP). ConocoPhillips announced earlier this month that it resumed exports from the plant, which was shut down just before the Tohoku earthquake and tsunami substantially changed Japan's energy markets. Its first shipment after re-opening reached Japan on May 25. With a capacity of 1.5 mtpa, the Kenai plant is smaller than its competitors' proposed plants further north, but if ConocoPhillips is able to build out its contracts I would expect the company to maneuver for expansion, in which case Marathon may receive an opportunity to inaugurate a new partnership.
Recent trading around $25 gives Marathon a price to book ratio of 1.0 and a forward price to earnings of 6.3, less of a deal than at some points in last week's trading, but still a considerable value. Marathon is working hard to drive its growth on multiple fronts, and with its track record of stability, I recommend buying this stock now. I believe the stock is set to increase its value, with a 2.8% dividend as an extra incentive to buy.