Analyst's Notes. Argus Recommendations

Transcription

1 Report created Mar 27, 2017 Page 1 OF 5 Marathon Oil is an international energy company engaged in exploration and production, oil sands mining and integrated gas. The company is headquartered in Houston, and has operations in the U.S., Europe, the Middle East and Africa. The company was formerly known as USX Corporation and changed its name to Marathon Oil Corp. in July Marathon Oil separated from Marathon Petroleum in 2011 and there is no connection between the two companies. Analyst's Notes Analysis by Bill Selesky, March 27, 2017 ARGUS RATING: BUY Marathon Oil adds 21,000 Permian acres for $700 million On March 21, Marathon Oil agreed to buy 21,000 acres in the oil-rich Permian's Northern Delaware basin for $700 million in cash, adding to shale holdings in the area it acquired earlier in the month. The Permian acreage, largely in New Mexico, was purchased from closely held Black Mountain Oil & Gas LLC and other sellers. The company will now hold about 91,000 acres in the Permian basin after selling oil-sands assets in Alberta for $2.5 billion. Marathon Oil continues to shed high-cost noncore assets in favor of higher-return North American unconventional oil, gas and NGL assets. We have a positive view of this strategy and believe that a rebound in oil and gas drilling will begin in the U.S. onshore market, where MRO has a dominant position. On February 15, Marathon reported an adjusted 4Q16 net loss of $83 million or $0.10 per share, compared to an adjusted loss of $323 million or $0.48 per share a year earlier. The 4Q net loss was narrower than our loss estimate of $0.13 and the consensus loss estimate of $0.14. INVESTMENT THESIS We are reaffirming our BUY rating on Marathon Oil Corp. (NYSE: MRO) with a price target of $52. Our aggressive price target includes a sum-of-the parts methodology as well as potential M&A activity. Since becoming an independent E&P company in 2011, Marathon Oil has made significant progress concentrating and simplifying its portfolio to focus on oil-rich U.S. resource plays. Marathon has divested non-core conventional assets, and in mid-2016, it added STACK acreage, in Oklahoma, which together with its other U.S. resource plays, offers materially better-than-average growth opportunities. We have a positive view of this strategy and believe that a rebound in oil and gas drilling will begin in the U.S. onshore market, where MRO has a dominant position. In addition, Marathon continues to realize sustainable cost savings through technology and efficiency gains. Since 1Q15, it has been able to lower total E&P expense by 40%, North American E&P costs by 30%, and International E&P unit production costs by Data Pricing reflects previous trading week's closing price. 200-Day Moving Average Price ($) Rating EPS ($) Quarterly Target Price: $ Week High: $ Week Low: $14.30 Closed at $14.61 on 3/24 Annual ( Estimate) Revenue ($ in Bil.) Quarterly Annual ( Estimate) 7.0 ( Estimate) FY ends Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Dec BUY HOLD SELL Argus Recommendations Twelve Month Rating SELL HOLD BUY Five Year Rating SELL HOLD BUY Rating Weight Under Over Weight Weight Argus assigns a 12-month BUY, HOLD, or SELL rating to each stock under coverage. BUY-rated stocks are expected to outperform the market (the benchmark S&P 500 Index) on a risk-adjusted basis over the next year. HOLD-rated stocks are expected to perform in line with the market. SELL-rated stocks are expected to underperform the market on a risk-adjusted basis. The distribution of ratings across Argus' entire company universe is: 47% Buy, 47% Hold, 6% Sell. Key Statistics Key Statistics pricing data reflects previous trading day's closing price. Other applicable data are trailing 12-months unless otherwise specified Overview Price $14.61 Target Price $ Week Price Range $9.77 to $19.28 Shares Outstanding Million Dividend $0.20 Overview Energy Rating MARKET WEIGHT Total % of S&P 500 Cap. 6.00% Financial Strength Financial Strength Rating MEDIUM Debt/Capital Ratio 29.3% Return on Equity -- Net Margin -52.4% Payout Ratio Current Ratio 1.64 Revenue $4.09 Billion After-Tax Income -$2.14 Billion Valuation Current FY P/E -- Prior FY P/E -- Price/Sales 3.03 Price/Book 0.71 Book Value/Share $20.71 Capitalization $12.38 Billion Forecasted Growth 1 Year EPS Growth Forecast N/A 5 Year EPS Growth Forecast 8.00% 1 Year Dividend Growth Forecast 0% Risk Beta 1.81 Institutional Ownership 83.13%

