Many Reasons to Love This E&P
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Marathon Oil (NYSE: MRO) is one of the most appealing assets in the E&P industry. Much like ConocoPhillips (NYSE: COP), spinning off its operations has helped improve its focus on the core functions of E&P. It's now more agile but also more susceptible to commodity prices than integrated energy companies like Exxon Mobil (NYSE: XOM). The strong correlation to commodity prices is one of the reasons for its low stock price lately. This presents an opportunity for investors to buy into an undervalued E&P at a discount. Marathon has made promising acquisitions in the Eagle Ford and Bakken basins recently. It’s consistently advancing its production rate and assets in North America while exploring emerging opportunities in Africa and Europe as well. Marathon has a diverse and balanced portfolio of oil, natural gas and LNG assets in North America and internationally as well.
Marathon recently announced that it will begin its exploration in the Gabon again. For around 21 percent working interest, Marathon will be working with the Republic of Gabon, Cobalt International Energy (CIE) and Total Gabon, a subsidiary of Total (NYSE: TOT) to start drilling in 2013. The group is waiting for the completion of the 3-D seismic data that been underway since 2011. Total is the largest operator in the area while this investment only represents a minority stake in Marathon’s interests in the continent. Marathon is also focused on developing its interests on the shores of Africa, including Angola. Marathon’s assets in Equatorial Guinea are the main constituent to its long-term growth initiative in LNG. The only factor that holds Marathon back from full development in this area is the unpredictability of civil unrest in the region.
Exploration activities in Europe have been challenging this year. Much like Chevron (CVX), Marathon is still analyzing land in Poland for the potential profitability in shale reserves in selected regions. ExxonMobil already pulled out of this region midway through 2012, Marathon and Chevron may also decide to leave soon if there are no promising results in the near future. Marathon most likely regrets selling its stake in the Kenai, Alaska LNG plant to ConocoPhillips. The company has the plant up and running again and currently has four to five more shipments planned to head to Japan by 2013. Alongside BP (NYSE: BP), Marathon is currently dealing with a production slowdown in Norway due to the recent breakout of a small strike from unhappy workers. BP and Norway’s Statoil (STO) have joint interests in developments from the Skarv Field in Norway. ExxonMobil and ConocoPhillips are also suffering as they have mutual interests in the assets in the nearby Barents Sea. The strike has decreased oil production by at least 11 percent and natural gas production by around four percent. These commodities are essential to Norway’s GDP and the Norwegian government has its own stake in Statoil. The government eventually stepped in and demanded both sides go to arbitration before the conflict gets out of hand in the near future. Despite the intervention, oil production is projected to hit a 20-year low in Norway.
The most promising prospects are Marathon's assets in the Bakken and Eagle Ford basins in the U.S. Management spent most of the time on their 1Q12 earnings call discussing these investments. The Eagle Ford asset is one of Marathon’s largest acquisitions to date. Marathon intends to focus more on the Three Forks development in the Bakken as well. Marathon benefits by working in areas with the foremost established energy firms so it is able to mimic their operations in order to address its own inefficiencies. It’s currently making changes in its Bakken program to move to 30 stage fracs in order to double its EURs to around 500 mboe. Marathon is focusing most of its efforts in Eagle Ford where it has around a 90 percent working interest and is producing 20,000 net boed that consists of close to 85 percent liquid assets. Amongst a variety of plays currently under development, Marathon is also working on developing steam assisted gravity drainage in Canada that is projected to be producing oil by 2016.
Marathon has been in line with its guidance throughout 2012. Despite exceeding expectations in some plays, it's been disciplined enough to stick with its initial estimations. This combination of a conservative approach paired with cost reduction, commodity prices trending higher and its aggressive exploration abroad puts Marathon in position for an uptick with its next earnings report. Marathon has a history of pulling out from unprofitable operations while resisting the urge to stretch itself too thin without getting the full value from its current plays. Marathon has a consistent, balanced and flexible approach that's been effective in strengthening its broad portfolio thus far. Right now is an opportune time to invest in this defensive asset for the long-term at a considerable discount. Both commodity prices are beginning to rebound, and Marathon’s stock price reflects that improving trend. I urge investors to consider buying now and holding long-term for the favorable dividend yield and anticipated capital appreciation throughout 2012.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Total SA. (ADR). 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.If you have questions about this post or the Fool’s blog network, click here for information.