Marathon Sets Foot in Ethiopia

U.S. independent energy company Marathon Oil Corporation (MRO - Analyst Report) – through its subsidiary Marathon Ethiopia Limited B.V. – has agreed to purchase 20% working interest in the South Omo concession in Ethiopia from an agricultural firm Agriterra Limited.

Per the sale and purchase agreement, Agriterra will receive net proceeds of $40 million from Marathon. An additional payment of $10 million will also be made by Marathon upon a commercial discovery.

The acreage spreads over an area of 7.2 million gross acres in the East African country. In the South Omo region, an exploration well is expected to be drilled in the fourth quarter of 2012.

London-based Tullow Oil controls 50% stake in the South Omo block and acts as an operator, while Africa Oil operates with the remaining 30% interest.

Following the necessary approvals from the Ethiopian authority, the transaction will likely be closed by the end of 2012.

Management of Marathon believes that this deal will add to its portfolio of ventures in the East Africa and open doors to more opportunities in the coming days.

Marathon – which last year spun off its refining/sales business into a separate, independent and publicly traded company Marathon Petroleum Corporation (MPC - Analyst Report) – currently retains a Zacks #3 Rank (short-term Hold rating). We also maintain our long-term Neutral recommendation on the shares.

We believe that Marathon – with its large and geographically-diverse reserve base and solid project pipeline – reflects impressive growth prospects and outlook. We also like the company’s healthy balance sheet, which helps it to capitalize on strategic acquisitions and investment options.

Marathon’s emphasis on the high-margin North American unconventional resource plays will further add to its efforts in developing a robust business model.

However, we believe that upside potential will remain limited until Marathon has fully reaped the benefits of the spin-off.