Company Reports

No-moat Marathon posted results below median PitchBook estimates, with earnings per share of $0.63 versus consensus estimates of $0.69. We attribute the earnings miss to a decline in natural gas prices and realizations, combined with a gassier production mix that occurred in the quarter. Given the impending merger with ConocoPhillips involves equity financing, we reduced our fair value estimate to $27 from $29 per share related to declines in Conoco’s share price.

Marathon has comprehensively reshuffled its portfolio in the past 10 years, discarding most of the conventional projects it historically focused on and doubling down on US shale. The international assets it has retained, in Equatorial Guinea, will be harvested for cash flows that can be redeployed in the US or returned to shareholders.

Marathon has comprehensively reshuffled its portfolio in the past 10 years, discarding most of the conventional projects it historically focused on and doubling down on US shale. The international assets it has retained, in Equatorial Guinea, will be harvested for cash flows that can be redeployed in the US or returned to shareholders.

ConocoPhillips announced an all-stock acquisition of Marathon Oil, which its management expects to close by the end of the year. The transaction would see 0.255 shares of ConocoPhillips exchanged for every 1 share of Marathon Oil, roughly corresponding to an offer of $29 per share of Marathon, or a 22% premium to our fair value. We assign a 100% probability that the deal will close, and therefore raise our Marathon fair value estimate to $29 from $24.

We see no reason to change our $24 fair value estimate for no-moat-rated Marathon Oil. We reduced our assumed lease operating expenses but raised our assumed depreciation, depletion, and amortization expense. These impacts were minor and offset one another. Total hydrocarbon production of 371 thousand barrels of oil equivalent, or mboe/d, came in slightly below our expectations, but Marathon's unit costs also dipped lower, leading to EBITDA roughly in line with what we hoped to see.

Marathon has comprehensively reshuffled its portfolio in the past 10 years, discarding most of the conventional projects it historically focused on and doubling down on US shale. The international assets it has retained, in Equatorial Guinea, will be harvested for cash flows that can be redeployed in the US or returned to shareholders.

Each year, we reevaluate well productivity for our entire US shale coverage. For each covered company, we scrutinize third-party data on both a basin and region basis. As in prior years, our process prompted mostly modest valuation changes but left our moat, capital allocation, and uncertainty ratings unchanged.

Marathon has comprehensively reshuffled its portfolio in the past 10 years, discarding most of the conventional projects it historically focused on and doubling down on U.S. shale. The international assets it has retained, in Equatorial Guinea, will be harvested for cash flows that can be redeployed in the U.S. or returned to shareholders.

No-moat-rated Marathon Oil underperformed our expectations for revenue, earnings, and cash in its latest fourth-quarter results. Total production of 400,000 barrels of oil equivalent per day, or 400 mboe/d, similarly fell below our expectations and dipped 5% sequentially, though production costs fell a bit below our model. Further, lower hydrocarbon volumes were primarily due to lower production than we expected from the Eagle Ford basin.

Marathon has comprehensively reshuffled its portfolio in the past 10 years, discarding most of the conventional projects it historically focused on and doubling down on U.S. shale. The international assets it has retained, in Equatorial Guinea, will be harvested for cash flows that can be redeployed in the U.S. or returned to shareholders.

Marathon has comprehensively reshuffled its portfolio in the past 10 years, discarding most of the conventional projects it historically focused on and doubling down on U.S. shale. The international assets it has retained, in Equatorial Guinea, will be harvested for cash flows that can be redeployed in the U.S. or returned to shareholders.

Marathon has comprehensively reshuffled its portfolio in the past 10 years, discarding most of the conventional projects it historically focused on and doubling down on U.S. shale. The international assets it has retained, in Equatorial Guinea, will be harvested for cash flows that can be redeployed in the U.S. or returned to shareholders.

