Analyst Actions: Marathon Oil Corp Upgraded to Outperform at Credit Suisse

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18-50% Unrisked Upside Potential; UPGRADING to OUTPERFORM (from Neutral) Rating; Raising Estimates

Bottom Line: As we said after Q2, in "Reiterating Growth, Spending within Cashflow", MRO is demonstrating capital discipline while delivering margin enhancing production growth. Today we raise our rating to Outperform (from Neutral), with a target price of $37/sh. Further upside is available from improving execution in the Eagle Ford (+$4/sh) and exploration in the pre-salt Gabon (up to $8/sh). MRO is under-earning today on 40% of its portfolio, has a high share of long lived assets, and is growing new sources of high margin barrels. We are raising EPS by 2-4% to reflect the Paloma acquisition We are raising our 2012/2013/2014 EPS estimates to $2.29/$3.46/$4.38 (from $2.28/$3.35/$4.23) respectively.

Eagle Ford Improvement Thus Far Is Mainly Drilling and Completion Efficiency: Delivering value in the Eagle Ford will require (1) good well production rates, (2) improving drilling efficiency and (3) successful downspacing. We believe most of the volume improvement thus far is due to faster drilling and completion days.

Eagle Ford Well Results Are Also Getting Better: In our full report we show how Eagle Ford condensate well results are steadily improving. MRO has even drilled some wells above the 1,100 boed 30 day IP that we assume in our valuation model (though the average is 790kboed). MRO is matching EOG in Karnes county while using a tighter choke. Downspacing success would drive additional value upside.

Strong Base Production, Rising Margins: If you believe US NGL and gas prices eventually recover, then MRO is underearning today on around 40% of its production. Spending close to cashflow is an achievement made possible by a stable set of base assets. As MRO delivers volume growth, MRO's cash margins should also expand.

Valuation: MRO shares trade at 23% discount to our NAV (including some 2P international reserves) and 30% below the group EV/CF multiple. Higher recoveries in the Eagle Ford could add an additional 11% to NAV. Aside from the Eagle Ford, disposals and Gabon exploration could be a source of further upside.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Commodities

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