Oil and natural gas exploration and production firm Marathon Oil Corporation ( MRO - Analyst Report ) reported marginally weaker-than-expected third quarter 2012 profits, as crude oil and natural gas prices dropped.

Houston, Texas-based Marathon, which last year spun off its refining/sales business into a separate, independent and publicly traded company Marathon Petroleum Corporation ( MPC - Analyst Report ) – announced earnings (excluding special items) of 64 cents per share, a penny below the Zacks Consensus Estimate.

However, the company’s per share adjusted profits came above the third-quarter 2011 level of 59 cents amid robust volumes from key resource plays.

Revenues at $4,161.0 million were up 9.5% year over year and were also above the Zacks Consensus Estimate of $3,496.0 million.

Segmental Performance

Exploration and Production: Income from the upstream segment totaled $486.0 million during the quarter, up from $330.0 million in the previous-year period.

The company reported production (available for sale) of 392,000 oil-equivalent barrels per day (BOE/d). While exceeding the company guidance of 365,000–380,000 BOE/d, volumes also reflected a 14.3% increase from the 343,000 BOE/d achieved in the third quarter of 2011. This primarily reflects improved output in Marathon’s U.S. resource plays.

Marathon's worldwide realized crude oil price of $97.40 per barrel was 1.8% below the year-earlier quarter level, while natural gas realizations decreased by 1.4% year over year to $2.77 per thousand cubic feet (Mcf).

Oil Sands Mining: Synthetic crude oil sales volumes in the oil sands business improved 6.0% year over year to 53,000 barrels per day. However, this was more than offset by higher operating costs. As a result, Marathon’s Oil Sands Mining segment recorded a profit of $65.0 million as against an income of $92.0 million in the corresponding quarter of last year.

Integrated Gas: Income from the segment shot down 29.1% year over year, from $55.0 million to $39.0 million, hamstrung by weak gas prices.

Capital Expenditure

During the quarter, Marathon spent $1,339.0 million on capital programs (95% on E&P).

Guidance

Marathon expects fourth quarter output to be in the range of 400,000–415,000 BOE/d. Buoyed by the strong third quarter volumes, management hiked its 2012 production guidance to the 375,000–385,000 BOE/d range from the previous band of 365,000–380,000 BOE/d.

Recommendation & Rating

Marathon is a leading energy firm with a large and geographically-diverse reserve base and solid project pipeline. Additionally, the company possesses a healthy balance sheet, which helps it to capitalize on investment opportunities. We also like the strong growth potential of Marathon’s high-margin liquids-rich unconventional plays, which diversify its portfolio and are expected to further drive its overall volumes.

While being incrementally more positive on the company, we believe Marathon will take some time to fully absorb the outcome of the spin-off. Consequently, we would rather wait for a better entry point before accumulating shares.

As such, we see the stock performing in line with the broader market and maintain our long-term Neutral recommendation, supported by a Zacks #3 Rank (short-term Hold rating).