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Marathon Oil: Making The Right Moves

June 23, 2014 | About:

Faisal Humayun

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On June 2, 2014, Marathon Oil (MRO) announced today that it has entered into a definitive agreement with Det norske oljeselskap ASA under which Det norske will purchase Marathon Oil's wholly owned subsidiary, Marathon Oil Norge AS. This article discusses this transaction and why Marathon Oil is making the right moves and the reasons to stay invested in the company.

Sale of Marathon Oil Norge AS

Marathon Oil has entered into an agreement to sell Marathon Oil Norge AS for a consideration of $2.7 billion. After adjustment for debt, net working capital and interest on the net purchase price, Marathon Oil expects net proceeds of approximately $2.1 billion at closing.

The sale includes the Marathon Oil-operated Alvheim floating production, storage and offloading (FPSO) vessel, 10 Company-operated licenses and a number of non-operated licenses on the Norwegian Continental Shelf in the North Sea.

For 2013, the net production in Norway averaged approximately 80,000 barrels of oil equivalent (BOE) per day.

Reason For Sale

This is not the first asset sale by Marathon Oil since becoming an independent E&P company in 2011. Marathon Oil has executed $6.2 billion of strategic divestitures over the last three years.

The primary reason for the sale of assets has been three high-quality U.S. resource plays with expanding opportunities. The company intends to focus on the Bakken, Okhalama Resource Basins and the Eagle Ford.

In line with this focussed strategy, Marathon Oil also intends to sell its U.K. North Sea business. The level of commitment towards developing these three projects is evident from the point that Marathon Oil intends to allocate $3.6 billion of 2014 capital expenditure to these resources out of the total planned capital expenditure of $5.9 billion in 2014.

Strong Developments In Eagle Ford

With major acquisitions in the Eagle Ford over the last several years, Marathon Oil has established a top-tier position in this liquids-rich resource play. As of 2013, the company had a working interest of 75% in its operated assets.

The key point here is the development of 2P resources in Eagle Ford. From an initial 2P reserve of 469mmboe, the company has increased the 2P reserves to nearly 1,000 mmboe. Further, there are more growth opportunities in the asset and the company expects to capture 1.7bboe of total resources.

Therefore, the 2P upside potential and the production upside potential from the resource is huge and is one of the key factors in supporting production and stock upside.

Equally Strong Development In Bakken

Marathon Oil holds approximately 370,000 net acres in the Bakken oil play in North Dakota and eastern Montana, with an average working interest of approximately 89% in its Company-operated assets. The development in Bakken over the last few years has been equally encouraging and it justifies the company’s decisions to sell relatively lower promising assets and invest in the core assets.

The company’s share of 2P reserves in Bakken has increased from 345mmboe in 2011 to 630mmboe in 2013. Further, the well inventory has growth from 450mmboe to 1,300mmboe in the last two years. The company expects total 2P reserves to be approximately 800mmboe and therefore there is more 2P upside potential from the Bakken over the next few years.

Oklahoma Resource Basins Is Not Behind

The Oklahoma resource basins include the Anadarko Woodford Shale, Southern Mississippi Trend and Granite Wash. The company’s share of 2P resources in the basin has increased from 300mmboe in 2011 to 800mmboe in 2013.

Further, the company expects 2P reserves to be in the range of 1.2bboe from the basin. Therefore, the basin in equally promising and has excellent long-term production prospects.

The available for sale oil from the three resource plays combined is expected to increase by 30% in 2014 as compared to 2013. This implies that the investment in these resources is yielding strong results in terms of cash inflow from the projects.

Conclusion

Marathon Oil has made all the right moves in the last few years and the company is well positioned to grow at a strong pace in the future with strong a growth in production from three key assets discussed above. In addition to production growth, 2P reserves growth will also continue for Marathon from the existing assets.

At a current market price of $39.7, the stock offers a dividend yield of $1.9. Also, in terms of shareholder value creation, Marathon Oil has already completed a share repurchase of $1 billion and will additionally complete a share repurchase of $2 billion in the future.

Considering these factors and an attractive EV/EBITDA valuation of 4.03, the stock is a long-term buy for value investors.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

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