Marathon Oil Corporation (MRO), coming out of a stable, but underwhelming second quarter, is ready to rig new revenue drivers. The company is driving growth with U.S.-based liquids rich plays, while focusing on growth within cash flow, a solid sign that Marathon does not intend to use its recent separation from downstream operations as an excuse to spend. It is reassuring to see that already Marathon is growing within its means and at a better clip than many expected; I think that its growth will continue on a similar track, particularly due to its willingness to think like an independent, and ability to move like a major.
Oil Sands Could Be a Growth Driver
Marathon is building out its Athabasca oil sands project in Alberta, a joint venture with Royal Dutch Shell (RDS.A) and Chevron Corporation (CVX), with a carbon capture and sequestration mechanism to be completed in 2015. The project, known as Quest CCS, will allow the partners to capture up to 1 million metric tons of carbon dioxide per year, to later be injected underground. The cost is estimated at $1.4 billion, although the Albertan government will cover approximately half of this amount.
Since Canada does not have a burdensome carbon tax or trade system, the project only makes economic sense for the partners insofar as it will blunt criticism on the environmental impact of oil sands extraction. But, this is an extremely important consideration as the oil and gas sector in Canada heats up. Operators are flocking north as the prospect of exporting liquefied natural gas to Asia from Canada's west coast promises high margins according to current forecasts.
Those with plans for export facilities include Shell as well as Marathon rival Apache Corporation (APA) and its partners EOG Resources, Inc. (EOG) and Encana Corporation (ECA). New, world class fields are also being discovered. Just this summer, Apache announced a prospective 48 tcf find in British Columbia, which is not only massive, but potentially low cost, since Apache reported outstanding production from only six fracs per well in testing.
These activities are casting a greater shadow over oil sands, the very term itself conjuring for some pictures of environmental impact that are not altogether in line with reality. Oil sands account for about 40% of Canada s oil production and were at one time believed to be the last method through which producers could extend the world's oil reserves. Rapid advances in unconventional drilling, such as those Apache brought to bear on its most recent finds, are changing that idea, which brings oil sand mining under scrutiny. Natural gas does not have the same poor reputation, and with Canada in the beginning stages of a natural gas boom, it is wise for Marathon and its partners to take steps to mitigate accusations that the oil sands mining process is unnecessary in light of "cleaner" natural gas availability.
The fact is that with improving technology oil sands are comparable to other non-renewable resources, and Marathon, Shell, and Chevron are at the forefront of cleaner energy extraction. This is particularly important for Marathon, which is continually experimenting (at substantial cost) with alternative extraction methods, like steam assisted gravity drainage. Marathon is taking on these technologies with the goal of expanding its oil sands production to new projects in coming years, with an eye to capturing its share of the projected 50% Canadian oil sands growth by 2030.
Canada is not the only area where Marathon can capture oil sands growth, either. Oil sands deposits are located in approximately 70 countries, and although Alberta's oil sands are the largest, Venezuela may have competitive fields. Success in extracting in Canada at a profit could position Marathon to be a first mover elsewhere, with the added benefit that revenues from elsewhere are likely to be higher: Restrictions in Canada add more to the cost per barrel than restrictions in countries like Nigeria, just for example. For all of these reasons, taking on the cost of "greening" tar sands is a good idea for Marathon.
Marathon is currently trading around $28 per share, with a price to book of 1.1 and a forward price to earnings of 8.0. Shell is trading around $69 with a price to book of 1.2 and a forward price to earnings of 10.9. Chevron is trading around $111 with a price to book of 1.7 and a forward price to earnings of 8.1. Apache is trading around $84 with a price to book of 1.1 and a forward price to earnings of 7.5. EOG is trading around $109 with a price to book of 2.2 and a forward price to earnings of 17.5, still low even after a run up following its second quarter earnings report. Finally, Encana is trading around $22, with a price to book of 2.3 and a forward price to earnings of 43.8. Encana will be counting on its liquid natural gas partnership with EOG and Apache to move its natural gas production at a profit, or face what could be the end of its business.
Marathon recently promoted Gretchen H. Watkins from Vice President, International Production Operations to Vice President, North America Production Operations. On its face this appears to be a lateral move, but Marathon is showing signs of pulling back from international growth to focus on its holdings in the U.S. and Canada. According to Marathon Executive Vice President and COO Dave Roberts, Watkins "improved [Marathon's] international business markedly in the past three years," and I think that Marathon needs the kind of improvement that Roberts is alluding to here in the U.S.
I like that Marathon Oil is shedding unprofitable projects, while pursuing a growth track that other producers are currently ignoring, and is beginning to see acknowledgement from investors that it is doing many things right. I believe that Marathon has huge growth potential with little downside risk and could be a major oil sands player in the future, while others are pursuing dwindling conventional plays. Marathon Oil is certainly worth a look.