November 18, 2009 at 2:56 pm #2871
Marathon Investors Seek Answers After Refining Bets (Update1)
By Edward Klump
Nov. 18, 2009 (Bloomberg) — Marathon Oil Corp., the fourth- largest U.S. energy producer, may have some explaining to do to investors who say bad bets on refineries are holding back the company’s growing exploration business.
Marathon is spending $6 billion on plant upgrades that began before refining profit margins collapsed, leaving it with less capital to exploit its oil and natural-gas fields. When Marathon meets tomorrow with investors and analysts in New York, it should address possibly selling refineries or justify keeping plants that will be less profitable than oil and gas wells, said Ted Harper of Frost Investment Advisors in Houston.
“Right now, I think investors are just a bit confused with respect to what is that strategy,” said Harper, who helps oversee $6.1 billion in assets. Frost’s holding company owns about 14,000 Marathon shares.
Refining has consumed almost 45 percent of Houston-based Marathon’s capital spending this year, and a project nearing completion in Garyville, Louisiana, will go at least $600 million over budget. Harper said oil and natural-gas output would be growing even faster than the 11 percent gain achieved in 2009’s first nine months if more money had been earmarked for exploration and production, known as upstream.
“If they weren’t spending the amount of money that they are to expand Garyville, that’d be incremental dollars that could go to the upstream, where theoretically you may have higher rates of return,” Harper said.
Marathon made investment decisions on refinery upgrades in Garyville and Detroit in 2006 and 2007, when profit margins on gasoline and diesel were climbing toward historic highs. Refining margins at Marathon, the biggest oil processor in the U.S. Midwest, dropped 70 percent from a year earlier in the third quarter after the recession eroded fuel demand.
Chief Executive Officer Clarence Cazalot said in February that Marathon plans to minimize refining spending after plant upgrades are completed. A $3.8 billion to $3.9 billion expansion at Garyville is scheduled to be finished in the current quarter, and a $2.2 billion upgrade to the Detroit plant is slated to be done in 2012.
“Optimally, they would not have spent the $4 billion on Garyville, but that’s 20-20 hindsight, right?” said Pavel Molchanov, an analyst at Raymond James & Associates Inc. in Houston who rates Marathon’s shares at “market perform.”
Marathon spokeswoman Lee Warren declined to comment on concerns over the company’s refining investments. Cazalot, 59, said in February that Marathon dropped a proposal to possibly split into separate refining and exploration companies, citing “unprecedented financial- and commodity-market uncertainty.”
Philip Weiss, an analyst at Argus Research in New York, said such a split is necessary for Marathon to realize the full value of its assets. A “difficult” refining market precludes the company from making that move now, he said.
“I’d like to see the Garyville and Detroit stuff done so we don’t have to worry about that anymore,” said Weiss, who rates Marathon shares at “buy” and owns none.
Marathon is up 27 percent this year in New York trading, the third-biggest gain among seven integrated oil companies in the Standard & Poor’s 500, after tumbling 55 percent, the worst performance in the group, in 2008. The shares fell 21 cents to $34.69 at 11:09 a.m. on the New York Stock Exchange.
Angola to Indonesia
Marathon’s oil and gas prospects are in places such as the Gulf of Mexico and off the coasts of Angola, Norway and Indonesia. The company also is a partner in the Athabasca Oil Sands Project in Canada that’s expanding, and it has acreage in gas-rich U.S. shale formations.
The company projects production gains averaging about 4 percent through 2011. Marathon said this month that 2009 output will be at the top end of its forecast after climbing 4.8 percent in the third quarter. Marathon estimates capital spending will be about $6 billion in 2009, down from $7.6 billion in 2009.
“They’re spending hasn’t been quite as high this year as last year, so I’m sort of interested to see how that’s impacting future growth,” said Matti Teittinen, an analyst at IHS Herold in Boston.
Marathon has announced $3.5 billion of divestitures since starting an asset review in March 2008. That includes the proposed $1.3 billion sale of a 20 percent stake in a block off the coast of Angola. Molchanov said he would like to see Marathon stop selling oil and gas assets.
Exxon Mobil Corp., Chevron Corp. and ConocoPhillips are the largest U.S. energy companies.
To contact the reporter on this story: Edward Klump in Houston at email@example.com.
November 18, 2009 at 3:04 pm #5924
Here is update on the MAP Investors hounding them over investing equally in Downstream & Upstream assets ….. especially now that the short term market has turned against the margins / economics.
After Environmentalist and Lawyers the Accounting-Investment Analyst have to be one of the most dangerously stupid groups in the Industry.
This group is incapable of holding the concept of long term business plan & flops like fish out of water whenever this plan cuts thru the inevitable economic downturn where the justifying economics are bad. If you want to have assets in place to catch large profits available during a upturn then you have to go against the herd of oil companies being driven by this group of short-term thinkers.
Another tired and totally incorrect position these analyst like to take is that the investments in Upstream assets have a higher rate of return than the downstream assets which traditionally have only a 9-11% ROI (even though they still like to pilory them for excess Gross profits – never mind the Net profits are in this 9-11% that wont put them in the top 100 Forbes list where 33% net profit is bottom rung). Fact is that ALL integrated oil companies FORCE the profit/transfer price into the upstream sector because it has tax favorable advantage due to depletion allowance ….. separate out the downstream companies (like over-balanced upsteam companies like BP & Shell) and profits averaged over time shrink to reality. There are rough patches like non-integrated independents like Valero and others find themselves in current financial crisis. The reverse will come on the recovery (and once environmentalist are kicked away from blocking heay non-conventional crude sources…..because there is no functional alternate light conventional sources).
MAP’s investment in both Garyville and Detroit are going to be strong good paying investments over the next 20 years and far ahead of any investments in oil or gas assets that are in the governments gunsights for rape via Cap & Trade, Execessive Environmental investment requirements that will ~remove any “higher” expected profits. The downstream assets will also help to head off a supply crisis that the current liberal adminstration is creating once the recovery kicks in and demand returns to near-normal levels (and prevent US from having to import even more Anti-US crude & gasoline suppliers).
All US companies were beaten down and forced to divert most of the funds they used to put into R&D efforts, and place them into dividends which never satisfy these vultures because even when they are as high as they can get this group still beats them when they don’t match their lack-knowledge, calculator, short-term thinking projections. About the only part of R&D left in any company on the stock exchange is just the “D = Development” on things they discovered in the past when they had an “R=Research” program.
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