MARATHON OIL CORP MRO
January 31, 2011 - 2:59pm EST by
otto695
2011 2012
Price: 45.50 EPS $3.78 $4.75
Shares Out. (in M): 710 P/E 12.0x 9.5x
Market Cap (in $M): 32,353 P/FCF 4.0x 3.3x
Net Debt (in $M): 6,300 EBIT 5,550 6,600
TEV ($): 38,653 TEV/EBIT 6.9x 5.8x

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Description

Last week, the Form-10 was filed - making the the break-up is imminent. At the current price, upside ranges 25% to 35% and downside is 10% -- if the catalyst is delayed.  There is also an additional $3 per share in hidden value if the company elects to conduct an additional separation of one of the businesses into an MLP.  Surprising, MRO has one of the low multiples sector.  At the end of the day, this is what you will get: Two strong, investment grade companies; each will have sufficient liquidity and financial flexibility to pursue their strategic objectives; the spin-off is intended to be tax-free to the corporation and domestic shareholders; IRS Ruling pending for confirmation of tax-free status
 
SUMMARY
 
Marathon Oil (MRO) is among the world's leading integrated energy companies - applying technologies to discover and develop valuable energy resources, providing high-quality products and is now looking to deliver value to shareholders via a tax-free restructuring.  A few days earlier, MRO announced it would spin off its downstream assets in a tax-free transaction. Newco, Marathon Petroleum Corporation (MPC) would have the company's refining assets, retail product sites and the company's terminal and pipeline business. The transaction is should be completed with 1H2011. The stub, Marathon Oil, would continue ahead with its global upstream business including its integrated Canadian oil sands assets.
 
You may recall that Marathon had looked at a spin-off of the refining company back during the market meltdown; however, the debt markets were not receptive to a spin. Over the last two years, credit spreads collapsed and MRO sold over $3.4 billion in assets, with very little effort - a good indication that these assets are in high demand. Once both companies are separated, there will be greater visibility on the diversified assets within each portfolio. Essentially, both stocks will see multiple expansions given that the consolidated company trades at a discount to its peers even with the recent run-up in the stock. Once can value MPC, at around $11 billion in equity or $14 to $18 per share.  The company's Detroit conversion, could add another $1.0 billion in equity to this valuation.  This business will also carry a dividend yield of about 2.5%.
 
The stub (MRO - the upstream assets) should trade around $37 to $41 per share assuming the market absorbs what should be a higher trading valuation for MRO's Canadian oil sands assets. If you add Marathon's other assets (nearly 400K net acres in the Bakken, 100 K acres in the Niobrara and the 20 kbod of net debottlenecking opportunities at oil sands) we can add another $6 per share in value.

BENEFITS OF THE TRANSACTION

Enhanced flexibility to pursue tailored strategies - Each company should have a greater ability to make business and operational decisions in the best interests of its business and to allocate capital and corporate resources with a focus on achieving its own strategic priorities. A more focused business strategy should also result in an expanded portfolio of attractive growth opportunities for each company.  Superior transparency - improved investor focus - As independent energy companies, analysis and investment decisions will be more transparent, allow for more specific comparisons against peers, competitors, benchmarks and performance metrics and thus facilitate evaluation assessments which will likely make the two companies appeal to different sets of shareholders seeking to invest in specific segments of the oil and gas industry. With improved investor focus, it is also anticipated each company will realize a reduction in their individual cost of equity.  Strengthened ability to attract and retain talent - More focused business models will enhance each company's ability to attract and retain individuals with the appropriate skill sets as well as to better align compensation and incentives with the performance of these different businesses.

Marathon Oil Corporation (MRO)

  • Substantial, geographically diverse oil and gas portfolio
  • Use proceeds from new MPC debt and cash on hand to reduce long-term debt by about $2.5 billion
  • Retain existing $3 billion revolving credit facility
  • Liquids focused with upside to long term gas
  • Impact rank exploration provides upside

Marathon Petroleum Corporation (MPC)

  • Strong across the full downstream value chain
  • $2 billion new 4 year revolving credit facility
  • $2.5 - $3 billion in new long term debt
  • $750 million minimum balance sheet cash
  • Well positioned geographically
  • Consistently a top performer on an operating income per barrel basis

 MARATHON CONTINUES TO TRADE AT A DISCOUNT

 

 2011 P/E

2011 EV/EBITDA

2011 EV/EBIDA

CVX

8.2x

2.9x

5.0x

COP

10.8x

4.1x

6.4x

XOM

11.0x

5.1x

7.8x

HES

12.4x

4.2x

6.6x

HES-TSE

12.1x

5.6x

6.6x

Maraton

9.9x

3.9x

6.2x

 MARATHON OVERVIEW

For the company as a whole, the increased visibility will reveal an underlying asset mix undergoing solid change that can drive production and earnings above current Street expectations.