2 Report created Mar 27, 2017 Page 2 OF 5 40%. We believe that in the current energy environment, with crude now at $48-$49 per barrel, Marathon should be able to generate compound annual earnings growth of 10%-15% over the next few years, which is significantly higher than its average peer-group competitor. RECENT DEVELOPMENTS MRO shares have underperformed since the beginning of 2017, dropping 15.6% while the S&P 500 Energy index has fallen 9.3%. However, they have outperformed over the past year, rising 43.8% while the Energy index has climbed 8.9%. On March 21, Marathon Oil agreed to buy 21,000 acres in the oil-rich Permian's Northern Delaware basin for $700 million in cash, adding to shale holdings in the area it acquired earlier in the month. The Permian acreage, largely in New Mexico, was purchased from Black Mountain Oil & Gas LLC and other sellers. The company will now hold about 91,000 acres in the Permian basin after selling oil-sands assets in Alberta for $2.5 billion. Drilling in the Delaware basin has surged after a recovery in oil and natural gas prices, with rig counts rising 24% since the end of December 2016, according to a report from Bloomberg Intelligence. A land rush has driven values to more than $50,000 an acre in some places. Marathon confirmed that it paid $23,400 per acre in this most recent deal after adjusting for current production. The transaction is expected to close in 2Q17, with an effective date of March 1. The company plans to triple drilling in the region, adding two rigs mid-year to the one rig operating now. Finally, MRO announced the sale of its stake in the Athabasca Oil Sands Project in Alberta to Royal Dutch Shell and Canadian Natural Resources Ltd. on March 9. At the same time, it agreed to spend $1.1 billion to enter the Permian. The company has now established stakes in four of the most active shale plays in the U.S., including the Eagle Ford of Texas, the Bakken in North Dakota, and the Scoop and Stack in Oklahoma. We view the recent acquisition, along with the prior transaction, as significant and strategic positives for the company. In their most recent quarterly results, on February 15, Marathon reported an adjusted 4Q16 net loss of $83 million or $0.10 per share, compared to an adjusted net loss of $323 million or $0.48 per share in the prior-year quarter. The net loss was narrower than our loss estimate of $0.13 and the consensus loss estimate of $0.14. The narrower-than-expected loss was attributable to improved financial results in all operating segments, especially in North America. Fourth-quarter revenue fell 6% to $1.389 billion, but rose 13% sequentially. Marathon ended 2016 with 12 rigs in U.S. resource plays, up from 7 at the end of Fourth-quarter net production available for sale from continuing operations (excluding Libya) averaged 396,000 barrels Growth & Valuation Analysis GROWTH ANALYSIS ($ in Millions, except per share data) Revenue 15,513 16,287 14,468 9,941 5,059 COGS 7,041 5,137 5,005 4,382 2,440 Gross Profit 8,472 11,150 9,463 5,559 2,619 SG&A R&D Operating Income 4,918 6,418 4, ,916 Interest Expense Pretax Income 4,780 6,177 4, ,221 Income Taxes 3,111 4,629 2, Tax Rate (%) Net Income 2,367 1,548 2,519 1,621-2,335 Diluted Shares Outstanding EPS Dividend GROWTH RATES (%) Revenue Operating Income Net Income EPS Dividend Sustainable Growth Rate VALUATION ANALYSIS Price: High Price: Low Price/Sales: High-Low P/E: High-Low Price/Cash Flow: High-Low Financial & Risk Analysis FINANCIAL STRENGTH Cash ($ in Millions) Working Capital ($ in Millions) Current Ratio LT Debt/Equity Ratio (%) Total Debt/Equity Ratio (%) RATIOS (%) Gross Profit Margin Operating Margin Net Margin Return On Assets Return On Equity RISK ANALYSIS Cash Cycle (days) Cash Flow/Cap Ex Oper. Income/Int. Exp. (ratio) Payout Ratio The data contained on this page of this report has been provided by Morningstar, Inc. ( 2017 Morningstar, Inc. All Rights Reserved). This data (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. This data is set forth herein for historical reference only and is not necessarily used in Argus analysis of the stock set forth on this page of this report or any other stock or other security. All earnings figures are in GAAP.

