We are maintaining our long-term Neutral recommendation on Marathon Oil Corporation (MRO), reflecting a host of development ventures, a healthy balance sheet anda well-diversified asset base. These are, however, partially offset by gas/oil price volatility, geo-political risks and project timing delays.
Marathon performed impressively in the first quarter of 2011, with earnings per share of $1.65 beating our projection ($1.42) and showing an improvement from 44 cents in the prior-year quarter. The company benefited from higher crude prices and much-improved downstream margins.
Marathon is on track to capture various investment opportunities intended to boost its refining capacity. In this regard, the company recently completed the expansion of its Garyville unit and continued construction of the Detroit Heavy Oil Upgrading Project – that is expected to deliver an extra 80,000 barrels a day of heavy oil processing capacity toward the second half of 2012.
Additionally, we remain optimistic regarding Marathon post split (Internal Revenue Service or IRS has approved the separation of the company’s downstream unit to be tax-free). Creation of two separate companies will allow both to pursue great opportunities in their respective market segments and better serve the needs of both investor groups without the constraints of the parent company.
However, as inherent to all other industry players, Marathon remains directly exposed to oil and gas prices, which are essentially volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flows.
With operations in many international arenas, the company is highly exposed to risks such as embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment.
Marathon also depends on property acquisitions to expand its resource base and failure to complete accretive transactions in a timely manner, which could negatively impact its growth rate. The company faces stiff competition from peers such as ExxonMobil (XOM), Chevron Corp. (CVX) and ConocoPhillips (COP).
Marathon currently retains a Zacks #3 Rank (short-term Hold rating).
CONOCOPHILLIPS (COP): Free Stock Analysis Report
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MARATHON OIL CP (MRO): Free Stock Analysis Report
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