We have retained our Neutral recommendation for Marathon Oil Corporation (MRO) following its second-quarter earnings release. Our decision reflects the leading integrated oil and gas company’s strong operational performance and array of development projects, partially offset by the volatile oil and gas prices along with macro-economic factors.
Second Quarter Performance
The company’s earnings per share in the quarter, excluding special items, came in at $1.11, surpassing the Zacks Consensus Estimate of 82 cents and the year-ago period adjusted profit of 35 cents. Total revenue of $18.6 billion increased 39.5% year over year and was 3.6% above the Zacks Consensus Estimate.
On a segmental basis, income from the upstream segment totaled $432 million, compared with $208 million in the year-ago quarter, The refining and marketing unit earned $421 million during the quarter, compared with income of $165 million last year, reflecting better margins and crack spreads.
‘ However, the company’s production (available for sale) was 375,000 oil-equivalent barrels per day (BOE/d) in the quarter, down 7% from the previous-year period. The downward movement of the result reflects a planned turnaround in Equatorial Guinea production facilities and the sale of a portion of Marathon’s Permian Basin assets in the second quarter of 2009.
(Read our full coverage on this earnings report: Marathon Cruises Past Estimates).
Guidance
Marathon estimates third quarter 2010 exploration and production (E&P) volumes available for sale to be in the range of 385,000 – 405,000 BOE/d, excluding the effect of any future acquisitions or dispositions. Full year 2010 guidance remains unchanged at 390,000 – 410,000 BOE/d.
Our Recommendation
In our opinion, Marathon’s growth profile is sustainable with the help of a large and geographically-diverse reserve base, strong balance sheet and benefits from the Garyville refinery expansion. Moreover, a pipeline of projects spreading all over the globe will aid the company in attaining its production targets in the coming quarters.
The oil sand fields in Angola, the Gulf of Mexico and Canada offer substantial upside to the company’s exploration and production business segment. We appreciate Marathon’s unrelenting efforts to complete major scheduled projects on time and at a competitive cost. The Droshky development is expected to significantly contribute toward the company’s production capacity and enhance the project portfolio.
Marathon also plans to boost returns and solidify its competitive position in the industry by embarking on cost reduction initiatives, exiting unprofitable markets and streamlining the organization.
However, the unstable oil and gas prices along with the company’s heavy downstream exposure will likely cut the profitability in the near term. We also remain apprehensive about delays in the development of its new upstream projects, negatively impacting the earnings outlook of the company.
In addition, Marathon depends on property acquisitions to expand its resource base. The company’s failure to complete accretive transactions in time may slash its growth rate. Another major area of concern is the suspension of operations in the Gulf of Mexico due to the moratorium by the government.
Considering these factors, we expect the stock to perform in line with its peers and the broader U.S. markets over the upcoming quarters.
MARATHON OIL CP (MRO): Free Stock Analysis Report
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