Citigroup Global Markets
1Q08 Earnings: Initial Reaction
30 April 2008
MRO reported clean earnings of $1.00 vs. consensus at $0.82 (CIR $0.81),
leaving earnings slightly below last year ($1.02). The beat versus consensus
was better integrated gas earnings, and a lower tax rate which benefited from
favorable consolidation effects likely related to the lower tax/higher earnings in
EG
At the operating level, E&P earnings of $684mm were in line with our
expectations ($674mm), while an R&M loss of $75 was slightly better than
expected ($102m loss). Integrated Gas earned $99m versus $45m expected
and will likely cause the market to revisit the leverage MRO has to US gas
prices from its EG LNG facility. Corporate charges of $17m compared with
$75m expected.
Oil and gas production of 378,000boe/d was slightly ahead of our expectations
(374,000boe/d) and up over 11% year over year. With the start up of Alvheim
imminent, MRO promises growth of over 20%, if oil sands is included as it is in
the upstream of its peers.
Looking ahead, we continue to view MRO as among the most opportunity rich
of the US oils: accelerating exploration success, a strong strategic integrated
gas position and a powerful upstream growth. While share performance has
been depressed by a weak downstream the reason to own this stock is the
evolving E&P story, which we expect to accelerate in 2H08.
Investment strategy
We rate the shares of Marathon Oil (MRO) Buy/Medium Risk (1M). The
resurgence and subsequent success of Marathonâs three-legged strategy
focused on upstream, downstream, and integrated gas sets the company apart
from its peers. Moreover, the company is still relatively small scale and
exposure to a material opportunity set across all businesses more than
compensates for the macro risk that we perceive exists in the sector over the
medium term. 2007 looks sound to us and holds the potential for progress on a
number of fronts. In particular, building out a strong LNG position, continuing
exploration in West Africa, and securing access to Canadian oil sands through
the recently announced WTO acquisition represent material opportunities.
Valuation
Our 12-month target price for MRO is $82 per share. Our primarily valuation
method is based on implied assessment of MROâs assets. Exploration is the key
story with this company, but the shares are ignoring a growing list of unbooked
discoveries where value is verified by recent transactions. Therefore, we have
calculated the implied values for MROâs proven and probable reserves (P1 and
P2) based on mid-cycle assumptions ($75 WTI and $7.50 Henry Hub) along
with the downstream and LNG business. Additional the recent acquisition of
WTO has been incorporated into our analysis. Alongside our assessment of MRO's upstream and downstream value, we include net debt of $8 billion at quarter end and an operating loss carry forward of $1 billion incurred in recent years, primarily associated with Norway and Angola, which yields an implied equity value of $82 per share.
1Q08 Earnings: Initial Reaction
30 April 2008
MRO reported clean earnings of $1.00 vs. consensus at $0.82 (CIR $0.81),
leaving earnings slightly below last year ($1.02). The beat versus consensus
was better integrated gas earnings, and a lower tax rate which benefited from
favorable consolidation effects likely related to the lower tax/higher earnings in
EG
At the operating level, E&P earnings of $684mm were in line with our
expectations ($674mm), while an R&M loss of $75 was slightly better than
expected ($102m loss). Integrated Gas earned $99m versus $45m expected
and will likely cause the market to revisit the leverage MRO has to US gas
prices from its EG LNG facility. Corporate charges of $17m compared with
$75m expected.
Oil and gas production of 378,000boe/d was slightly ahead of our expectations
(374,000boe/d) and up over 11% year over year. With the start up of Alvheim
imminent, MRO promises growth of over 20%, if oil sands is included as it is in
the upstream of its peers.
Looking ahead, we continue to view MRO as among the most opportunity rich
of the US oils: accelerating exploration success, a strong strategic integrated
gas position and a powerful upstream growth. While share performance has
been depressed by a weak downstream the reason to own this stock is the
evolving E&P story, which we expect to accelerate in 2H08.
Investment strategy
We rate the shares of Marathon Oil (MRO) Buy/Medium Risk (1M). The
resurgence and subsequent success of Marathonâs three-legged strategy
focused on upstream, downstream, and integrated gas sets the company apart
from its peers. Moreover, the company is still relatively small scale and
exposure to a material opportunity set across all businesses more than
compensates for the macro risk that we perceive exists in the sector over the
medium term. 2007 looks sound to us and holds the potential for progress on a
number of fronts. In particular, building out a strong LNG position, continuing
exploration in West Africa, and securing access to Canadian oil sands through
the recently announced WTO acquisition represent material opportunities.
Valuation
Our 12-month target price for MRO is $82 per share. Our primarily valuation
method is based on implied assessment of MROâs assets. Exploration is the key
story with this company, but the shares are ignoring a growing list of unbooked
discoveries where value is verified by recent transactions. Therefore, we have
calculated the implied values for MROâs proven and probable reserves (P1 and
P2) based on mid-cycle assumptions ($75 WTI and $7.50 Henry Hub) along
with the downstream and LNG business. Additional the recent acquisition of
WTO has been incorporated into our analysis. Alongside our assessment of MRO's upstream and downstream value, we include net debt of $8 billion at quarter end and an operating loss carry forward of $1 billion incurred in recent years, primarily associated with Norway and Angola, which yields an implied equity value of $82 per share.