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Rich Asset Base Would Create Value for Marathon Oil
Posted by: Value Investor (IP Logged)
Date: April 29, 2014 05:18PM
Marathon Oil Corporation (MRO) is an oil exploration and production company based in Houston, Texas. The company operates in three segments: North America Exploration and Production (E&P), International E&P and Oil Sands Mining.
Marathon has its operations in North America and key international locations. Eagle Ford and Bakken Shales and Oklahoma Resource basins are the primary growth drivers for the company. I have already discussed about the Bakken boom in one of my earlier articles, discussing an estimated 40 billion barrels of oil production according to Continental resources.
Source: Company Presentation
In this article I will focus why Eagle Ford is the company’s best resource and how a good amount of capital expenditure in this resource would reap rewards in the long term.
Before discussing about MRO’s operations I would like to highlight the company’s undervaluation. I will discuss the company’s valuation based on the company’s EV/EBITDA.
The industry average for the same is calculated as an average of seven close peers based on the market capitalization. MRO is currently trading at a trailing 12-month EV/EBITDA of 3.9 with peers Devon Energy (DVN) and Pioneer Natural Resources (PXD) trading at an EV/EBITDA of 4.7 and 16.9, respectively.
Further, the industry average EV/EBITDA currently stands at 7.8. This shows that the company is grossly undervalued and has immense upside potential.
Value Creation from High Value Resource Plays
The company has increased the resource base in U.S. onshore by more than 100% in the last two years and this increase has helped MRO to accelerate its rig activity by 20% each in Eagle Ford and Bakken shale and by 100% in Oklahoma.
The increasing rig activity would result in the U.S. onshore (2012 to 2017) CAGR of 17% to 22% over a span of five years along with a 25% increase in resource base. In addition to this, Marathon also has a 10-plus year of drilling inventory that would increase the activity from 22 to 28 rigs. The company is well positioned in these basins and has been able to double its 2P reserves over the time span of two years. As 2P reserves increase, valuations will adjust on the upside.
Source: Company Presentation
Why Eagle Ford?
Eagle ford is the company’s flagship asset and hence a capital expenditure of $2.3 billion of the total $5.9 billion has been allocated for the developments in Eagle Ford Shale for fiscal year 2014. A resource of 1.7 billion boe has been identified, which the company plans to capture in the next few years.
In order to increase the value of one of the most rich and high quality resource the company plans to increase their well development from current 290 to 340 to 355 wells in 2014. This would increase the production CAGR from Eagle Ford by 30% to 35% over five years and the forecasted field peak rate is expected to be approximately 150,000 boepd in 2017.
Industry Dynamics Support Growth
The U.S. domestic production of crude oil and natural gas has been increasing. Crude oil production will reach its all-time high of 9.6 million barrels per day by 2015. With an improved horizontal drilling and hydraulic fracturing, the U.S. has emerged as the leader in oil and gas production.
Source: Annual Energy Outlook 2014 Early Release Overview
Also, as the shale gas production increases, natural gas would become the biggest source of electricity, replacing coal by 2035. This increase in production would not only have its positive impact on the country’s job scenario but would also meet the increasing demand for energy in various sectors.
A fairly undervalued stock trading with high growth opportunities in Eagle Ford along with growing assets in Bakken and Oklahoma is an attractive investment opportunity. Also after considering the supportive Industry dynamics I would recommend this stock as a BUY.
Stocks Discussed: MRO, DVN, PXD,