Marathon Spin-off Clears IRS Hurdle

Following a positive ruling by the U.S. Internal Revenue Service (IRS), leading integrated energy firm Marathon Oil Corporation (MRO - Analyst Report) has passed a key milestone on its way to separating its refining and sales business from its exploration and production operations, to create two independent companies.

The IRS has approved that the spin-off of the company’s downstream unit will be tax free to Marathon shareowners. The transaction, which was announced in January and could take effect on June 30, 2011 subject to the completion of review by the U.S. Securities and Exchange Commission.

The deal will lead to the formation of a new downstream company called Marathon Petroleum Corporation, expected to be the fifth largest domestic refiner. It will include Marathon’s six refineries having a combined capacity of 1.1 million barrels a day and also deal with marketing and pipeline transportation.

The remaining business will continue as an upstream venture under the ‘Marathon Oil Corp.’ name and comprise the company's exploration and production unit and its Canadian oil sands operations.

Post separation, current stockholders of Marathon will get one share of Marathon Petroleum for every two shares held. Marathon Oil will remain in Houston, Texas, while the new company will trade on the New York Stock Exchange under the symbol ‘MPC’ beginning July 1 and will be headquartered in Findlay, Ohio.

Marathon’s move to split itself into two is seen as an attempt to focus on its core, profitable business of finding and producing energy. Marathon also reasoned that it has become difficult to carry out two different kind of businesses simultaneously, considering the lack of physical integration between the two. Just about 5% of the crude churned out by the company was being utilized by its refineries, Marathon pointed out. The timing of the spin-off also makes sense, as it had almost winded up a major capital expenditure program that was incurring $7–$8 billion annually.

We remain positive on the outlook for new Marathon post-split, as it holds the promise of unlocking significant value. Creation of two separate companies will allow both of them to pursue great opportunities in their respective market segments without the constraints of the parent company and better serve the needs of both investor groups.

Marathon, the fourth largest U.S.-based integrated oil company behind ExxonMobil (XOM - Analyst Report), Chevron Corp. (CVX - Analyst Report) and ConocoPhillips (COP - Analyst Report), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

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