Marathon Oil Corporation Free of Steel


One of our asset-rich recommendations appears especially timely.  After two decades tied to U.S. Steel, Marathon is once again an independent natural gas and oil producer.  Shareholders of USX-Marathon Group and USX-Steel Group voted on Thursday, October 25 to reorganize as completely separate companies to be named Marathon Oil Corporation and U.S. Steel Corporation.  Subject to a favorable tax ruling, the transaction is expected to be effective by year-end.  A major impediment to stock market appreciation has been removed and we are optimistic that the stock can be a winner again.


Investors ask, "Who is going to buy Marathon?"   We are not counting on an acquisition as we expect the new Chief Executive Officer to concentrate reinvestment in the company's strongest properties and prospects and to be generous in returning capital through dividends and stock repurchase.  Should Mr. Cazalot not be as successful as we expect, Marathon would be an attractive acquisition candidate. 


We first recommended Marathon 28 years ago in October 1973 on the expectation that the Texas Railroad Commission would lift the allowable producing rate in the Yates oil field. 


After the strong move in energy stocks peaked in 1980, the stock fell back.  Convinced that the company's resource value exceeded its stock market value we recommended the stock again on April 1, 1981 as a leading candidate for financial restructuring.  Sedco, the drilling company, and the Bass brothers, advised by Richard Rainwater, soon began to accumulate the stock.  At mid year, Mobil made a tender offer and by year-end, U.S. Steel made its winning bid.


While Marathon stockholders profited from selling to USX, Marathon assets ended up subsidizing steel operations.  We do not recall recommending USX stock. 


In 1990, as an advisor to investor Carl Icahn, we recommended that USX holders vote for a spinoff of Steel from the energy and other diversified businesses of USX.  Although USX took out full page newspaper ads criticizing the McDep analysis, management compromised by implementing the tracking stock idea whereby steel and energy could trade separately, but still be part of the same legal structure.  As we recall, Mr. Icahn sold his stock soon thereafter for a price higher than, or at least close to where Marathon trades more than ten years later.


In 2001 we have recommended Marathon again partly in anticipation of the event that occurred last week.  Now it is time for the benefit of that change to unfold.  The option of selling out to a large buyer is at least as good as in other undervalued companies.  That is important even if there is currently no obvious acquirer.


On the fundamental side we have seen a sharp recovery in natural gas, which accounts for perhaps a third of the value in Marathon.  Crude oil, which accounts for perhaps another third of value, has taken its hit for slower economic activity.  We don't see much further weakness and we see a lot of strength eventually.  The refining business has now come down quite sharply to a profit margin well below what we expect in the next few years (see Chart).  Futures prices imply higher profits than current spot prices.  While the more relevant prices for Marathon are those in Chicago, only the New York futures prices are quoted widely.


Finally there is good strategic justification to own Marathon and other energy stocks.  A recent heading in the New York Times caught our attention: The High, Hidden Cost of Saudi Arabian Oil.  The article reminds us that while our country has many friends in Saudi Arabia, we may have even more enemies in that country.  The alternative implication of the New York Times heading is: The High, Hidden Value of Non-Saudi Arabian Oil.


Excerpt from October 29, 2001; Meter Reader: Enrun