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Shares of Marathon Oil (MRO) rose some 1.5% during the past trading week. The energy company reported its third quarter results on Tuesday which were well-received by the market.

Third Quarter Results

Marathon Oil Corporation reported third quarter revenues of $4.16 billion, up 9.5% on the year. Revenues beat analysts consensus of $3.5 billion by a comfortable margin.

Marathon reported third quarter earnings of $450 million, up 11% on the year. Earnings per share rose from $0.57 per share last year to $0.63 over the past quarter. Adjusted earnings came in at $0.64 per diluted share, in line with analysts expectations.

For the full year of 2012, Marathon raises its full year sales estimates to 375,000-385,000 barrels per day, excluding the contribution from Libya.

CEO and Chairman Clarence P. Catalot Jr. commented on the results:

"Marathon Oil's producing assets exceeded expectations in the third quarter, driven by superior execution in our U.S. resource plays and continued strong reliability from our base assets. Our investment in the Eagle Ford shale a little more than a year ago, and our bolt-on acquisitions since then, continue to deliver value beyond original expectations."

Segmental Information

Exploration and production income rose from $417 million in the second quarter to $486 million in the third quarter. Sales volumes rose 10% over the quarter to 399,000 barrels per day. Sales were driven by strong performance at the Eagle Ford, Bakken and Anadarko Woodford plays.

Production excluding the contribution from Libya rose to 392,000 barrels of oil-equivalent, exceeding the company's third quarter guidance of 365,000-380,000 barrels. The increase in production was the result of a ramp up in US resource plays.

The activities in Libya produced 74,000 barrels per day during the quarter, up from 44,000 in the second quarter. Given the uncertainty of the activities, Marathon excludes the contribution of Libya in its reported production levels.

For the current fourth quarter, production levels are expected to come in between 400,000 and 415,000 barrels per day. Again, this excludes the contribution of Libya.

Operating income for the US exploration and production division rose from $70 million in the second quarter to $110 million. Profits were driven by increased production and sales volumes. International exploration and production income rose from $347 million in the second quarter, to $376 million in the third quarter.

Oil sands mining operating income rose from $51 million to $65 million in the past quarter. Higher oil sales and prices contributed to profits, as the Athabasca Oil Sands Project produced 46,000 barrels per day.

Integrated gas segment income rose from $13 million to $39 million on higher sales and lower costs.

Valuation

Marathon Oil ended its third quarter with $671 million in cash, equivalents and short term investments. The company operates with $6.5 billion in short and long term debt, for a net debt position of $5.8 billion.

For the first nine months of 2012, Marathon Oil generated revenues of $12.0 billion. The company net earned $1.26 billion, or $1.77 per diluted share. At this rate, Marathon is expected to generate revenues north of $16 billion. Net earnings could come in around $1.6-$1.7 billion, or $2.30-$2.40 per diluted share.

The market currently values Marathon at $21.5 billion. This values the firm at 1.3 times annual revenues and 13 times annual earnings.

Marathon Oil currently pays a quarterly dividend of $0.17 per share, for an annual dividend yield of 2.2%.

Investment Thesis

Year to date, shares of Marathon Oil rose some 4%. Shares rose from $30 in January to highs of $35 in February. Shares fell back to lows of $23 per share at the start of the summer. Shares recovered and are currently exchanging hands at $30 per share.

Shares of Marathon fell from $65 in 2007 to trade in the low-twenties at the start of 2009. Shares recovered to a peak of $50 in the beginning of 2011 before falling back again.

Like many energy companies, Marathon has split up its operations. In 2011, Marathon has spun off its downstream business, now listed as a separate company named Marathon Petroleum Corporation (MPC). Shares of Marathon Petroleum have risen some 43% since their spin-off in July of 2011, comfortably outperforming their former parent company amidst a favorable refining environment.

Earlier this year, Phillips 66 (PSX) has been spun-off from parent company ConocoPhillips (COP). Again, shares of the downstream company Phillips 66 comfortably outperformed shares of the parent.

Marathon Oil anticipates divestitures of $1.5 to $3 billion between 2011 and 2013, to optimize the company's portfolio for profitable growth. So far, agreements for $1.1 billion in divestitures have been entered.

I thinks that shares are fairly valued at the moment. The debt position is under control if the company stays on course with its divestiture plan. Investors can foresee significant growth in production in the coming years. Current production levels of 399,000 barrels per day are expected to increase significantly. Marathon expects to boost production in its Eagle Ford basin in south Taxes from 40,000 barrels per day at the moment to 120,000 barrels by 2016.

I think shares offer compelling value in the long term valued at 13 times annual earnings, operating with a manageable debt load, given the expected future production growth.

I am a buyer on dips.

Source: Marathon Oil: Strong Production Performance Creates Long-Term Value Appeal