Note: More details to come; changes are highlighted. Except where highlighted, no other sections of this report have been updated.
Reason for Report:Flash Update: 1Q18 Earnings Release
Prev. Ed.: Mar 16, 2018; 4Q17 Earnings Update (broker material was as of Feb 20, 2018)
Flash News Update [Earnings Update to Follow]
On May 2, 2018, Marathon Oil posted first-quarter adjusted income of 18 cents per share, turning around from the year-ago quarter’s loss of 7 cents. The bottom line was also ahead of the Zacks Consensus Estimate of 15 cents.The strong numbers are attributed to higher production from the U.S. E&P segment and recovery in crude prices. In particular, total quarterly output rose 20.6% year over year to 398,000 oil-equivalent barrels per day (BOE/d).
Quarterly revenues of $1,733 million comfortably beat the Zacks Consensus Estimate of $1,347 million and also rose from the prior-year quarter level of $1,072 million.
Segmental Performance
United States E&P:Marathon Oil’s United States upstream segment reported a profit of $125 million, turning around from the loss of $79 million a year ago. Higher oil prices and production improved the results.
Marathon Oil reported production available for sale of 284,000 BOE/d, up from 208,000 BOE/d in the first quarter of 2017. The improvement was mainly due impressive contribution from U.S. resource plays in Eagle Ford, Bakken, Oklahoma and Northern Delaware.
The company realized liquids (crude oil and condensate) price of $62.22 per barrel, 28.4% higher than the year-earlier quarter’s level of $48.46 per barrel. Natural gas liquids price realizations also witnessed a year-over-year increase of 18.7% to stand at $22.95 a barrel. However, natural gas realizations decreased 14.2% year over year to $2.59 per thousand cubic feet (Mcf).
International E&P:The segment’s income increased 42% from the prior-year quarter to $132 million. Substantially higher liquids realizations led to the profit growth.Marathon Oil reported production available for sale (excluding Libya) of 114,000 BOE/d, down from 122,000 BOE/d in the first quarter of 2017. The decrease in output could be blamed on planned turnaround activity in Equatorial Guinea.
The company realized liquids (crude oil and condensate) price of $66.23 per barrel, reflecting a 31.4% rise from the year-earlier quarter’s level of $50.41 per barrel.
Also, natural gas realizations were up 18.2% year over year to 65 cents per thousand cubic feet (Mcf). However, natural gas liquids realizations fell to $1.83 a barrel compared with $3.86 per barrel in the first quarter of 2017.
Costs & Expenses
The company’s exploration expenses in the quarter came in at $52 million, higher than $28 million in the year-earlier quarter. Moreover, Marathon Oil’s total quarterly cost and expenses rose 16.1% to 1,161 million compared with the prior-year quarter.
Capex & Balance sheet
During the quarter, Marathon Oil’s capex stood at $618 million. As of Mar 31, 2018, Marathon Oil had cash and cash equivalents of $2,490 million and long-term debt of around $5,723 million. Debt-to-capitalization ratio of the company was 31.2%.
Guidance
Marathon Oil expects second-quarter 2018 United States E&P output available for sale in the range of 270,000-280,000 BOE/d and International E&P output within 115,000-125,000 BOE/d. For the full year, Marathon Oil forecasts 25-30% annual growth in U.S. shale plays, up from the prior guidance of 20-25%. Full-year capital expenditure budget remains intact at $2.3 billion.
MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON MRO.
Portfolio Manager Executive Summary[Note: only highlighted material has been changed]
Marathon Oil Corp. (MRO) is a leading oil and gas company with extensive upstream operations. The company operates in the U.S., Canada, North Sea (the U.K. and Norway), Equatorial Guinea, Angola, the Kurdistan Region of Iraq and Gabon.
Of the 17 firms in the Digest group covering the stock, nine firms assigned positive ratings, eightfirms rendered neutral ratings whilenone rated it negative. Of the 17 firms, 13provided target prices. The firms provided the lowest target price of $14.00 (11.7% downside from the current price) and the highest target price of $26.00 (64% upside from the current price), with the average being $19.68.
The outlook of the brokerage firms on Marathon Oil is dealt with in the following paragraphs:
Positive or equivalent (52.94%; 9/17 firms):The bullish firms believe that by successfully repositioning the company into the Delaware Basin and STACK/SCOOP resource plays, the company will substantially improve its oil production in the long run, which will be reflected in higher earnings.In addition, the firms believe that Marathon is focusing on cash conservation by reducing its capital spending, which will help to generate positive cash flows and limit financial pressures on the company.They also appreciate the company’s decision to exit the Libyan operations which according to them will help in further strengthening the balancesheet and streamline Marathon Oil’s business.
