Congress Holding Marathon Oil's Future in its Hands
Cory is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
So far, 2013 has been a shaky year for exploration and production companies. Marathon Oil (NYSE: MRO) represents that trend well. The Jan. 16 attack on the natural gas plant in Algeria, run jointly by Statoil, BP, and Algerian Sonatrach caused a negative ripple effect on most E&P companies with North African operations, Marathon Oil included.
A lackluster Q4 2012 didn't help matters either, despite posting slightly higher revenues than the previous quarter, EPS came in at $0.45 per share, down 29% from the previous quarter and 42% year on year. Between reporting Q4 2012 results on Feb. 22 and March 1, the company's share price sunk about 5%.
Personally, I feel this represents an opportunity to purchase a great energy company at a discount. When evaluating potential long-term investments, The Motley Fool favors the ‘SWOT’ method. A balanced look at Strengths, Weaknesses, Opportunities, and Threats facing Marathon Oil should help us decide if its recent price weakness is an opportunity, or a sign to back off.
Consistent growth of shareholder equity
In June 2011, Marathon Oil spun off its refining business into Marathon Petroleum Corporation (NYSE: MPC). At that time, shareholders received one share of the new downstream company for every two shares of common stock previously held in Marathon Oil. All downstream operations at Marathon Oil ceased after the split. Although it was a difficult transition, when viewed as a whole, the two companies managed to retain their book value immediately following the split. Since then, long-term investors have enjoyed steady growth from both companies, an especially impressive feat for a highly cyclical commodity-based businesses.
Although Marathon Petroleum is also a fine company, it may be trading at too much of a premium at the moment. The Ohio-based refiner hit a 52-week high on March 1, 2013. Several U.S.-based downstream companies are getting a great deal of attention lately. Domestic oil and gas production has experienced explosive growth in the past few years. Refineries located in the Mid-West, like Marathon Petroleum, are taking advantage of cheap domestic oil and gas, and then selling it based on globally determined prices. If the Brent-WTI spread narrows, a pullback in refinery profitability is likely.
Consistently performing base assets
Viewed annually, Marathon Oil has not posted a loss since 1995. One of the reasons for its rock-steady growth are its stable group of base assets. Oil sands mining in Canada, liquids rich plays in the Eagle Ford and Bakken shales, and highly profitable conventional oil wells in Libya are just a few of Marathons diverse base assets. Their consistent production allows the company to safely invest in numerous growth and exploration projects using cash, instead of taking on heavy levels of debt.
Map Source: Marathon Oil Annual Report 2012
Weakness: African instability
The Waha Oil Company is an enormous consortium led by Libya's National Oil Company (NOC). Foreign oil companies operating in partnership with the NOC include Marathon Oil, ConocoPhillips (NYSE: COP), and Hess (NYSE: HES). During Libya's civil war in 2011, the Waha Oil Consortium ceased operations for most of the year. Further turmoil within Libya could result in losses for Marathon Oil and the rest of the Waha consortium.
Marathon Oil Corporation holds a 16% working interest in Waha's operations. Production in Libya ceased in the first quarter of 2011, and operations there didn't resume until the fourth quarter of that year. Despite the nearly year long shutdown, Marathon Oil's 2011 net income was $2.95 billion, representing an increase of 15% over 2010.
About 20% of Hess' total reserves are located in Africa. Luckily, it only has an 8% interest in the Waha Concession. Its production there the year before the civil unrest averaged 23,000 barrels of oil equivalents per day. That figure dropped to just 4,000 BOED during the civil unrest of 2011.
ConocoPhillips holds a 16.3% interest in the Waha Concession. In 2011, the company reported an average of only 8 million barrels of oil equivalents per day in that region. Production was back up to normal throughout 2012, and it was able to produce an average of 43 MBOED. ConocoPhillips is far less exposed to instability on the African continent compared to Hess and Marathon Oil. At end of fiscal year 2012 just 4.6% of the company's total reserves were located there.
Marathon Oil is an international player with about 30% of its total proved reserves in Africa, and the rest in Europe and North America. The geographic distribution of its assets hardly represent its overall exploration and production operations. Nearly all of its E&P segment currently operates within the U.S. In 2012, only seven of its 202 wells under development were outside of the U.S. This means that in a worst case geopolitical scenario, the company might suffer some long-term asset writedowns, but would still be able to meet its short-term liabilities.
Opportunity: Exports from the U.S.
The U.S. ban on crude oil exports dates back to the 1970s. Tensions in the Middle East, and the resulting oil crisis, were a rude awakening to the U.S.'s dependence on imported fossil fuels. Now that U.S. output is expected to out-pace that of Saudi Arabia, the export ban is beginning to seem unnecessary, or at least ready for some modifications. Vulnerability to global energy prices has been ingrained in the American psyche for decades, but that could all change. If the U.S. oil lobby has its way, the Congress may lift, or at least modify the ban on oil exports.
In the meantime, ultra-light crude, often referred to as condensate, can circumvent the crude oil export ban. In the past, condensate was typically sent to traditional refineries and added to heavier crude oil. Now, condensate is helping struggling producers circumvent the export ban. Special processing units, called splitters, cheaply split condensate into industrial feedstocks and kerosene. The feedstocks are used for a diverse range of products from plastics to paints. The kerosene is used for building loopholes in outdated policies.
Fortunately, there isn't a ban on exporting kerosene. The cheaply produced fuel is sold to international markets, where it demands a much higher price. It isn't much, but it might be enough to keep Marathon Oil's condensate rich Eagle Ford assets profitable until the Congress does something about the U.S. energy glut.
Threat: Domestic over production
In my opinion, the greatest threat to Marathon Oil in the upcoming decade is the increasing production of oil and natural gas throughout the U.S. Horizontal drilling and hydraulic fracturing have resulted in a reversal of the Brent-WTI spread mentioned earlier. Cheap domestic oil and gas might be wonderful for Marathon Petroleum, but profit margins are getting squeezed tighter than ever for Marathon Oil's North American producing assets.
Advanced extraction techniques might have started in the U.S., but it isn't the only country with enormous shale reserves. If the Congress doesn't at least modify the crude oil export ban soon, the Brent-WTI spread could erode before Marathon Oil has an opportunity to profit from it.
crenauer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!