Can a Leaner Marathon Hold Its Ground?

When Marathon Oil (NYS: MRO) decided to go lean by shedding its refining and marketing business, it was with hopes of harnessing greater value from the exploration and production business.

On the face of it, investors stood to benefit from the spinoff. But then S&P played spoilsport by downgrading Marathon as it felt the move weakened the company's business profile. However, analysts across the industry contradicted the downgrade. The immediate quarter after spinoff has taken S&P's side. I feel comparing results both yearly and sequentially will portray a better picture. Let's get the lowdown.

Joint effort
Let's compare the third quarter's performance with the same period last year. Two factors had a contradictory effect on Marathon's sales growth. Higher oil prices, which were up 30% to $66.69 per barrel of oil equivalent (BOE), helped increase revenue. On the other hand, a fall in volumes, which dipped to 343 mboed (thousand BOE per day) from 359 mboed (excluding Libya), pulled the top line down. The resultant sales growth was 28%. Sales volume fell as there was no contribution from strife-wracked Libya. Moreover, field decline lowered production from the Gulf of Mexico, pushing the company's output to an under-production state.

Marathon managed to increase operating income by 27% despite a whopping 119% hike in exploration expenses. The company's efforts in reducing selling, general and administrative expenses were impressive. Sequentially, however, the picture was different.

Feeling blue
The quarter is of greater significance as it was Marathon's first after shedding its refining and marketing business. So let's compare the quarter to the previous quarter. Sales decreased by 2% with price per BOE dipping $3.05 and sales volume increasing by 1%. The hike in production was largely due to Europe's output going up. Operating income increased by 44%, but if we deduct the $307 million impairment, the rise was just 8%.

The road ahead
Excluding Libya, Marathon is expecting to produce between 360 mboepd and 370 mboepd for the fourth quarter of 2011. For 2012, the range resides between 360 mboepd and 380 mboepd. Although the projections don't look high, they will help the company reach 2010 levels. With oil prices expected to decline further in December and next year, initiatives such as strategic acquisitions and divestitures to attain more productive assets should be a natural step for the company.

Marathon, in fact, has already initiated divestments. It recently sold stakes in Poseidon Oil Pipeline (28%), Odyssey Pipeline (29%), Eugene Island Pipeline System (23%), and certain other oil pipeline interests for $210 million to Genesis Energy (NYS: GEL) . Marathon also sold off its remaining 30% interest in Kenai LNG Corp. to ConocoPhillips (NYS: COP) .

Foolish bottom line
Marathon Oil's journey as solely an E&P company has begun coping with low-return assets and production hindrances. Two things tell me the company will prove itself. First, the management's commitment toward enhancing growth, and second, the fact that the E&P sector is going to get a huge fillip from the burgeoning global energy demand. I foresee brighter days for the company.

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At the time thisarticle was published Abantika Chatterjee doesn't own any shares of the companies mentioned above. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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