Marathon Oil Corporation (MRO) – the fifth largest refiner and marketer of petroleum products in the U.S. – reported a jump in its first-quarter 2011 profits.
As has been the case with the larger rivals that have already reported, such as ExxonMobil Corp. (XOM), Royal Dutch Shell plc (RDS.A) and Chevron Corp. (CVX), results were boosted by higher crude prices. Much-improved downstream margins also contributed towards Marathon’s strong results.
Earnings per share, excluding special items, came in at $1.65, comfortably beating the Zacks Consensus Estimate of $1.42 and significantly ahead of the year-ago period adjusted profit of 44 cents.
Quarterly revenue of $21,071.0 million was up 26.4% from the year-earlier level, and was 6.4% above our projection.
Segmental Performance
Upstream: Income from the upstream segment totaled $668 million during the quarter, up from $502 million in the year-ago period. Marathon's worldwide realized crude oil price of $95.79 per barrel was 28.8% above the year-earlier level, while natural gas realizations increased marginally (by 0.9%) to $3.34 per thousand cubic feet (Mcf).
The company reported production (available for sale) of 370,000 oil-equivalent barrels per day/BOE/d, 16.7% above the previous-year level. Volumes for both periods exclude Libyan operations, where production is currently suspended due to continued political and civil unrest. The positive year-over-year performance reflects higher contribution from Droshky (in deepwater Gulf of Mexico), Norway and Equatorial Guinea.
Downstream: Margins in the refining business increased significantly from the year-earlier levels. The situation was further helped by improved sales volumes, wider sweet/sour differentials, and lower manufacturing costs.
Marathon’s refining and marketing unit earned $527 million during the quarter, compared to loss of $237 million last year – reflecting better margins and crack spreads.
The company's realized gross refining and wholesale marketing margin of 16.24 cents per gallon was up markedly from last year's loss of 5.69 cents per gallon. Total refined product sales volumes were up 15.3% from the year-earlier level to 1,562 thousand barrels per day, while throughput was up 20.1% to 1,321 thousand barrels per day.
Capital Expenditure
During the quarter, Marathon spent $995 million on capital programs (67% on E&P and 20% on Refining, Marketing and Transportation).
Guidance
Marathon estimates second quarter 2011 E&P production available for sale in the range of 340,000 – 360,000 BOE/d, excluding the effect of any future acquisitions or disposals.
Our Recommendation
Marathon shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
Marathon Oil is a leading integrated energy firm with a large and geographically-diverse reserve base, competitive downstream operation and a solid project pipeline. Additionally, Marathon possesses a healthy balance sheet, which helps it to capitalize on investment opportunities.
Marathon’s proposal to split into two separate entities is expected to further enhance shareholder worth. However, we see limited upside potential for the stock considering Marathon’s sensitivity to gas/oil price volatility, as well as drilling results, costs, geo-political risks and project timing delays.
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