In its investor day meeting, integrated oil major Marathon Oil Corporation (MRO) offered a glimpse of its 2010 production and capital spending plans.
 
Capital Spending Trimmed
 
Marathon said that it will prune its capital expenditures by about $1 billion in 2010, as the company allocates a larger percentage of funds towards the Exploration & Production (E&P) segment as against the under-pressure refining business. The Houston-based firm has pegged its 2010 capital budget at about $5 billion, down nearly 7% from the $6 billion it expects to invest by the end of 2009. As per the plan, expenditure on the downstream business (refining, marketing and transportation), which constituted approximately 40% of this year’s budget, will fall to 23%, while the remaining portion will go to exploration and production projects.
 
Upstream Production Outlook
 
Marathon’s change in focus to the upstream business can be attributed to plummeting refining profits on the back of weak demand for gasoline, diesel and jet fuel. The company’s new area of emphasis will be deepwater exploration, unconventional resource plays in North America and development in Angola.
 
Marathon also guided towards 2009 E&P production growth of around 6% from the 2008 level. During the four-year period 2008–2011, the company expects upstream volumes to increase at a compound annual growth rate of approximately 4% (with contributions from new projects in the Gulf of Mexico, Canada’s oil sands, Libya and Angola).
 
In 2010, Marathon plans to drill 3–4 significant wells in the Gulf of Mexico, 2 high-risk, high-potential wells in Indonesia, as well as commence activity in Norway, Libya, Angola and the domestic onshore resource plays.
 
Outlook
 
Marathon’s move to chop capital spending follows a similar decision by rival ConocoPhillips (COP), which earlier announced a 12% reduction in its 2010 budget. In contrast, super majors such as ExxonMobil (XOM) and Chevron (CVX) have maintained their capital spending even during the current downturn in an effort to lift production. 
 
We like Marathon’s large and geographically diverse reserve base, competitive downstream operation, and solid project pipeline. However, the uncertain commodity-price environment and the company’s 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 and rate it as Neutral.
Read the full analyst report on “MRO”
Read the full analyst report on “COP”
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Read the full analyst report on “CVX”
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