Reiterate Buy based on refining leverage, inexpensive valuation May 02, 2007
Goldman Sachs
What's changed
Marathon Oil reported adjusted 1Q2007 EPS of $2.04, ahead of the $1.93 First Call consensus though below our $2.20 estimate. On its earnings conference call management announced that E&P production will likely be at the lower end of its 390-425 MBOE/d range for 2007, given a delayed start-up in Norway, which was only partially offset by an early expected start to it LNG project in Equatorial Guinea.
Implications
The key driver of our Buy rating on Marathon Oil is its favorable leverage to our bullish US refining outlook. We do not consider the Norway E&P delay to be a material issue for the shares and would use any noise created by that news to add to positions. With major delays expected for new Middle East refinery projects, seemingly year-round “unplanned” downtime by industry, and resilient oil demand growth, we think investors will become increasingly comfortable assuming a $10/bbl Gulf Coast 3:2:1 benchmark refining margin forecast over the next several years. Using a $10/bbl crack spread and a $68/bbl WTI spot oil forecast, our EPS estimates for Marathon are 35% above the First Call consensus for 2008 and 42% above for 2009. For more details on our favorable view of Marathon, see our March 14, 2007 industry update note, “Upgrading MRO, FTO; downgrading COP, APC” as well as our April 22, 2007 note “Upgrading refiners to Attractive; adding VLO to Buy List”.
Valuation
Despite a very favorable outlook, Marathon trades at just 7.2X 2008E P/E, at the low end of the 6.5-13X forward P/E range in which it has traded since 2004. Our $122 ($121 before) 12-month target price (based on asset value, cash flow and P/E valuation analyses) offers 20% upside and implies a forward P/E of just 8.5X.
Key risks
The key risk is lower commodity prices. |
