Buy This Eagle Ford Player, Ride It Higher In 2013
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Recently, Goldman Sachs upgraded Marathon Oil (NYSE: MRO) to a "Buy", citing the company’s impressive growth and favorable production. The main reason why Goldman Sachs differentiated Marathon from other domestic oil companies is because it operates in the Eagle Ford and Bakken shales, which are very profitable regions. Marathon has set aside more than one-third of its $5.2 billion capital budget for its South Texas operations. This means that Marathon has begun to understand the importance of domestic shale formations, where profits can be made more easily than spending on locations overseas.
Increase in Capital Budget Aimed at Increasing Production in Eagle Ford
Marathon increased its capital budget by $200 million for 2013. The increased spending will boost its production levels at Eagle Ford, which is located in South Texas. Marathon has decided to avoid rigs and focus on liquid-rich plays like Eagle Ford. Essentially, liquids like oil, ethane and propane are priced better than natural gas in dry form, which is very cheap in the U.S. $1.9 billion, or almost $2 billion will be spent at Marathon's Eagle Ford operations, and much of that money will be used to explore, drill and boost existing infrastructure.
In the long-term, this expenditure will reflect positively in its profits and earnings as the region holds a treasure trove of liquefied natural gas. In the 3rd quarter, the company had an average of 40,000 barrels per day at Eagle Ford. This number will increase to 85,000 barrels of oil equivalent/day in 2013. This optimistic outlook and the company's stated focus on U.S. shale formations led to Goldman Sachs upgrading Marathon to a definite "buy".
Marathon Takes a More Domestic Posture
Texas is one of the most oil and gas rich states in the U.S., and has more energy resources than many major oil producing nations. This fact alone has led Marathon to augment its capital budget in favor of Eagle Ford. While the existing facilities and infrastructure are satisfactory, Marathon does not want to let its competitors have an edge over it. Analysts believe Marathon has an edge over other domestic oil companies that operate in South Texas.
We must also bear in mind that Marathon's international energy business is splendid and has helped it to remain profitable over the years. The sudden focus towards American shale formation is mostly because it is safer and less expensive to explore and drill in the U.S. As Marathon concentrates on liquids, its sales will bring back a lot of revenue as well. That will reflect in the company’s margins and will invariably help investors to earn more through stable results.
Marathon’s Competitors at Eagle Ford
Eagle Ford had long avoided the kind of attention that shale-rich regions usually receive from oil companies. However, when BHP Billiton (NYSE: BHP) purchased PetroHawk Resources for $12 billion in July 2011, the region finally arrived on the international scene. BHP had a spending budget of almost $5 billion for its Eagle Ford and Permian locations. BHP believes that dry gas resources are valuable in the long term, and that is something I must agree with. With that in mind, Marathon has again ensured that it is working in the right direction at Eagle Ford, whether it is dry natural gas or liquids.
Anadarko Petroleum (NYSE: APC), one of the most successful American oil companies sold 33% of its Eagle Ford Shale assets to Korea National Oil for $1.55 billion. Anadarko employs horizontal drilling techniques at its facilities in Eagle Ford. Meanwhile, Chesapeake (CHK) sold its Eagle Ford assets to Plains All American Pipeline (NYSE: PAA) for $125 million. The facility has a storage capacity of 15,000 barrels while another 300,000 barrels can be stored in a capacity that is still being constructed. Plains All American also purchased another $190 million for other purchases in Eagle Ford.
ZaZa Energy (ZAZA) is an interesting player at Eagle Ford. The company has 72,000 net acres and production began in late 2012. The company has successfully completed more than 7,500 wells globally. The company will not be a threat to Marathon, but is a company that it will need to watch in order to follow developments in the area.
Marathon has taken a big step in the right direction by deciding to invest almost $2 billion at Eagle Ford. This increase in capital budget spending will help Marathon to increase output and augment its profitability. The company has an operating cash flow of $4 billion and total cash of almost $1 billion. Though it does not have a lot of money, Marathon has made the smart decision to invest in the U.S. instead of overseas, which is why Goldman Sachs upgraded the company. Going forward, this will help investors realize solid gains for the long-term.
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