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Thursday July 01, 2010
Marathon Oil (MRO): A 'Prudent' speculation
by John Buckingham, editor The Prudent Speculator  We think there is too much risk to owning pure refiners in this environment.However, there is one company with a valuation now hurt by its refining exposure, but that is shifting upstream in a way that makes the eventual mix worth owning now: Marathon Oil (MRO). Since the turn of the century, Marathon Oil has generated an average of 85% of its revenue from refining. And profit coming from the upstream division was weighted by taxes and royalties. As a result, the company has traditionally been valued much more like a refiner than a true integrated oil company. 
Its price to sales ratio of 0.4 is much closer to the independent refiner multiple than the 0.7 average afforded to the integrated companies that Marathon counts as its peers. We do not however, want to discount the refining operations entirely. In the four years since margins on operating income per barrel of throughput topped in 2006, Marathon has averaged the second-best marks in the industry. And the company is still posting healthy profits, even though every other refiner has posted at least two consecutive quarterly losses. Completion of a massive expansion of the company’s Garyville refinery earlier this year increased its capacity almost 75% and its Detroit refinery is beefing up bitumen refining capacity, providing vertical synergy with the company’s oil sands operations. The step change in Marathon’s valuation should occur when investors better understand the company’s rising leverage to higher oil prices. Currently, corporate and special taxes total 80% on its Norway project. In Libya, earnings caps resulted in a 93% income tax rate in 2009. Similar situations exist for many other international properties. A pipeline full of projects in more normal tax jurisdictions is set to change that dynamic. First up is the Droshky project set to come online later this year. The high pressure acreage in the Gulf of Mexico that will see greater production in the first few years can be a bridge to other production increases. Marathon is beginning to ramp production in North Dakota. Potential upside could also come from further development and debottlenecking of the Athabasca tar sands, which are 20% owned by Marathon. The largest oil sands development in Canada, Athabasca operations have struggled immensely with high costs and abnormal downtime. We think healthier returns on these new projects may be just the thing needed to clear up Marathon’s cloudy valuation. Learn more about this financial newsletter at The Prudent Speculator. 
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