Competitive Edge for Marathon Oil

We are maintaining our Buy recommendation on Marathon Oil Corporation (MRO - Analyst Report) shares ahead of the company’s second-quarter results. We are increasing our 2008 ($6.33 vs. $5.95) and 2009 ($7.35 vs. $7.10) EPS estimates to reflect the continued strength in crude oil and natural gas prices.

With its repositioned upstream asset portfolio and its best-in-class Midwest-focused downstream business, Marathon remains well-positioned to capitalize on the continued favorable commodity-price environment. An attractive inventory of development projects will drive the company’s high single-digit volume growth going forward. Additionally, downstream projects, particularly the Garyville expansion and the Detroit Project are expected to further strengthen its refining assets.

Marathon’s $6.2 billion acquisition of Western Oil Sands allows it access to a major producing joint venture in Canada. The company’s best-in-class U.S. Midwest-focused downstream business is well-positioned to maximize the value of these bitumen resources. Significant progress has been made in repositioning its upstream business, ensuring stable and visible long-term production growth.

Marathon pays a growing dividend that currently yields an attractive 1.83%. The company has also been fairly active on the buyback front.

While a relatively weak outlook for the refining business may continue to weigh on Marathon shares in the near term, we continue to view the company’s top-quartile Midwest-focused downstream business as a major competitive edge. Outlook for the company’s upstream business has also steadily improved, driven by a detailed line-up of development projects coming off its successful exploration program.

We believe that upstream growth will exceed the management’s target of 7% over the next few years. Our unchanged $60 price objective reflects 2008 P/E and P/CF multiples of 10.1x and 6.1x, respectively.

Read the full analyst report on MRO