The Case For Investing In Marathon Oil

Marathon Oil(NYSE ticker: MRO) appears to be a good investment opportunity. The case appears to be fairly strong but two caveats before we get to it: MRO's business is like any other in that it is cyclical and it could be argued that it is very early in the cycle so if you are not willing to hold it for a year or possibly longer, this might not be for you.



Whats to like about Marathon Oil? More than a few things:

1. Marathon Oil is geographically diversified but does not do business in the "core Muslim countries" which reduces risks which may arise from political instability in the Persian Gulf. Too, MRO appears to have no significant operations in South America which can arguably be interpreted as a plus.

Marathon Oil has Libyan exposure, has other North and West African exposure, does business in Europe, has a substantial presence in North America, and has operations in Indonesia.

2. Marathon Oil is a very integrated oil company. MRO has operations all along the supply chain from exploration to retail distribution with a variety of upstream and downstream operations. MRO has a good sized foot print in the natural gas business.

Furthermore, Marathon Oil has expertise in some of the more advanced areas of the liquid fuel business such as Liquified Natural Gas (a.k.a. LNG), refining of "sour" crude oil (more in a moment on their refining operations) and has a Gas-to-Liquids demonstration project which they claim will be much more efficient than current Fischer-Tropsh process efforts and other competing technologies

Marathon Oil is also getting into North American shale gas to gain expertise to take overseas for projects such as its five and a half year Polish shale gas exploration project. Between November and January, MRO in Poland was awarded 100% interest and operatorship in three blocks totalling approximately 800,000 acres according to their 2009 Annual Report.

3. Marathon Oil is currently trading pretty much right at its book value. As of market close on 5 March, MRO's share price was $30.61 and its book value is $31.15 according to Yahoo Finance.

4. Marathon Oil appears to have support for the current share price trading just above its 50 Day Moving Average and just below its 200 Day Moving Average.

5. Marathon Oil has a P/E ratio in line with its industry group and currently pays a dividend. What the sustainability of that dividend may be is certainly open to interpretation with a Payout Ratio TTM of 47%. This appears to be in line with their industry, however, and MRO does have a good history of paying and growing dividends.

6. Marathon Oil swung from loss to profit in the Fourth Quarter of 2009 helped mainly by sustained high oil prices.

7. Marathon Oil has the look of a takeover or possibly merger target. They have sold off poorly performing assets in Ireland, Gabon and Angola during the downturn, appear to have their debt under control and are keeping about $1.5 billion in cash on hand.

Too, there is only so much exploration & production being done and only so much that can and will be done so for a Super Major to expand in this area it makes more sense to buy somebody with a handsome E & P portfolio and Marathon Oil arguably has some good stuff in their own.

Now, getting back to Marathon Oil's refining business. The whole refining business is pretty beat up and MRO's segment is no exception. However, it is not quite as bad for MRO in the big picture. True the losses in refining will continue to adversely effect MRO's bottom line and many investors will continue to see them as just another beat down refining outfit, but lets take a closer look.

First, the barriers to entry into the oil refining business are very high so over time the refineries which Marathon Oil currently possesses have a great deal of intrinsic value. New refining capacity in North America will not be forthcoming any time soon so when demand picks up supply will return to its traditional tightness. According to MRO's annual report section on refined product sales, volume of gasoline is up significantly over 2009 from 2008 but the feedstock and specialty product category is still down about 25%. Given the early stages of economic recovery, is no surprise industrial feedstock demand is weak.

Secondly, Marathon Oil ranks number five in the North American refining business so they are clearly not as overexposed to the downturn in business as, say Valero (VLO). As has been shown, MRO has other ways of generating earnings.

Also, of Marathon Oil's seven North American refineries, five are capable of refining "sour" crude oil. Venezuelan, Columbian, oil from the Gulf of Mexico and oil from the much talked about oil sands of Alberta are generally of the sour type of crude. Marathon has the assets and expertise to process these feed stocks as the U.S. seeks to divorce itself from distant, sometimes troublesome suppliers. With refineries in Minnesota, Texas and Louisiana MRO has plenty of "skin in the game".

So, in a nutshell, this is the lipstick on Marathon Oil's refining pig: they are not as exposed to the business as some of their competitors, they can make money as the cycle moves forward or they can sell hard assets for for cash. Not exactly a bad state of affairs now is it? Even with the refinery losses taken into account, MRO is still posting a satisfactorily positive EPS.

One may argue that it is early in the cycle to buy Marathon Oil but it is pretty clear that the company is sound and it is certainly attractively valued at this time.

DISCLOSURE: I am long in Marathon Oil and intend to increase my position. When looking to plunk down hard earned money to gamble at Wall Street's table you MUST do these two things: do lots of your own homework and consult with a properly certified, reputable financial professional...oh, and like the song says "know when to hold 'em, know when to fold 'em, know when to walk away and know when to run".

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