Marathon Oil Corporation (MRO) – the fifth largest refiner and marketer of petroleum products in the U.S. – reported a jump in its third-quarter 2010 profits.

As has been the case with the larger rivals that have already reported, such as ExxonMobil (XOM), ConocoPhillips (COP), and Royal Dutch Shell PLC (RDS.A), results were boosted by higher fuel prices. Much-improved downstream margins also contributed towards Marathon’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.

Segmental Performance

Upstream: Income from the upstream segment totaled $510 million during the quarter, up from $491 million in the year-ago level. Marathon’s worldwide realized crude oil price (from continuing operations) of $72.95 per barrel was 13.8% above the year-earlier level, while natural gas realizations (also from continuing operations) increased 22.3% to $2.69 per thousand cubic feet (Mcf).

The company reported a production (available for sale) of 405,000 oil-equivalent barrels per day (BOE/d), at the upper end of the previous guidance and 3.1% above the previous-year level. The positive year-over-year performance reflects the start-up of production at the Droshky development in deepwater Gulf of Mexico and strong reliability from Marathon’s Equatorial Guinea and Norway production facilities.

Downstream: Margins in the refining business increased significantly from the year-earlier levels. The situation was further helped by improved sales volumes and wider sweet/sour differentials.

Marathon’s refining and marketing unit earned $285 million during the quarter, compared to income of $158 million last year – reflecting better margins and crack spreads.

The company’s realized gross refining and wholesale marketing margin of 9.21 cents per gallon was up markedly from last year’s income of 7.62 cents per gallon. Total refined product sales volumes were up 20.1% from the year-earlier level to 1,681 thousand barrels per day, while throughput was up 21.4% to 1,445 thousand barrels per day.

Capital Expenditure

During the quarter, Marathon spent roughly $1.1 billion on capital programs (55% on E&P and 26% on Refining, Marketing and Transportation).

Guidance

Marathon estimates FOURTH quarter 2010 E&P production available for sale in the range of 410,000 – 425,000 BOE/d, excluding the effect of any future acquisitions or disposals. Full year guidance is 390,000 BOE/d, at the lower end of its previous guidance.

Our Recommendation

Despite the robust third quarter results and the strong outlook, Marathon shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

We like Marathon’s large and geographically-diverse reserve base and strong inventory of development projects (that provide visible production growth over the coming years). 

However, the uncertain commodity-price environment and the heavy downstream exposure will continue to weigh on Marathon’s revenue and profitability, at least in the near term.  As such, we see the stock performing in line with the broader market.

 
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