Marathon Oil's Transition from Base to Growth


Ever since spinning off its downstream business, Marathon Oil has been gradually turning leaner and meaner. A truly global exploration and production company, Houston-based Marathon's international accomplishments are as promising as its North American shale exploits. But more importantly, the company has developed its growth assets, and in the process, moved away from relying heavily on its legacy base assets. It's time to take a closer look.

Photo credit: Marathon Oil

Solid growth
Thanks to an early mover advantage in the North American shale boom, Marathon's exposure to the Eagle Ford and Bakken shale plays are now turning into solid investments. The company's Eagle Ford production for the second quarter shot up a whopping 280% to 80,000 barrels of oil equivalent per day, or Boed, compared to last year . With 62% crude oil and 17% natural gas liquids in the production mix, the Eagle Ford should continue to be a part of Marathon's growth story in North America.

Currently, Marathon is trying to increase the number of wells drilled within a unit area of spacing -- a move that should likely pay rich dividends. Another successful player in the Eagle Ford, EOG Resources , have been attempting a similar feat wherein the company is aiming to drill 16 wells in a 640-acre area, or one well in a 40-acre unit. EOG estimates this "downspacing" to increase the asset's net present value by a solid 35%.

Marathon is similarly testing out a potential downspacing to 40-acre and 60-acre units. While the results will be out by December 2013 , I'm betting big on a successful transition. According to management, this is going to transform an 840-million-barrel resource into a conservative 1.2 billion barrels in the ground . From an investor perspective, this is nothing less than solid organic growth.

The Bakken picture is as exciting. Currently pushing for a 40,000 Boed in 2013, Marathon is aiming for 10% annual production growth until 2017 . With about 390,000 net acres under its belt, the resources are huge. Average drilling times have also fallen to 15 days from spud-to-total depth. With just five active drilling rigs and one frac crew , Marathon has been the most efficient driller in the Bakken. According to North Dakota Industrial Commission, Marathon drilled an average 1,000 feet/day in 2012 -- the highest by any Bakken operator . This is where the economics turn out to be hugely beneficial.

Similar efficiency drives among Bakken operators have proved to be advantageous. For example, Kodiak Oil and Gas have lowered its spud-to-total depth to 18.5 days in the second quarter . This brought down overall well costs, a clear plus for Kodiak. When dealing with technologically advanced methods of extracting oil, economics plays a vital role. Investors should always keep an eye on the costs involved.

Promising international growth prospects
Marathon's international portfolio, too, looks promising. The company is currently engaged in six proven or emerging hydrocarbon basins. This includes the pre-salt resources offshore Gabon. Holding a 21.5% working interest where French E&P Total is the operator, the Diaba block is estimated to hold reserves in the range 1.3-3.0 billion barrels of oil equivalent . Another very interesting project is in the Kurdistan region of Iraq with two new discoveries to date.

The rest of the international projects will continue to be Marathon's base assets generating positive free cash flow. For the next five years, management has earmarked a base production rate of 350,000 Boed .

A nice mix of growth and legacy
The overall business model is disciplined for an international E&P. Marathon has so far managed to keep costs under check and improving gross margins. The balance looks solid with a debt-to-equity of 34%. With new CEO Lee Tillman, who previously has been overseeing the global engineering staff at ExxonMobil, things look exciting. Marathon has definitely kept the right balance for base and growth assets.

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