No-moat Marathon Oil delivered a strong third-quarter financial performance, setting the firm on track to meet—if not exceed—its full-year production target of 395 thousand barrels of oil equivalent per day. Firmwide output in the third quarter came in at 422 mboe/d, nearly 6% higher sequentially, and management indicated full-year volumes will likely approach the high end of guidance provided in February. Full-year capital expenditures also remain on track, with no revision. We expect service pricing will continue to soften through year-end and maintain our estimate for a 5% reduction in well costs in 2024. Following the results, we’re raising our fair value estimate to $27 from $22.

We have adjusted our valuation methodology for U.S. exploration and production companies. Our multistage DCF valuation incorporates five years of explicit projections for a fixed period, typically five years. Terminal values are derived by assuming firms eventually earn their cost of capital in perpetuity. This contrasts with our previous methodology, which modeled the harvesting of all company assets over a 30-year timeframe. The change brings our E&P valuations in line with Morningstar’s standard equity research methodology.

Marathon has comprehensively reshuffled its portfolio in the past 10 years, discarding most of the conventional projects it historically focused on and doubling down on U.S. shale. The international assets it has retained, in Equatorial Guinea, will be harvested for cash flows that can be redeployed in the U.S. or returned to shareholders.

Marathon's second-quarter financial results were ahead of consensus estimates, according to FactSet, and the firm still expects to meet its previous full-year production target of 395 thousand barrels of oil equivalent per day. Firmwide output in the second quarter came in at 399 mboe/d, 1% higher sequentially, and management believes third-quarter volumes will meet or exceed the annual target as well. Full-year capital expenditures are also on track, with no revision. We do expect service pricing to soften in the back half of the year, but this is more likely to affect 2024 spending, and we already incorporate a 5% reduction in well costs starting next year.

We're reducing our fair value estimate for Marathon to $27 per share from $30 after marking our model to market for near-term oil, gas, and liquefied natural gas forward curves, and correcting a modeling error (we were previously overstating the benefit of the firm's contractual linkage to global LNG pricing from 2024 for its gas processing assets in Equatorial Guinea). This reduces our star rating to 3 stars from 4. However, our earlier conclusion—that the market is underestimating the upside from Equatorial Guinea—still looks valid, given that the stock trades at a discount to our updated valuation. That makes Marathon one of only three exploration and production firms with a favorable price/fair value ratio, albeit one that no longer implies sufficient margin of safety for the 4-star rating.

Marathon has comprehensively reshuffled its portfolio in the past 10 years, discarding most of the conventional projects it historically focused on and doubling down on U.S. shale. The international assets it has retained, in Equatorial Guinea, will be harvested for cash flows that can be redeployed in the U.S. or returned to shareholders.

We have refreshed our oil and gas producer valuations to incorporate the latest outlook for near-term commodity prices after a particularly volatile spell for both oil and gas futures during the recent reporting season. In addition, we have incorporated a slight reduction in well costs from 2024 across our upstream coverage, based on consistent commentary from both producers and oil service firms. The latter supplies equipment and services to the former to enable the drilling and completion of oil and gas wells. This includes oil-country-tubular goods, or OCTG, which is sensitive to prevailing steel prices, proppant (typically sand, for fracking), and labor. Supply and demand for these services also impacts pricing. As oil services firms typically operate under contract, there is a lag between inflationary pressures and the resulting impact on upstream spending levels, when contracts are renewed at current rates. And the same holds true in reverse. Producers mainly agree that inflation has cooled off, with several anticipating moderate price declines in the back half of 2023, and service providers are reporting that the markets for rigs, OCTG, and proppant have leveled off. The recent decline in commodity prices also supports a moderating environment for well costs, as these are historically correlated. And since the late 2022 peak, the North American rig count has declined by about 6%, signaling weakening demand for oil services in that region. Our upstream valuations now include a 5% decrease in well costs beginning in the first quarter of 2024.

Marathon has comprehensively reshuffled its portfolio in the past 10 years, discarding most of the conventional projects it historically focused on and doubling down on U.S. shale. The international assets it has retained, in Equatorial Guinea, will be harvested for cash flows that can be redeployed in the U.S. or returned to shareholders.