Neutral or equivalent (47.06%; 8/17 firms):The firms with a neutral stance, appreciate Marathon Oil’s decision to focus more on oil rich resources in the U.S. like Bakken, Eagle Ford and Oklahoma basins by selling non-profitable properties. Theyexpect higher production in the coming years as the company has a stronger balance sheet and is allocating capital for liquid rich U.S. plays.However, they also believe that believe Marathon’s leverage to these plays makes it susceptible to drilling results, transportation issues and pricing differentials in these regions. They are of the opinion that although the company is likely to generate strong free cash flows, it plans to utilize the same for strategic acquisitions and balance sheet strengthening but does not seem much committed for higher cash returns to shareholders. They believe that the management should increase its priorities assigned to dividend growth and share buyback programs.
Mar 16, 2018
Overview[Note: only highlighted material has been changed]
Based in Houston, TX, Marathon Oil Corp. (MRO) is an independent global energy company. The company has a strong portfolio of assets delivering defined growth leveraged to crude oil production with exploration upside. Marathon Oil operates across the U.S. Angola, Canada, Equatorial Guinea, Ethiopia, Iraqi Kurdistan Region, Norway, Gabon and the U.K.
The firms identified the following factors for evaluating the investment merits of Marathon Oil:
Key Positive Arguments / Key Negative ArgumentsFundamentals
- Accelerating exploration success.
- Sharp focus on core asset development and revival of growth.
- Upgrading its high-grade deepwater exploration programs where technical risk is high but success rate is higher.
- Production growth is expected to be in the mid-to-upper single-digit range over the next few years.
- Acquisitions extend production growth into the next decade.
- Risk of unfavorable decisions from pending litigations.
- Significant delays in new upstream projects.
- Tight markets for skilled labor.
- Spin off of downstream segment has led to a weaker company profile.
- Volatile oil and gas prices.
- Slow recovery of the global economic conditions.
Marathon Oil divides its operations into three segments: North America Exploration and Production (E&P); International E&P and Oil Sands Mining. For more information on Marathon Oil, please visit its website: Marathon Oil operates on a calendar-year basis.
Mar 16, 2018
Long-Term Growth [Note: only highlighted material has been changed]
Marathon Oil expects significant upstream growth opportunities in the coming years and a long-standing asset base is likely to enhance value in the long term. The company exhibits a sound financial position to fund growth together with the global asset portfolio review, which is underway, to enhance shareholders’ value. In an attempt to redesign its portfolio, and to focus mainly on core assets, management has divested several non-core assets. Proceeds from the sale will be utilized by the company for developingthree of its major resource plays (Bakken, Eagle Ford, and Oklahoma basins) along with boosting the balance sheet.
Target Price/Valuation [Note: only highlighted material has been changed]
Provided below is the summary of valuation and ratings as compiled by Zacks Digest:
Rating DistributionPositive / 52.94%↑
Neutral / 47.06%↓
Negative / 0%
Avg. Target Price / $19.68↑
Digest High / $26.00↑
Digest Low / $14.00↑
Number of Analysts with Target Price/Total / 13/17
Primary risks to the target price include significant decline in oil and natural gas prices, delays or production problems at core assets, disappointing drilling outcome, exposure to political, economic, and meteorological events as well as geological risks associated with resource exploration.
Recent Events[Note: only highlighted material has been changed]
On Mar 2, 2018, Marathon Oil announced that it offloaded its oil acreage in Libya to France-based supermajor TOTAL. Per the deal, Marathon Oil divested 16.3% interest in the Waha acreage in Libya. Other partners in Waha concessions include Libya’s national oil company with 60% stake, along with ConocoPhillips and Hess Corp. with 16.3% and 8.2% stake, respectively. At the end of 2017, Marathon Oil held 199 million barrels of oil equivalent (boe) of proved reserves in Libya.
The divestment deal was valued at $450 million.
On Feb 14, 2018,Marathon Oil posted fourth-quarter adjusted income of 7 cents per share, ahead of the Zacks Consensus Estimate of 2 cents. In the year-earlier quarter, the company incurred adjusted loss of 10 cents.Quarterly revenues of $1,382 million beat the Zacks Consensus Estimate of $1,280 million and also rose from the prior-year quarter level of $1,124 million.
Revenue[Note: only highlighted material has been changed]
Marathon Oil reported total revenue of $1,382 million in 4Q17 compared with $1389million in 4Q16 and $1,246.3million in 3Q17. Full year revenues stood at $4,765 million as against $4,650 million recorded in the year-ago quarter.
Revenue ($ M) / 4Q16A / 2016A / 3Q17A / 4Q17A / 2017A / 1Q18E / 2018E / 2019E / 2020ETotal Revenue / $1,389.0 / $4,650.0 / $1,246.3 / $1,382.0 / $4,765.0 / $1,384.7 / $5,851.5 / $6,280.5 / $7,046.0
Digest High / $1,389.0 / $4,650.0 / $1,252.0 / $1,382.0 / $4,765.0 / $1,414.4 / $6,429.0 / $6,531.0 / $7,046.0
Digest Low / $1,389.0 / $4,650.0 / $1,206.0 / $1,382.0 / $4,765.0 / $1,355.0 / $5,274.0 / $6,030.0 / $7,046.0
Y-o-Y Growth / -5.8% / -20.7% / 1.4% / -0.5% / 2.5% / 29.2% / 22.8% / 7.3% / 12.2%
Q-o-Q Growth / 13.0% / 17.7% / 10.9% / 0.2%
North America E&P
Marathon Oil reported production available for sale of 261,800 oil-equivalent barrels per day (BOE/d), up from 212,800 BOE/d in fourth-quarter 2016 and 244,500 BOE/d in the third quarter of 2017.
