A Moderate Present with Short Projections
Marathon Oil is an integrated oil and gas firm with operations in the U.S., Angola, Indonesia, and Norway. The business model is focused on organic growth from exploration and development drilling activities and strengthened by strategic mergers and acquisitions. Approximately 50% of reserves are located in the US, while the rest is spread across its international assets. And over 90% of its revenues come from the oil, gas and natural gas liquids sales. On the downside, proven reserves were down 2% with respect to 2012.
Growth for Marathon Oil is expected to originate from its high-return, liquids-rich unconventional plays in the US. Growth so far has been driven by higher oil prices and greater volumes of natural liquid gas, capable of offsetting declines in oil prices. Most importantly, drilling costs have been reduced and progress has been achieved in pad drilling and downspacing. However, earnings have fallen by almost $80 million and total oil production fell by 50 million barrels of equivalent per day.
Prospects for Marathon Oil are fed by development projects with management expecting an annual production growth of 8% to 10%. The business model is supported by a high-margin acquisition in the Eagle Ford shale formation, and the divestiture of non-core, non-performing assets. The bigger risk to long-term performance is the volatility of the industry, especially due to the sudden swings on oil and gas prices.
The balance sheet for Marathon Oil is strong thanks to a very wide operating margin and rising revenues. Currently trading at 15.4 times its trailing earnings, the stock packs a 50% premium to the industry average. James Barrow is the guru with the largest stake in the company, which has been growing through the current year, and Technology Renaissance has followed suit. I do not share their optimism because of a weak cash flow and weak prospects.
The Israeli Project
Noble Energy is praised a success story in the industry. The firm owns assets in the Gulf of Mexico and US, with a greater international exposure than Marathon Oil. In line, the U.S. counts for 57% of total production and 49% of total reserves, while the remaining operations are spread throughout Equatorial Guinea, Cameroon, Suriname, Israel and China. And the latest news points to a presentation at the Bank of America Merrill Lynch Global Energy Conference on Thursday, Nov. 21, 2013.
For the road ahead, Noble Energy is set to perform above the industry average thanks to the high-quality assets it possesses. An additional push, expected to be reflected in the upcoming quarter results, is the Israeli court ruling allowing the government to export more than 40% of its natural gas production. This is a major growth driver for the future since the shale is the largest gas field discovered in the last decade, and recoverable resources are estimated at 18 trillion cubic feet. Most importantly for operations in the US, the company’s contract includes a clause for the suspension of drilling carry payments.
A well-balanced portfolio of high-quality oil and gas properties across the U.S., in addition to deepwater operations in the Gulf of Mexico, and the soon to become online Kyoto and Tioga gas plants support great prospects for growth. Operational costs are expected to improve efficiency through modernization of technology and cost reduction programs. Meanwhile, management will have to keep an eye on political developments in West Africa and the Middle East to avoid any unpleasant surprise.
Financially, Noble Energy is moderate due to a high but declining debt. Currently trading at 24.9 times its trailing earnings, the stock carries an 18% discount to the industry average. Meryl Witmer is the largest guru holding a stake in the firm, and has increased his position throughout 2013. I share his optimism especially by the potential growth unlocked by the Israeli projects.
Witmer Over Barrow
I prefer Noble Energy over Marathon Oil because of the discount offered and the prospects of operations in Israel. Additionally, while both portfolios are similarly balanced between oil and gas activities, international exposure for Noble Energy is greater. That offers a better shield against the industry´s volatility.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.
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