Earlier this month, Marathon Oil Corporation (MRO) – the fifth largest refiner and marketer of petroleum products in the U.S. – reported its financial results for the third quarter ended September 30, 2010.
Now that the analysts have had some time to ponder over the quarterly performance of Marathon, they are weighing in their estimate revisions. Below we cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for the outlook.
Earnings Review
On November 2, 2010, Marathon reported a jump in its third-quarter 2010 profits, boosted by higher fuel prices. Much-improved downstream margins also contributed towards the company’s strong results.
Earnings per share, excluding special items, came in at $1.00, comfortably beating the Zacks Consensus Estimate of 94 cents and significantly ahead of the year-ago period adjusted profit of 61 cents.
Quarterly revenue of $18.6 billion was up 28.3% from the year-earlier level, and was 2.3% above our projection.
(Read our full coverage on this earnings report: Marathon Profits Shoot Up)
Agreement of Estimate Revisions
Despite the quarterly outperformance, analysts exhibit a strong negative sentiment regarding Marathon’s 2010 and 2011 outlooks. In particular, we see a notable number of estimate revisions over the past 30 days, indicating that revisions were in response to the company’s third quarter earnings release.
Out of 18 analysts covering the stock, 7 have revised their estimates for 2010 downward, while 4 have gone in the opposite direction. Looking to 2011, the trend is more or less similar. Out of 20 analysts, 12 trimmed their estimates as against just 2 positive revisions.
Estimates are down for the December quarter of 2010 as well. For the current quarter, 10 of the 19 analysts have decreased their estimates over the last 30 days, compared to a single hike.
This downtrend in estimate revisions reflects the uncertain commodity-price environment and the company’s heavy downstream exposure that will continue to weigh on Marathon Oil’s revenue and profitability, at least in the near term.
In particular, the weaker-than-expected performance at the Droshky development in deepwater Gulf of Mexico – which is likely to result in a faster production decline and eventually reduce the amount of total recoverable resources – scared investors and overshadowed the company’s strong quarterly results.
Magnitude of Estimate Revisions
As a result of the analysts revising estimates downwards over the past 30 days, the Zacks Consensus Estimates for fiscal 2010 and 2011 have dropped by 4 cents (from $3.42 to $3.38) and 18 cents (from $4.50 to $4.32), respectively. Meanwhile, the estimate for the December 2010 quarter is down by 6 cents.
Our Recommendation
Marathon Oil enjoys the diversification benefits afforded by an integrated business model. In terms of company-specific fundamentals, Marathon Oil’s upstream asset base, particularly on the international front, is one of the most robust in the group.
The key negative, in our view, is the current unfavorable macro backdrop, which is expected to continue drowning out the positives, at least in the near term. We are also concerned about the disappointing reservoir performance from Marathon Oil’s 100%-owned and operated Droshky development in deepwater Gulf of Mexico, which only started production in July.
Marathon, the fourth largest U.S.-based integrated oil company, and behind ExxonMobil (XOM), Chevron Corp. ( “>CVX ) , and ConocoPhillips (COP), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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