Refining, Oil Prices Lift Marathon - Analyst Blog - Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP)

Marathon Oil Corporation (MRO) – the fifth largest refiner and marketer of petroleum products in the U.S. – reported a jump in its fourth-quarter 2010 profits.

As has been the case with the larger rivals that have already reported, such as ExxonMobil (XOM), ConocoPhillips (COP) and Chevron Corp. (CVX), results were boosted by higher crude prices. Much-improved downstream margins also contributed towards Marathon's strong results.

Earnings per share, excluding special items, came in at $1.09, comfortably beating the Zacks Consensus Estimate of 96 cents and significantly ahead of the year-ago period adjusted profit of 32 cents.

Quarterly revenue of $20.2 billion was up 26.4% from the year-earlier level, and was 19.3% above our projection.

Segmental Performance

Upstream: Income from the upstream segment totaled $496 million during the quarter, up from $439 million in the year-ago period. Marathon's worldwide realized crude oil price (from continuing operations) of $81.50 per barrel was 15.9% above the year-earlier level, while natural gas realizations (also from continuing operations) increased 16.3% to $3.07 per thousand cubic feet (Mcf).

The company reported a production (available for sale) of 420,000 oil-equivalent barrels per day (BOE/d), 4.2% above the previous-year level. The positive year-over-year performance reflects contribution from the Droshky development in deepwater Gulf of Mexico that commenced in July 2010. Full year 2010 production (available for sale) came at 391 BOE/d.

Downstream: Margins in the refining business increased significantly from the year-earlier levels. The situation was further helped by improved sales volumes (resulting from the Garyville refinery expansion) and wider sweet/sour differentials.

Marathon's refining and marketing unit earned $213 million during the quarter, compared to loss of $18 million last year – reflecting better margins and crack spreads.

The company's realized gross refining and wholesale marketing margin of 8.99 cents per gallon was up markedly from last year's income of 0.62 cents per gallon. Total refined product sales volumes were up 16.5% from the year-earlier level to 1,691 thousand barrels per day, while throughput was up 17.6% to 1,400 thousand barrels per day.

Capital Expenditure

During the quarter, Marathon spent roughly $1.2 billion on capital programs (57% on E&P and 27% on Refining, Marketing and Transportation).

Marathonhas pegged its 2011 capital budget at $5.3 billion. Of the total, roughly 71% will go towards oil and gas exploration projects worldwide, and 24% towards downstream businesses.

Guidance

Marathonestimates 2011 E&P production available for sale to be essentially flat with 2010 volumes, in the range of 380,000 – 400,000 BOE/d, excluding the effect of any future acquisitions or disposals.

Our Recommendation

Marathonshares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.