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Energy: Profit-Squeezed Marathon Considers Dividing Company

August 1, 2008

By Kristen Hays, Houston Chronicle

Aug. 1–Marathon Oil Corp. may be two companies by next year.

The fourth-largest U.S. oil company announced Thursday that it may separate its production, natural gas and Canadian oil sands businesses from refining and marketing amid the poor margin environment that has squeezed its profits.

“We’re always looking to see what we can do to enhance our business strategically, financially and operationally,” Clarence Cazalot, Marathon’s president and CEO, told analysts during a conference call seeking more information about the possible split.

When asked if the Houston-based company has considered other options, such as selling the entire organization or bits and pieces of it, Cazalot said “that is always on the table and we’re constantly reviewing our options, yes.

“This is the one that we have elected to go forward and study in greater detail,” he said, noting that the company’s directors will decide by year’s end.

Analysts said the move, if approved, could entice other companies seeking to boost their output to chase Marathon’s exploration and production assets.

“It would be a reasonably attractive takeover target,” said Derek Butter, an analyst with Edinburgh, Scotland-based Wood Mackenzie. “Fundamentally, what Marathon’s board is looking at here is, ‘We are convinced the market isn’t seeing the full value here, so to maximize the value for shareholders, we will consider splitting up.’ “

Investors enthusiastically received the news as Marathon shares surged 9.6 percent, or $4.34, to close at $49.47 Thursday on the New York Stock Exchange. Marathon’s shares have traded between $41.12 and $63.22 in the last year.

In 2004, Marathon Oil Corp. beefed up its refining lineup with a $3 billion cash and stock acquisition of a partner’s minority interest in seven plants. But its second-quarter results, announced Thursday, illustrate how low refining margins squeezed by record-high oil prices have been a drag on profits.

While the company’s exploration and production income rose, low margins slashed refining profit to $158 million, down from $1.25 billion in the second quarter of 2007 when margins were high. The company said its wholesale marketing gross margin per gallon was 8.35 cents, compared to 39.25 cents in the year-ago period.

Overall, Marathon earned $774 million, or $1.08 per share, down from $1.55 billion, or $2.25 per share a year ago. Excluding one-time items — a $220 million after-tax mark-to-market loss in the value of its trading positions, United Kingdom natural gas contract losses, gains on sales of operations and a loss on extinguishing debt early — the company earned $1.51 per share, meeting Wall Street expectations. Revenue rose to $22.2 billion from $16.9 billion.

Houston-based Apache Corp.’s second-quarter results, also released Thursday, illustrated how independent producers that lack refining and marketing functions are reaping full benefits of record-high oil prices.

The company’s profit skyrocketed 128 percent to $1.4 billion, or $4.28 per share, from $632 million, or $1.89 per share in the April-June period of 2007. Apache’s revenue rose 58 percent to $3.9 billion from $2.4 billion.

“We think the large integrated players are being rated lower than the large, pure upstream players,” Butter said. “Upstream” is industry jargon for exploration and production.

Simmons & Co. International said in a note that Marathon investors now have a catalyst to start thinking about the value of the company’s exploration and production-focused segments.

“Heretofore, Marathon’s value has been depressed by the company’s group-leading refining leverage, which has hampered the company’s ability to translate higher oil and natural gas prices into earnings growth, particularly relative to peers,” Simmons said.

Phil Weiss, an analyst with Argus Research, said that the market has treated Marathon as a refiner because that’s been the dominant part of its business for some time.

But while high prices compress the difference between what refiners pay for crude and the selling price of products made with it, Marathon’s exploration and production business is on an upswing. Weiss said Argus estimates Marathon could increase production up to 8 percent in the next three to five years.

A new stand-alone refining business may not be as well received, he said. Other independent refiners have struggled amid the low-margin environment, including San Antonio-based Valero Energy, the nation’s largest refiner. Valero on Tuesday announced a 67 percent drop in quarterly income.

“But Marathon’s refining assets are pretty strong,” Weiss said. “Ultimately, it would probably show itself to be a strong player.”

Weiss also said Marathon’s possible split doesn’t necessarily signal a trend among integrated companies to get out of the refining business. Integrated companies like Marathon, Exxon Mobil and ConocoPhillips have divisions in exploration and production as well as refining and marketing. Independent companies like Anadarko Petroleum Corp. and Devon Energy just have exploration and production.

Both Murphy Oil and Hess Corp., smaller integrated companies like Marathon, have said they don’t intend to split those divisions.

Chronicle reporter Brett Clanton contributed to this story.

kristen.hays@chron.com

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