3 Report created Mar 27, 2017 Page 3 OF 5 of oil equivalent per day (boe/d), down 8% from the prior-year quarter and down 2% from 3Q16. The decrease was primarily the result of planned maintenance activities in the Oil Sands segment. EARNINGS & GROWTH ANALYSIS In 2017, Marathon expects full-year capital spending of $2.2 billion, up from $1.1 billion in The increase assumes higher spending on U.S. resource plays this year. Approximately 90% of the additional spending will be allocated to the company's Eagle Ford, Bakken, and Oklahoma assets. The company projects 2017 production of 335, ,000 net boe/d, compared to 342,000 net boe/d in It expects full-year North American unit production costs of $5.00-$6.00 per boe, and International unit production costs of $4.50-$5.50 per boe. We are maintaining our 2017 loss estimate of $0.06 per share and our 2018 profit estimate of $0.25 per share, representing a swing from an operating loss to an operating profit over the next two years. FINANCIAL STRENGTH & DIVIDEND We rate Marathon's financial strength as Medium, the midpoint on our five-point scale. The company's debt is rated BBB-/stable by Standard & Poor's and Ba1/stable by Moody's. Fitch rates Marathon's debt at BBB/negative. At the end of 4Q16, MRO's total debt/capitalization ratio was 27.9%, down from 28.2% a year earlier. The total debt/cap ratio was significantly below the peer average. Total outstanding debt, consisting primarily of long-term debt, was $7.285 billion at the end of 4Q16, down from $7.277 billion at the end of 4Q15. Marathon had cash and cash equivalents of $1.950 billion at the end of 4Q16, compared to $1.221 billion at the end of 4Q15. Cash flow from operating activities was negative $733.0 million in 4Q16, down from positive $352.0 million in 4Q15. The company has an undrawn $3.3 billion revolving credit facility. On October 29, 2015, the Marathon board cut the quarterly dividend to $0.05 per share from $0.20 per share. The current yield is about 1.4%. Our dividend estimates remain $0.20 for both 2017 and The dividend reduction will save the company an average of about $425 million per year. MANAGEMENT & RISKS Lee M. Tillman, formerly the vice president of engineering at Exxon Mobil, has been president and chief executive officer of Marathon Oil since August We have a favorable view of the company's enhanced well-completion designs, which have led to higher resource recovery and lower per-barrel costs in the unconventional drilling regions of Oklahoma, the Eagle Ford shale, and the Bakken shale. We expect these regions to remain the primary drivers of Marathon's production and future earnings. We also note that MRO has increased its exposure to U.S. unconventional production as a result of recent asset sales. Peer & Industry Analysis The graphics in this section are designed to allow investors to compare MRO versus its industry peers, the broader sector, and the market as a whole, as defined by the Argus Universe of Coverage. The scatterplot shows how MRO stacks up versus its peers on two key characteristics: long-term growth and value. In general, companies in the lower left-hand corner are more value-oriented, while those in the upper right-hand corner are more growth-oriented. The table builds on the scatterplot by displaying more financial information. The bar charts on the right take the analysis two steps further, by broadening the comparison groups into the sector level and the market as a whole. This tool is designed to help investors understand how MRO might fit into or modify a diversified portfolio. P/E Value 5-yr Growth Rate(%) DVN HES COP OXY MRO 7 8 Growth 5-yr Net 1-yr EPS Cap Growth Current Margin Growth Argus Ticker Company ($ in Millions) Rate (%) FY P/E (%) (%) Rating COP Conoco Phillips 54, BUY OXY Occidental Petroleum Corp 48, BUY DVN Devon Energy Corp. 20, BUY HES Hess Corp 14, BUY MRO Marathon Oil Corp 12, BUY Peer Average 29, P/E Price/Sales Price/Book PEG 5 Year Growth Debt/Capital P/E not available

4 Report created Mar 27, 2017 Page 4 OF 5 Investors in Marathon Oil, as well as in other energy companies, face risks. The company's revenues, operating results and future growth are highly dependent on the pricing of crude oil and condensate, NGLs, natural gas and synthetic crude oil. Additionally, Marathon is impacted by worldwide supply and demand for these products. COMPANY DESCRIPTION Marathon Oil is an international energy company engaged in exploration and production, oil sands mining and integrated gas. The company is headquartered in Houston, and has operations in the U.S., Europe, the Middle East and Africa. The company was formerly known as USX Corporation and changed its name to Marathon Oil Corp. in July Marathon Oil separated from Marathon Petroleum in 2011 and there is no connection between the two companies. VALUATION Marathon Oil has traded in a range of $9.77-$19.28 over the last 52 weeks and is currently above the midpoint of this range. The shares are trading at a meaningless 2017 P/E based on our loss estimate for this year, and at a still high 58-times our 2018 estimate. At the same time, they are trading at a discount to peers based on enterprise value/trailing 12-month EBITDA, enterprise value/reserves, enterprise value/daily production, price/cash flow, and price/book. Looking ahead, we expect Marathon to benefit from its focus on higher-producing North American assets as well as from continued cost-reduction programs. In addition, we expect the company to swing to modest full-year profitability in 2018, with help from gradually rising commodity prices, and to generate 10%-15% earnings growth in subsequent years. We also see Marathon as a potential takeover target for a larger E&P company. On March 27 at midday, BUY-rated MRO traded at $14.60, down $0.01.

