Marathon Oil Cut to Underperform - Analyst Blog

We have downgraded energy explorer Marathon Oil Corporation (MRO) to Underperform from Neutral following the company’s second quarter miss and the clouded post-split outlook.

Houston, Texas-based Marathon Oil is a leading integrated oil and gas firm with extensive upstream operations. The company’s business is organized into three segments – Exploration and Production (accounting for more than 80% of Marathon’s total income), Oil Sands Mining, and Integrated Gas.

In July 2011, Marathon completed the spin-off of its refining/sales business into a separate, independent and publicly traded company Marathon Petroleum Corporation (MPC).

In the recently reported second quarter results, Marathon Oil came up with weaker-than-expected numbers. Earnings from continuing operations (excluding special items) came in at 96 cents per share, below the Zacks Consensus estimate of 99 cents per share, as unplanned disruptions hurt production.

Near-term upstream production profile remains muted without any meaningful large volume additions for the next few years. The disappointing performance at the Droshky development in deepwater Gulf of Mexico is another cause for concern.

The facility – which started production last July – has seen its reservoir performance fall short of expectations. This is likely to result in a faster production decline and eventually reduce the amount of total recoverable resources.

Marathon has been adversely affected by suspended operations in Libya, which, apart from being a low cost base, accounts for about 11% of the company’s total oil and gas output. Production is currently shut down in the North African nation due to continued political and civil unrest.

The transfer of the refining/sales operations – that has left Marathon Oil with a less diversified business, thereby heightening its risk profile – has added to the bearish sentiment.

Given these concerns, we expect Marathon Oil to perform below its peers and industry levels in the coming months. As such, we see little reason for investors to own the stock. Our long-term Underperform' recommendation is supported by a Zacks #5 Rank (short-term Strong Sell rating).

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