 The Upstream Business

MRO exploration activities are focused on adding production to existing core areas (the U.S., Equatorial Guinea, Libya and the North Sea) and developing potential new core areas (Angola, Indonesia and Poland). Marathon's production operations supply liquid hydrocarbons and natural gas to the growing world energy markets. Worldwide production operations are currently focused in North America, Africa and Europe. The Company also holds ownership interests in both operated and outside-operated oil sands leases in Canada that could be developed using in-situ methods of extraction.  MRO owns a 20 percent outside-operated interest in the Athabasca Oil Sands Project (AOSP), which includes the existing Muskeg River Mine and the Scotford Upgrader, the upcoming Jack Pine Mine and Scotford Upgrader expansion and additional prospective acreage in Alberta, Canada. These assets give Marathon access to stable, long-life Organization for Economic Cooperation and Development (OECD) production through several future phased expansions.  MRO's integrated gas business adds value through the development of opportunities created by demand for natural gas. This business complements the Company's exploration and production operations and opens a wide array of investment opportunities designed to add sustainable value growth.

Downstream business

Marathon's downstream assets reveals a dominant refining business that separate retail and mid stream, remains amongst the most profitable of its peers.   MPC has extensive re?ning, marketing and transportation operations concentrated primarily in the Midwest, Upper Great Plains, Gulf Coast and Southeast regions of the U.S. MPC ranks as the ?fth largest crude oil re?ner in the U.S. and the largest in the Midwest. Strategically located to serve major markets, MPC's operations include a seven-plant re?ning network, a comprehensive terminal and transportation system, and extensive marketing operations. This also includes MPC's wholly owned retail marketing subsidiary Speedway SuperAmerica LLC, the third largest chain of company owned and -operated retail gasoline and convenience stores in the U.S. and the largest in the Midwest.  MPC is currently the primary beneficiary of the disconnect between Brent / WTI.  The downstream assets is a dominant refining business that separate retail and mid stream, remains amongst the most profitable of its peers and has typically accounted for ~85% of legacy downstream earnings.

VALUATION

 

MRO

   

MPC

 
 

Reserve EBITDA

6000

 

2011 EBITDA

2900

 

Multiple

4.0x

 

Multiple

4.5x

   

24000

   

13050

           
 

Oil sands

900

     
 

Multiple

8.0x

     
   

7200

     
           
 

Nat Gas

600

     
 

Multiple

5.5x

     
   

3300

     
           
 

Total

34500

 

Total

13050

 

Debt

(6200)

 

Debt

(1700)

   

28300

   

11350

 

Shares

710

 

Shares

710

   

 $ 39.86

   

 $ 15.99

           

 POTENTIAL HIDDEN  VALUE COULD BE REALIZED: Approximately $3 per share

Retail and pipeline earnings are good - with a combined range of $400m versus $800m - $3.4bn in 2007-2009 for the total downstream. Clearly, the relative stability of these earnings streams perhaps deserves a higher relative value.  But what will likely garner most attention is the contribution from the pipeline business - and the potential, value that could be 'released' from a potential secondary separation into an MLP.  If we apply a mid range multiple for a sector trading on 12x-17x it would yield an implied value of ~$2.7bn; however, netting the $2bn value associated with the free cash 'lost' to the remaining downstream, would yield a total value 'released' of just ~$950m or about $3 per share.

RISK: The macro environment

The real risk is the current sustaining.  While I am not an expert in this area, I comfortable with this idea because the macro environment should continue to help Marathon due to it's positioned among the most attractive stocks in the sector.  For example, MPC is currently the primary beneficiary of the disconnect between Brent / WTI which should underpin strong near term earnings momentum vs peers.  The parent, MRO with upstream visibility, revealing an underlying asset mix undergoing substantial change that can drive production and associated earnings.  Indeed, the greater transparency on the upstream should focus the Street's attention on the change underway in Marathon's upstream portfolio.