5 METHODOLOGY & DISCLAIMERS Report created Mar 27, 2017 Page 5 OF 5 About Argus Argus Research, founded by Economist Harold Dorsey in 1934, has built a top-down, fundamental system that is used by Argus analysts. This six-point system includes Industry Analysis, Growth Analysis, Financial Strength Analysis, Management Assessment, Risk Analysis and Valuation Analysis. Utilizing forecasts from Argus Economist, the Industry Analysis identifies industries expected to perform well over the next one-to-two years. The Growth Analysis generates proprietary estimates for companies under coverage. In the Financial Strength Analysis, analysts study ratios to understand profitability, liquidity and capital structure. During the Management Assessment, analysts meet with and familiarize themselves with the processes of corporate management teams. Quantitative trends and qualitative threats are assessed under the Risk Analysis. And finally, Argus Valuation Analysis model integrates a historical ratio matrix, discounted cash flow modeling, and peer comparison. THE ARGUS RESEARCH RATING SYSTEM Argus uses three ratings for stocks: BUY, HOLD, and SELL. Stocks are rated relative to a benchmark, the S&P 500. A BUY-rated stock is expected to outperform the S&P 500 on a risk-adjusted basis over a 12-month period. To make this determination, Argus Analysts set target prices, use beta as the measure of risk, and compare expected risk-adjusted stock returns to the S&P 500 forecasts set by the Argus Strategist. A HOLD-rated stock is expected to perform in line with the S&P 500. A SELL-rated stock is expected to underperform the S&P 500. Argus Research Disclaimer Argus Research is an independent investment research provider and is not a member of the FINRA or the SIPC. Argus Research is not a registered broker dealer and does not have investment banking operations. The Argus trademark, service mark and logo are the intellectual property of Argus Group Inc. The information contained in this research report is produced and copyrighted by Argus, and any unauthorized use, duplication, redistribution or disclosure is prohibited by law and can result in prosecution. The content of this report may be derived from Argus research reports, notes, or analyses. The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but Argus makes no representation as to their timeliness, accuracy or completeness or for their fitness for any particular purpose. This report is not an offer to sell or a solicitation of an offer to buy any security. The information and material presented in this report are for general information only and do not specifically address individual investment objectives, financial situations or the particular needs of any specific person who may receive this report. Investing in any security or investment strategies discussed may not be suitable for you and it is recommended that you consult an independent investment advisor. Nothing in this report constitutes individual investment, legal or tax advice. Argus may issue or may have issued other reports that are inconsistent with or may reach different conclusions than those represented in this report, and all opinions are reflective of judgments made on the original date of publication. Argus is under no obligation to ensure that other reports are brought to the attention of any recipient of this report. Argus shall accept no liability for any loss arising from the use of this report, nor shall Argus treat all recipients of this report as customers simply by virtue of their receipt of this material. Investments involve risk and an investor may incur either profits or losses. Past performance should not be taken as an indication or guarantee of future performance. Argus has provided independent research since Argus officers, employees, agents and/or affiliates may have positions in stocks discussed in this report. No Argus officers, employees, agents and/or affiliates may serve as officers or directors of covered companies, or may own more than one percent of a covered company s stock. Morningstar Disclaimer 2017 Morningstar, Inc. All Rights Reserved. Certain financial information included in this report: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.