Oil Corporation Free of Steel
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.
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
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.
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.
Marathon stockholders profited from selling to USX, Marathon assets ended up
subsidizing steel operations. We do
not recall recommending USX stock.
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.
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.
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.
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.