The $23 billion acquisition of Andeavor on Oct. 1 has made Marathon Petroleum Group Corp. (MPC) the largest oil refiner and second-largest fuel retailer in the U.S. Despite the rout in the price of oil and gas this November, this dirty energy industry is not going anywhere.
The latest price declines came as OPEC reported overall production growth in October with both Saudi Arabia and the United Arab Emirates, highlighting their ability and willingness to ramp when necessary, almost doubling production in a single month. That was more than enough to crush the price of oil as market jitters related to Iran and Venezuela sanctions continue. Iran has lost about 500 million barrels per day since the U.S. nuclear pact was withdrawn. When the price of crude goes from the mid-$80s to mid-$50s in a month, many people get hurt. Just ask James Cordier.
Marathon was not immune to oil price declines, but the company is not going under simply because of short-term volatility in its product, and the 33% drop in its share price is just a buying opportunity for smart investors.
The company has net proved reserves of 1.4 billion barrels of oil and production is on the rise. At the end of 2017, it was producing around 404,000 barrels per day. Now it is pumping out 419,000 barrels of oil equivalent per day at a ratio of about 66% oil and NGLs and about 34% natural gas.
This marks the third consecutive period that the company has increased its full-year production guidance. The company is also expanding into the Louisiana Austin Chalk, building a land position in the basin of about 240,000 net acres at less than $900 an acre. Exploration is set to begin shortly with the first well looking to open at year-end. All of its land is located in an area adjacent to proven oil production. Marathon is good at exploration. The company is also participating in a 400-mile 3D seismic survey to provide more exact data on the reserves available on its properties, which could be much higher than its current proven reserves.
Long term, oil and gas prices will go to zero in tandem with societies' reliance on them, but that's not likely to happen in my lifetime. Marathon's break-even level is under $35 per barrel, so the company is still making money. It has 91,000 acres in the northern portion of the Delaware Basin, in what many analysts believe is the most lucrative part of the lowest-cost U.S. shale basin.
The abundance of advantages that Marathon built is hard to ignore. With its stock trading near a 52-week low, and a forward price-earning rate of 12x, this stock is a no brainer.
Disclosure: I am not long or short Marathon.Â
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Seeking Value in the Oil Industry: Marathon Oil
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