Marathon Oil Corporation’s (MRO) second-quarter 2009 results came in sharply weaker-than-expected, with the contribution from increased oil and natural gas production and improved refining margins more than offset by lower realized commodity prices. Earnings per share, excluding mark-to-market and divestment gains, came in at 35 cents, below the Zacks Consensus Estimate of 53 cents.
As has been the case with the other oil majors that have already reported — Exxon (XOM), ConocoPhillips (COP) and Chevron (CVX) — earnings and revenue comparisons with the year-earlier period were even worse. Marathon’s adjusted earnings per share plunged 71%, while sales declined 40% to $13 billion.
Lower Prices More Than Offset Increased Upstream Volumes
Income from the upstream segment totaled $220 million during the quarter, down more than 73% from the year-ago level.
The company reported production (available for sale) of 411,000 oil-equivalent barrels per day (BOE/d), in-line with its interim guidance last month. This is a 12% year-over-year production growth, reflecting strong operating performance from the company’s Alvheim/Vilje oil field in the North Sea and natural gas assets in Equatorial Guinea.
Lower realized oil and natural gas prices offset the significant upstream volume gains. Marathon’s worldwide realized crude oil price of $55.49 per barrel was more than 50% below the year-earlier level, while natural gas realizations dropped 57% to $2.21 per thousand cubic feet (Mcf).
Downstream Margins Improve
Margins in the refining business improved from the weak levels in the year-earlier quarter, particularly in Marathon’s core Midwest region. Partly offsetting the improved indicator margins were narrower sweet/sour differentials, dampening overall capture rates. Marathon ‘s refining and marketing unit earned $165 million during the quarter, compared to $158 million last year, reflecting improved margins and lower costs.
The company’s realized gross refining and wholesale marketing margin of approximately 9 cents per gallon was up from last year’s income of 8 cents per gallon. Total refined product sales volumes were essentially unchanged from the year-earlier level, while throughput was down 4% to 1,158 thousand barrels per day.
Capital Expenditure & Balance Sheet
During the quarter, Marathon spent roughly $1.7 billion on capital programs (37% on E&P and 43% on Refining, Marketing, and Transportation), with the full-year budget being $6 billion. At the end of the quarter, the company had cash and cash equivalents of $1.5 billion and cash adjusted debt-to-capitalization ratio of approximately 25%.
Strategic Sale
During the last few months, Marathon’s important strategic divestments include sale of an undivided 20% participating interest in Angola Block 32, all of Marathon’s holdings in Ireland , interests in the Heimdal area offshore Norway , and interests in the Permian Basin in Texas and New Mexico . These sales are part of the company’s $2 billion to 4 billion asset divestiture program announced last March. The company has already made $3.2 billion worth of dispositions.
We currently rate Marathon shares as Neutral, expecting the stock to perform in-line with the broader market.
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