MRO Beats on Strong Downstream

Highlights include Marathon Oil Corp. (MRO - Analyst Report), Exxon Mobil Corp. (XOM - Analyst Report), ConocoPhillips (COP - Analyst Report), BP plc (BP - Snapshot Report) and Apache Corp. (APA - Analyst Report).

Marathon's (MRO - Analyst Report) first-quarter 2009 results came in better than expected on the back of improved downstream margins and lower costs. As has been the case with the other oil majors that have already reported, Exxon (XOM - Analyst Report), ConocoPhillips (COP - Analyst Report) and BP (BP - Snapshot Report), earnings and cash flow comparisons with the year-earlier period were ugly. We continue to like Marathon for its revitalized upstream business, top-tier Midwest-centered refining business, and very cheap valuation.

Marathon's recurring EPS of $0.34 was down from $1.07 in the year-earlier period, with the contribution from increased oil and natural gas production and improved refining margins offset by lower realized commodity prices. The company reported production (available for sale) of 429,000 oil-equivalent barrels per day (BOE/d), inline with its interim guidance earlier this month. This is a 7% sequential production growth, reflecting strong operating performance from the company's Alvheim oil field in the North Sea and natural gas assets in Equatorial Guinea.

Production in the company's oil sands business in Canada was up modestly from both the previous and year-earlier quarters. Lower realized oil and natural gas prices offset the significant upstream volume gains. Marathon's worldwide realized crude oil price of $40.20 per barrel was almost 55% below the year-earlier level, while natural gas realizations dropped almost 35%.

Margins in the refining business improved from the weak levels in the previous and year-earlier quarters, particularly in Marathon's core Midwest region. Partly offsetting the improved indicator margins were narrower sweet/sour differentials, dampening overall capture rates. Marathon's refining and marketing unit earned $159 million during the quarter, compared to last year's $75 million loss, reflecting improved margins and lower costs.

The company's realized gross refining and wholesale marketing margin of approximately $0.08 per gallon was up from last year's loss of $0.003 per gallon. Total throughput and refined product sales volumes were essentially unchanged from the year-earlier level.

The company also announced the sale of its producing assets in the Permian Basin of New Mexico and West Texas to Apache Corp. (APA - Analyst Report) for approximately $301 million. These assets produced oil and natural gas at the rate of approximately 15,300 oil-equivalent barrels per day. The sale is part of the company's $2 billion to 4 billion asset divestiture program announced last March. Including this sale to Apache, the company has already made $1.6 billion worth of dispositions, with additional announcements expected by the middle of the year.

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