Marathon Oil Corp. (MRO): Analyst meeting reinforces + L-T view, but N-T prefer other stocks - Goldman Sachs - March 28, 2008
What's changed
Marathon Oil hosted an analyst meeting on March 27, 2008, providing a detailed update on its strategy and key goals.
Implications
There is no change to our fundamentally positive view of Marathon’s top quartile refining and marketing (R&M) business and generally improved exploration and production (E&P) outlook. The company’s updated E&P production profile was largely in line with our previously lowered expectations, but notably is still expected to show a competitive mid-single digit CAGR over the next several years. While its E&P business is important, we see Marathon’s shares as being more driven by the outlook for refining margins. We continue to have an Attractive coverage view on the refiners, but believe we currently are sufficiently exposed to refining via our Buy ratings on Valero Energy (also Conviction Buy), Frontier Oil, and Sunoco. As such, among the integrated oils, we prefer the shares of Conviction Buy-rated ConocoPhillips as the better integrated oil compliment to our otherwise refining-heavy favorites. In comparison to Marathon, Conoco has greater leverage to our bullish crude oil and natural gas view and less exposure to refining than Marathon. In addition, Conoco’s meaningfully higher free cash yield (due to a much lower reinvestment rate) makes it more attractive in the recessionary trading environment that currently exists.
Valuation
We see 34% upside to our $62 (unchanged) 12-month target. Marathon shares are trading on 2008E/2009E estimates at 4.8X/3.9X EV/DACF and a 2.0%/8.4% free cash yield, which compares with Conoco at 4.9X/4.1X and 11.3%/13.2% and Valero at 5.5X/3.7X and 3.3%/7.9%, respectively.
Key risks
Key risk is sustained lower commodity prices. |
