(MRO) Marathon Oil Profit Meets Estimate

Oil and natural gas exploration and production firm Marathon Oil Corporation (MRO) reported in-line second quarter 2012 profits, as robust volumes from the company’s key resource plays was offset by a drop in crude oil and natural gas prices.

Houston, Texas-based Marathon – which last year spun off its refining/sales business into a separate, independent and publicly traded company Marathon Petroleum Corporation (MPC) – announced earnings (excluding special items) of 59 cents per share, matching the Zacks Consensus Estimate

However, the company’s per share adjusted profits came sharply lower than the second quarter 2011 level of 96 cents amid lower commodity prices.

Revenues at $3,784.0 million were down 2.1% year over year but were above the Zacks Consensus Estimate of $3,263.0 million.

Segmental Performance

Exploration and Production: Income from the upstream segment totaled $417.0 million during the quarter, down from $601.0 million in the previous-year period.

The company reported production (available for sale) of 362,000 oil-equivalent barrels per day (BOE/d). While being at the high end of guidance, volumes also reflected a 6.5% increase from the 340,000 BOE/d achieved in the second quarter of 2011. This primarily reflects improved output in the Eagle Ford, Bakken and Anadarko Woodford shale plays.

Marathon’s worldwide realized crude oil price of $97.81 per barrel was 6.8% below the year-earlier quarter level, while natural gas realizations decreased by 15.9% year over year to $2.70 per thousand cubic feet (Mcf).

Oil Sands Mining: Synthetic crude oil sales volumes in the oil sands business improved 7.3% year over year to 44,000 barrels per day. However, this was more than offset by lower price realizations. As a result, Marathon’s Oil Sands Mining segment recorded a profit of $51.0 million as against income of $69.0 million in the corresponding quarter of last year.

Integrated Gas: Income from the segment shot down 69.8% year over year, from $43.0 million to $13.0 million, hamstrung by lower liquefied natural gas volumes and weak gas prices.

Capital Expenditure

During the quarter, Marathon spent $1,245.0 million on capital programs (95% on E&P).

Recommendation & Rating

Marathon is a leading energy firm with a large and geographically-diverse reserve base and solid project pipeline. Additionally, the company possesses a healthy balance sheet, which helps it to capitalize on investment opportunities. We also like the strong growth potential of Marathon’s high-margin liquids-rich unconventional plays, which diversify its portfolio and are expected to further drive its overall volumes.

While being incrementally more positive on the company, we believe Marathon will take some time to fully absorb the outcome of the spin-off. Consequently, we would rather wait for a better entry point before accumulating shares.

As such, we see the stock performing in line with the broader market and maintain our long-term Neutral recommendation, supported by a Zacks #3 Rank (short-term Hold rating).

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