Why Ratings Agencies Are Wrong About Marathon Oil

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The benefits of focusing on exploration and production activities cannot be understated these days. Marathon Oil (NYSE: MRO  ) has realized that and oriented itself around becoming an independent upstream company. But there have been a few problems, especially as the company sheds some of its old operations -- namely, its marketing and refining divisions.

In fact, critics of the company's management team are growing louder. Ratings agencies Standard & Poor's and Fitch have downgraded the company's investment rating since the company began initiating these changes. However, I find no reasons to take these agencies on their word.

They blow hot and cold simultaneously
S&P thinks the Marathon spinoff results in a weaker business profile for the upstream division. I don't really buy into that argument. Exploration and production is an exclusive business these days. With a number of oil and gas plays being discovered, including unconventional ones, in my mind, it makes more sense to focus wholly on upstream activities.

Ironically, in spite of the downgrade, S&P expects the company to strengthen its financial performance over the course of this year thanks to better fundamentals and well-diversified reserves. Then where exactly is the problem? I'm having a tough time figuring this out.

Proven track record and huge potential
Marathon's total proved reserves stand at more than 1.6 billion barrels of oil equivalent, of which more than 75% is developed.

Total E&P capital spending for 2011 has been a huge $3.4 billion, a 29% increase over last year. Acquisition and development of base assets accounts for nearly $1 billion of the total amount. These include operations in the Gulf of Mexico, Norway, and Equatorial Guinea, among others. Other worldwide locations will be subject to surveys and experimental drilling, including deepwater in the Gulf of Mexico. Marathon's strategy to expand its global operations looks exciting.

Another $1 billion will be solely for the unconventional liquid plays of the Bakken, Eagle Ford, and Anadarko Woodford shale plays.

Ambitious plans, shrewd strategy
I believe this company has the potential to take on even Big Oil companies like Chevron (NYSE: CVX  ) and ConocoPhillips (NYSE: COP  ) by focusing solely on upstream activities. Spinoff-induced efficiency is a huge factor, whose benefits will be immense in the long run. No doubt things would have been tougher had the company remained integrated.

Analysts value the spun-off downstream unit, named Marathon Petroleum (NYSE: MPC  ) , on par with Valero Energy (NYSE: VLO  ) -- the largest independent refiner -- with a valuation of about $14.7 billion. If this is true, it would be only a matter of time before Marathon Petroleum turns out to be the biggest, thanks to various growth initiatives.

Foolish bottom line
Both Marathon Oil and Marathon Petroleum will perform well in the long run, no matter what the ratings agencies say. I strongly believe the upstream company is undervalued, and it will be only a matter of time before Mr. Market realizes the huge potential.

How well will Marathon perform? Use the comments box below to let us know your opinion.

Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (11)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 13, 2011, at 4:02 PM, naturallight99 wrote:

    I think the main reason the ratings agency downgraded MRO is because the company is now less diversified. It wasn't a comment on the stock performance potential. In credit, diversification is good.

    Also, I would point out that MRO paid an absolute fortune on a per acre basis for the Eagle Ford play.

  • Report this Comment On July 13, 2011, at 5:40 PM, designbydiana wrote:

    So is MRO a good buy now at 31 bucks a share? I have been watching this one and wanting to get in but there seems to be conflicting reports. I would think it is a good buy since it has been much higher but if there are problems with the company then maybe its better to stay away from that one.:)

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