Marathon Oil Earnings: Good Valuation As Long As Growth Ramps Up

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Marathon Oil (NYSE: MRO) is an international leader in oil exploration and production, having spun off its refining and marketing businesses in 2011 into a new company, Marathon Petroleum (NYSE: MPC)

Marathon has traded pretty flat since the spinoff (while Marathon Petroleum Corp has performed wonderfully), and with the stock currently hovering around its 52-week high, are we set for a dip in the share price, or is Marathon finally ready to pop?  With the company set to report its earnings next Wednesday, investors will be looking for answers to that question and more.

Profile

Since the above-mentioned spinoff, Marathon Oil operates its business in three segments.  By far the largest of these is the Exploration and Production segment, which accounts for about 89% of the company’s revenues.  The other two segments are Oil Sands Mining (9%) and Integrated Gas (2%).  Marathon has proved oil and gas reserves of 1.8 billion boe (barrels of oil equivalent), which has grown about 10% in the past year.

Speaking of the spinoff, Marathon Petroleum has performed wonderfully lately, rising over 125% since June!  The company still looks extremely attractive, trading for only 7.5 times TTM earnings.  This stock will be the topic of a whole other discussion of mine soon, but for now, suffice it to say that both Marathons look pretty good right now.

Growth Strategy

In the U.S., Marathon Oil plans to grow by developing liquids-rich shale play positions.  The company’s exploration efforts are focused in Poland, Kurdistan, Norway, and the Gulf of Mexico.  Marathon also plans to divest between $1.5 billion and $3 billion of non-core assets this year. 

The company invested about $5 billion in its growth assets during 2012.  Of this, 65% goes to U.S liquids-rich growth assets.  The company also has a goal of increasing operations in the Eagle Ford shale play in Texas, having budgeted about $1.5 billion to this. 

Dividend

Marathon pays a small, but significant dividend yield of just over 2%.  The company has an excellent track record of increasing the dividend (see below – pay the most attention to the 2002-2010 period).  Bear in mind that the dividend was not cut in 2011; this was a result of the spinoff.  Shareholders actually received increased income since they owned shares of the new company also.  I would be surprised if we did not see an increase from the current payout of 68 cents per share for 2013.

Valuation and Competition

One of the main reasons that I have an interest in Marathon is because of its exceptionally attractive valuation.  Marathon currently trades at 12.9 times 2012’s consensus earnings of $2.58, which are expected to grow to $3.16 and $3.35 in 2013 and 2014.  In the oil services industry, a 10.7 forward P/E is pretty attractive.

For a competitive analysis, one company that is similar to Marathon business-wise is Energen (NYSE: EGN)  Energen trades at a slight premium at 13.7 times forward earnings, however, analysts are uncertain about future growth.  The company is projected to earn $3.61 in fiscal year 2013, rising to $4.34 and $3.81 in 2014 and 2015, respectively.  I know they are just estimates, but trading at 12.6 times 2015’s earnings is a bit of a turnoff to me.

Conclusion

Marathon is a solid company; however I want to hear more about the company’s growth plans and how they plan to create shareholder value.  Pay particular attention to how the company’s investments in its four U.S. liquids-rich plays are panning out.  As fairly valued as this company is, as long as the company reports positively next week, I am confident that Marathon is a buy.


KWMatt82 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!

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