Adding to Buy List on refining leverage and inexpensive valuation - Goldman Sachs - October 22, 2007
Source of opportunity
We have removed the Not Rated designation from Marathon Oil shares. We have added Marathon to the Americas Buy List, with 26% total return upside to our $72, 12-month target price. We see Marathon as the integrated oil company most favorably leveraged to our bullish refining view. Our 2008 and 2009 EPS estimates are well ahead of consensus, and we would use the current period of seasonal refining margin weakness to add to refining leveraged equities like Marathon. The shares have lagged the sector meaningfully since mid-June and now appear very inexpensive to us.
Catalyst
Key drivers of our favorable view include: (1) expected upward EPS revisions to consensus estimates for 2008 and 2009, with our updated forecasts 38% and 75% above the corresponding First Call consensus; (2) continued outperformance of Mid-Continent refining margins relative to the rest of the United States, which would disproportionately benefit Marathon’s R&M business vis-à-vis other integrated oils; and (3) improved E&P performance from Marathon, given attractive projects in deepwater Angola, Norway, Equatorial Guinea (LNG), and now Canada’s oil sands (Western Oil Sands acquisition).
Valuation
On 2008 estimates, the shares are trading at just 5.2X EV/DACF, 6.5X P/E, and a 7.7% free cash yield, all of which appear inexpensive relative to the respective 5.5X, 8.7X, and 6.0% North America integrated oil peer group averages. Note, we have slightly lowered our 2007-2012 EPS estimates to reflect the Western Oil Sands acquisition, latest company guidance, and other modeling adjustments.
Key risks
Key risk is sustained lower commodity prices. |
