Marathon Beats, Production Up

Marathon Oil Corporation’s (MRO - Analyst Report) third-quarter 2009 results came in better-than-expected, helped by the contribution from increased oil and natural gas production. Earnings per share, excluding mark-to-market and divestment losses, came in at 61 cents, above the Zacks Consensus Estimate of 56 cents.

However, as has been the case with the other oil majors that have already reported -- Exxon (XOM - Analyst Report), ConocoPhillips (COP - Analyst Report) and Chevron (CVX - Analyst Report) -- earnings and revenue comparisons with the year-earlier period were quite ugly, severely hampered by lower realized commodity prices and weak refining margins. Marathon’s adjusted earnings per share plunged 77.9%, while sales declined 37.9% to $14.5 billion.

Lower Prices More Than Offset Increased Upstream Volumes

Income from the upstream segment totaled $491 million during the quarter, down 43.5% from the year-ago level.

The company reported production (available for sale) of 393,000 oil-equivalent barrels per day (BOE/d), slightly below its interim guidance last month. However, this represents a 5% year-over-year production growth, reflecting the timing of international oil liftings.

Lower realized oil and natural gas prices offset the upstream volume gains. Marathon's worldwide realized crude oil price (from continuing operations) of $64.12 per barrel was 42.1% below the year-earlier level, while natural gas realizations (also from continuing operations) dropped 56.8% to $2.20 per thousand cubic feet (Mcf).

Downstream Margins Plunge

Margins in the refining business decreased significantly from the year-earlier levels, particularly in Marathon's core Midwest and Gulf Coast regions. The situation was further aggravated by narrower sweet/sour differentials. Marathon’s refining and marketing unit earned $158 million during the quarter, compared to $771 million last year -- reflecting weak margins and crack spreads.

The company's realized gross refining and wholesale marketing margin of approximately 7.6 cents per gallon was down markedly from last year's income of 25.2 cents per gallon. Total refined product sales volumes were up 3.2% from the year-earlier level to 1,400 thousand barrels per day, while throughput was up 4.0% to 1,190 thousand barrels per day.

Capital Expenditure

During the quarter, Marathon spent roughly $1.4 billion on capital programs (36% on E&P and 45% on Refining, Marketing and Transportation).

Strategic Sale

During the last few months, Marathon’s important strategic divestments include the sale of an undivided 20% participating interest in Angola Block 32, all of Marathon’s holdings in Ireland, interests in the Heimdal area offshore Norway and interests in the Permian Basin in Texas and New Mexico. Most recently, the company entered into a definitive agreement to sell its wholly owned subsidiary in Gabon.

These sales are part of the company's $2 billion to 4 billion asset divestiture program announced last March. The company has already made $3.5 billion worth of dispositions.

We currently rate Marathon shares as Neutral, expecting the stock to perform in-line with the broader market.