Catalyst

1. Tax-free spin-off effective by June
2. Additional break-up into an MLP
3. Macro environment  for oil/integrated getting better
    sort by    

    Description

    Last week, the Form-10 was filed - making the the break-up is imminent. At the current price, upside ranges 25% to 35% and downside is 10% -- if the catalyst is delayed.  There is also an additional $3 per share in hidden value if the company elects to conduct an additional separation of one of the businesses into an MLP.  Surprising, MRO has one of the low multiples sector.  At the end of the day, this is what you will get: Two strong, investment grade companies; each will have sufficient liquidity and financial flexibility to pursue their strategic objectives; the spin-off is intended to be tax-free to the corporation and domestic shareholders; IRS Ruling pending for confirmation of tax-free status
     
    SUMMARY
     
    Marathon Oil (MRO) is among the world's leading integrated energy companies - applying technologies to discover and develop valuable energy resources, providing high-quality products and is now looking to deliver value to shareholders via a tax-free restructuring.  A few days earlier, MRO announced it would spin off its downstream assets in a tax-free transaction. Newco, Marathon Petroleum Corporation (MPC) would have the company's refining assets, retail product sites and the company's terminal and pipeline business. The transaction is should be completed with 1H2011. The stub, Marathon Oil, would continue ahead with its global upstream business including its integrated Canadian oil sands assets.
     
    You may recall that Marathon had looked at a spin-off of the refining company back during the market meltdown; however, the debt markets were not receptive to a spin. Over the last two years, credit spreads collapsed and MRO sold over $3.4 billion in assets, with very little effort - a good indication that these assets are in high demand. Once both companies are separated, there will be greater visibility on the diversified assets within each portfolio. Essentially, both stocks will see multiple expansions given that the consolidated company trades at a discount to its peers even with the recent run-up in the stock. Once can value MPC, at around $11 billion in equity or $14 to $18 per share.  The company's Detroit conversion, could add another $1.0 billion in equity to this valuation.  This business will also carry a dividend yield of about 2.5%.
     
    The stub (MRO - the upstream assets) should trade around $37 to $41 per share assuming the market absorbs what should be a higher trading valuation for MRO's Canadian oil sands assets. If you add Marathon's other assets (nearly 400K net acres in the Bakken, 100 K acres in the Niobrara and the 20 kbod of net debottlenecking opportunities at oil sands) we can add another $6 per share in value.

    BENEFITS OF THE TRANSACTION

    Enhanced flexibility to pursue tailored strategies - Each company should have a greater ability to make business and operational decisions in the best interests of its business and to allocate capital and corporate resources with a focus on achieving its own strategic priorities. A more focused business strategy should also result in an expanded portfolio of attractive growth opportunities for each company.  Superior transparency - improved investor focus - As independent energy companies, analysis and investment decisions will be more transparent, allow for more specific comparisons against peers, competitors, benchmarks and performance metrics and thus facilitate evaluation assessments which will likely make the two companies appeal to different sets of shareholders seeking to invest in specific segments of the oil and gas industry. With improved investor focus, it is also anticipated each company will realize a reduction in their individual cost of equity.  Strengthened ability to attract and retain talent - More focused business models will enhance each company's ability to attract and retain individuals with the appropriate skill sets as well as to better align compensation and incentives with the performance of these different businesses.

    Marathon Oil Corporation (MRO)

    Marathon Petroleum Corporation (MPC)

     MARATHON CONTINUES TO TRADE AT A DISCOUNT

     

     2011 P/E

    2011 EV/EBITDA

    2011 EV/EBIDA

    CVX

    8.2x

    2.9x

    5.0x

    COP

    10.8x

    4.1x

    6.4x

    XOM

    11.0x

    5.1x

    7.8x

    HES

    12.4x

    4.2x

    6.6x

    HES-TSE

    12.1x

    5.6x

    6.6x

    Maraton

    9.9x

    3.9x

    6.2x

     MARATHON OVERVIEW

    For the company as a whole, the increased visibility will reveal an underlying asset mix undergoing solid change that can drive production and earnings above current Street expectations.

