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 (in $M): | 38,653 | TEV/EBIT | 6.9x | 5.8x |
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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.
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