The company realized liquids (crude oil, condensate and natural gas liquids) price of $47.60 per barrel in 4Q17 versus $38.96 and $40.46 in 4Q16 and 3Q17 respectively, Natural gas realizations decreased 7.7% year over year to $2.65 per thousand cubic feet (Mcf). It also witnessed a sequential decline of 2.2%.
International E&P
The company reported production available for sale (excluding Libya) of 121,000 BOE/d, below the 129,000 BOE/d in the third quarter of 2016 and 126,000 BOE/d recorded in the prior quarter.
he company realized liquids price of $51.13 per barrel, reflecting a 35.1% rise from the year-earlier quarter level of $37.85 per barrel.. Natural gas realizations increased to 59 cents per thousand cubic feet (Mcf),reflecting growth of 10.3% and 15.7% year over year and sequentially, respectively.
Guidance
Marathon Oil expects first-quarter 2018 United States E&P output available for sale in the range of 265,000–275,000 BOE/d and International E&P output in the range of 105,000–115,000 BOE/d.
For the full year, Marathon Oil forecasts sale-ready output from the combined United States and International E&P segments to average 390,000 to 410,000 net BOE/d.
Outlook
Per the Bullish firms, Marathon has material acreage in the Eagle Ford in south Texas, the STACK and SCOOP areas in Oklahoma, the Permian in New Mexico, and the Bakken in North Dakota, which will drive its production growth and improved earnings and cash flow.They also appreciate the company’s entry into Permian Basin, which positions it better for long-term growth and earnings.
Margins [Note: only highlighted material has been changed]
Operating income (GAAP)in 4Q17 was $203 million as against $52.8 millionin 4Q16 and an operating loss of $397.4 in3Q17.
Provided below is a summary of margin compiled by the Zacks Digest:
Margins / 4Q16A / 2016A / 3Q17A / 4Q17A / 2017A / 1Q18E / 2018E / 2019E / 2020EOperating Margin / 3.8% / -19.4% / -31.9% / 14.7% / -0.9% / 22.0% / 28.2% / 20.5%
Pre-Tax Margin (GAAP) / -1.7% / -26.6% / -36.8% / 0.5% / -12.2% / 8.8% / 8.0% / 5.2% / 3.8%
Net Margin / -6.0% / -14.9% / -5.5% / 4.1% / -4.5% / 8.7% / 7.2% / 4.1% / 1.7%
Note: Blank cells indicate that none of the brokers provided any estimates
Operating Income by Segment
North America Exploration and Production (E&P)
Marathon Oil’s North American upstream segment reported an income of $76 million, turning around from the year-ago loss of $91 million and $38 million in 4Q16 and 3Q17, respectively. Higher price realizations and increased production boosted the segment’s results.
International E&P
The segment’s income increased to $118 million, compared with the year-ago income of $104 million and $110 million in the prior quarter and the year-ago quarter, respectively.
Earnings per Share[Note: only highlighted material has been changed]
The earnings (excluding special items) was 7 centsper share, reflecting an increase of 170.3% and 186.1% growth on an yearly and a sequential basis, respectively.
EPS (GAAP) / 4Q16A / 2016A / 3Q17A / 4Q17A / 2017A / 1Q18E / 2018E / 2019E / 2020EZacks Consensus
Digest High / ($0.10) / ($0.84) / ($0.08) / $0.07 / ($0.25) / $0.20 / $1.17 / $0.87 / $0.14
Digest Low / ($0.10) / ($0.88) / ($0.08) / $0.07 / ($0.25) / $0.08 / ($0.18) / ($0.26) / $0.14
Digest Average / ($0.10) / ($0.85) / ($0.08) / $0.07 / ($0.25) / $0.14 / $0.50 / $0.31 / $0.14
Y-o-Y Growth / 79.4% / 36.0% / 29.9% / 170.3% / 70.6% / 261.0% / 298.0% / -38.4% / -54.1%
Q-o-Q Growth / 14.1% / 60.3% / 186.1% / 103.3%
Outlook
The firms with a bullish view believe that higher production from the Bakken and Permian properties should lead to improved earnings in the long run.
Mar 16, 2018
Analyst / Rimmi SinghiCopy Editor
Content Ed. / Nilanjan Choudhury
Lead Analyst / Nilanjan Choudhury
QCA / Nilanjan Choudhury
No. of Broker reported/ Total No. of Brokers
Reason for Update / 1Q18 Earnings Flash
Zacks Investment ResearchPage 1