     The Upstream Business

    MRO exploration activities are focused on adding production to existing core areas (the U.S., Equatorial Guinea, Libya and the North Sea) and developing potential new core areas (Angola, Indonesia and Poland). Marathon's production operations supply liquid hydrocarbons and natural gas to the growing world energy markets. Worldwide production operations are currently focused in North America, Africa and Europe. The Company also holds ownership interests in both operated and outside-operated oil sands leases in Canada that could be developed using in-situ methods of extraction.  MRO owns a 20 percent outside-operated interest in the Athabasca Oil Sands Project (AOSP), which includes the existing Muskeg River Mine and the Scotford Upgrader, the upcoming Jack Pine Mine and Scotford Upgrader expansion and additional prospective acreage in Alberta, Canada. These assets give Marathon access to stable, long-life Organization for Economic Cooperation and Development (OECD) production through several future phased expansions.  MRO's integrated gas business adds value through the development of opportunities created by demand for natural gas. This business complements the Company's exploration and production operations and opens a wide array of investment opportunities designed to add sustainable value growth.

    Downstream business

    Marathon's downstream assets reveals a dominant refining business that separate retail and mid stream, remains amongst the most profitable of its peers.   MPC has extensive re?ning, marketing and transportation operations concentrated primarily in the Midwest, Upper Great Plains, Gulf Coast and Southeast regions of the U.S. MPC ranks as the ?fth largest crude oil re?ner in the U.S. and the largest in the Midwest. Strategically located to serve major markets, MPC's operations include a seven-plant re?ning network, a comprehensive terminal and transportation system, and extensive marketing operations. This also includes MPC's wholly owned retail marketing subsidiary Speedway SuperAmerica LLC, the third largest chain of company owned and -operated retail gasoline and convenience stores in the U.S. and the largest in the Midwest.  MPC is currently the primary beneficiary of the disconnect between Brent / WTI.  The downstream assets is a dominant refining business that separate retail and mid stream, remains amongst the most profitable of its peers and has typically accounted for ~85% of legacy downstream earnings.

    VALUATION

     

    MRO

       

    MPC

     
     

    Reserve EBITDA

    6000

     

    2011 EBITDA

    2900

     

    Multiple

    4.0x

     

    Multiple

    4.5x

       

    24000

       

    13050

               
     

    Oil sands

    900

         
     

    Multiple

    8.0x

         
       

    7200

         
               
     

    Nat Gas

    600

         
     

    Multiple

    5.5x

         
       

    3300

         
               
     

    Total

    34500

     

    Total

    13050

     

    Debt

    (6200)

     

    Debt

    (1700)

       

    28300

       

    11350

     

    Shares

    710

     

    Shares

    710

       

     $ 39.86

       

     $ 15.99

               

     POTENTIAL HIDDEN  VALUE COULD BE REALIZED: Approximately $3 per share

    Retail and pipeline earnings are good - with a combined range of $400m versus $800m - $3.4bn in 2007-2009 for the total downstream. Clearly, the relative stability of these earnings streams perhaps deserves a higher relative value.  But what will likely garner most attention is the contribution from the pipeline business - and the potential, value that could be 'released' from a potential secondary separation into an MLP.  If we apply a mid range multiple for a sector trading on 12x-17x it would yield an implied value of ~$2.7bn; however, netting the $2bn value associated with the free cash 'lost' to the remaining downstream, would yield a total value 'released' of just ~$950m or about $3 per share.

    RISK: The macro environment

    The real risk is the current sustaining.  While I am not an expert in this area, I comfortable with this idea because the macro environment should continue to help Marathon due to it's positioned among the most attractive stocks in the sector.  For example, MPC is currently the primary beneficiary of the disconnect between Brent / WTI which should underpin strong near term earnings momentum vs peers.  The parent, MRO with upstream visibility, revealing an underlying asset mix undergoing substantial change that can drive production and associated earnings.  Indeed, the greater transparency on the upstream should focus the Street's attention on the change underway in Marathon's upstream portfolio.

    Catalyst

    1. Tax-free spin-off effective by June
    2. Additional break-up into an MLP
    3. Macro environment  for oil/integrated getting better
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