Marathon Oil's 15% Stake in Kenya Good for Investors
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Kenya isn't the first country that comes to our mind when we think about oil exploration and drilling. Its neighbors Mozambique and Tanzania are more established locations for oil exploration. Mozambique has joined the ranks of the largest oil and gas producing nations of the world, thanks to the exploratory and drilling efforts of Anadarko Petroleum (NYSE: APC) and Eni (NYSE: E). In early August, Eni discovered a new source of natural gas off the shores of Mozambique. Meanwhile, when Marathon Oil (NYSE: MRO) oil announced that it would be buying a 15% stake at the Tullow Oil field, analysts began to view Kenya as the next big destination, but with skepticism. Marathon has agreed to pay $78.5 million totally to Africa Oil for the 15% stake and future costs. The fields are spread over 30,000 square kilometers and could prove to be a cash machine, if Marathon succeeds.
Marathon is also expected to explore certain areas in Ethiopia jointly with Africa Oil. Ethiopia lies to the north of Kenya, and most analysts believe that a lot of undiscovered oil and natural gas can be tapped there. Marathon will work closely with Africa Oil to explore possibilities in both Kenya and Ethiopia, which will in turn help Marathon to establish itself as a leader in East Africa. Though investing in Kenya seems like a great idea, few analysts that I spoke to feel it may not be a wise decision for Marathon to do so.
First, they cite Kenya's complex laws that tend to be unfriendly towards investors. Secondly, analysts also feel that Kenya is not as lucky as Mozambique in terms of resources, which already has a number of companies working on its soil and in its waters. Thirdly, political and cultural issues that revolve around Islamic fundamentalism and terrorism worry many scholars. These concerns are valid and legitimate but before I try and explain why Kenya is indeed a great place for companies like Marathon to explore, I shall discuss the aforementioned problems in detail.
The first problem consists of concerns related to bureaucracy, red tape and a constitution that is Victorian in nature - the Kenyan constitution was inherited from the British colonial constitution. This is only partly true, as the constitution has already been revised twice. It was first revised in 1963 and the second time, the constitution of Kenya was revised in 2010. The Kenyan constitution is not as bureaucratic as one might imagine it to be. It is easier to set up a business in Kenya than it is in India, another country that inherited part of the British constitution.
The second problem that a few analysts cite is that of doubts regarding Kenya's importance as a resource-rich nation. While Mozambique has a well developed oil and gas business and an equally lucrative mining business, Kenya is not lagging behind either. Kenya's market based economy is one of the most liberal in the world and a GDP growth of 4-5% is impressive. Apart from this, Kenya has vast reserves of natural resources that are virtually untapped. It is wrong to compare Kenya with its neighbors as the market is yet to mature and it has every hallmark of a vibrant economy.
The third issue that the scholars I spoke to cited was that of security, terrorism and Islamic fundamentalism. Kenya is not a Muslim-majority nation. Most Kenyans follow Christianity or tribal religions. Only 11.2% of the country is Muslim and by nature they are peace loving. The 1998 United States embassy bombings are still fresh in many people's memory but the perpetrators came from outside Kenya. The attacks were led by Al-Qaeda and Kenya could do very little to stop the attack anyway. But this and a few other terrorist attacks in Kenya have damaged its international image as a peaceful, vibrant and market-oriented economy which it really is. In reality, Kenya continues to be one of the most peaceful nations in Africa and various communities live peacefully with each other. This is especially important to oil companies which need local employees who are not swayed by political and communal allegiances.
With these 3 concerns sorted out, there is no reason why Kenya is not a great place for Marathon to explore and drill. The 15% stake that the company bought is enough to help Marathon become one of the major players in this part of the Indian Ocean. I would not be surprised if Marathon becomes the most important oil company in East Africa.
Marathon has had a good year and this was reflected in its second quarter earnings. The company reported a net income of $393 million and held a working capital of $4 million on June 30th. The company's earnings fell from $996 million to $393 million, which has been attributed to discontinued operations, market volatility and other factors. With total debt of $4.8 billion and a market cap of $19.44 billion, this is one company that can't be ignored even if it reports tepid results.
With exploration and drilling set to begin in Kenya, Marathon investors can look forward to increased revenues. Marathon has a price-to-sales ratio of 1.29, while its operating margin was reported to be 50.3%. Its profit margin is 11.7%. These numbers are expected to improve as Marathon grows its business in East Africa. Its competitors such as Anadarko, Total (NYSE: TOT) and Apache (NYSE: APA) have all struck very lucrative deals in Kenya. In late June, Total signed a production sharing contract with the Kenyan government. The contract allows Total to explore off the Lamu Archipelago, on the coast of Kenya. More recently, Apache has started offshore drilling in an area known as the Mbawa prospect located on Block L8.
Marathon should succeed in making money through its projects both onshore and offshore. The company's decision to purchase a 15% stake was probably one of the best it has made in recent years. Those who have invested in Marathon may expect slight fluctuations due to market volatility. But the long-term prospects of the company are positive, and Marathon Oil seems to be one of the more stable stocks to purchase at the moment.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of Apache. 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.