4, 2002; Marathon Oil Pursues Integrated Gas Strategy
is a new era for Marathon Oil. Chief
Executive Clarence Cazalot has been in place for little more than a year and the
company has been completely independent of the steel business for just two
months. An important reason that
has contributed to lackluster performance for MRO stock the past two decades has
we have suggested, the value of Marathon depends almost equally on three
businesses - natural gas, oil and refining/marketing. Management characterizes its business model in the same three
parts. The company further
characterizes one of its three businesses not just as natural gas, but
"Integrated Gas". In a
step that coincidentally jibes with our previous discussion, Marathon recently
purchased the Equatorial Guinea properties of CMS Energy. The seller is in our Mid Cap Infrastructure Group with a
ratio of debt of 0.62. MRO's ratio
of debt is 0.27.
project includes a giant African natural gas field with liquids that will be
separated while gas is reinjected in the ground. Ultimately some of the gas will be turned into methanol for
export. Marathon further eyes an
innovative gas to liquids plant that will convert a stranded resource to a
sulfur free diesel fuel for example. LNG
exports may be another option. The
long-term payoff of the project remains to be seen.
Yet it is a reasonable project for MRO to undertake and MRO is much
stronger financially to handle it than is CMS.
company also announced two new interesting Integrated Gas projects.
One is an LNG regasification facility for Baja California. The other is a
sub sea pipeline for the North Sea. Both
are somewhat non traditional for a producer and reflect a creative view of a
has its strongest competitive position in its refining/marketing business
concentrated in the Midwest and one of the most efficient networks in the
industry. Among other assets, MRO
operates terminals and pipelines where it interfaces with Kinder Morgan.
We doubt that Kinder Morgan is more efficient than MRO.
Yet investors pay 17 times Ebitda for KMP and 5 times Ebitda for MRO. In our opinion the main difference between MRO and KMP is h y
has been an apparent negative influence on the stock in recent months - dry
holes. There have been no further
discoveries in the Gulf of Mexico. A
well offshore Nova Scotia has been delayed for rig repairs.
Our view is that the amount of exploration risk MRO undertakes,
particularly at the newly reduced level, can be supported by the strength of its
business. While we would welcome
any unusual success such as in the waters near Sable Island, we don't count on
reason to own Marathon starts with the fact that it is among the most
out-of-favor large oil stocks. As
such it is not likely to become more out-of-favor.
At the same time we believe it is soundly managed. It is also in strong financial condition, not as strong as
the Mega Caps, but far stronger than most infrastructure stocks.
If one owns several low McDep Ratio stocks with low ratios of debt the
worst that is likely to happen is that the stocks are dull.
More likely something good is likely to happen to one or more of the
stocks that would make the combination perform well on a risk-adjusted basis