A Diversified Shale Player With Plenty of Upside

Marathon Oil (NYSE: MRO  ) just posted strong results out of its numerous shale plays, with Eagle Ford output helping investors sleep easy.

America's favorite animal
Marathon Oil recently updated investors on its operations, with production out of the Eagle Ford up 100% year over year. Marathon pumped out ~92,000 boe/d during the last seven days of October, and plans on maximizing strategies that helped it get there.

Year to date Marathon has used downspacing in ~85% of its new wells to increase the amount of potential drilling locations in the area and push up the reserve recovery rate. Previously Marathon thought it was going to drill on 160 and 80 acre units, but now it is drilling on units 60 acres or smaller.

Another strategy Marathon is using is pad drilling, which now makes up almost all of Marathon's new wells. Quarter over quarter Marathon Oil drilled 8% more wells on pads, which led to ~97% of all new wells being drilled on pads.

Marathon is using pad drilling to bring down well completion costs and lower the amount of time it takes to bring wells online. Marathon also is drilling more wells per pad, with each pad averaging 3.3 wells versus 3.1 last quarter. Drilling times have also decreased year over year by 20%.

Using these strategies, Marathon hopes to have an exit production rate of ~100,000 boe/d for 2013 out of the Eagle Ford. The Eagle Ford production mix was 64% crude, 17% natural gas liquids, and 19% dry gas. 

The cash
Adjusted net income for the quarter was $617 million, up 29% from a quarter ago. Operating cash flow came in at $1.44 billion, before adding in working capital. A year ago operating cash flow was $992 million and adjusted net income was $454 million.

To put that into year-over-year terms, operating cash flow (excluding working capital changes) grew by ~45% year-over-year and adjusted net income grew by ~36%. That isn't bad growth for a company with a trailing-twelve month P/E of 15. Marathon Oil makes roughly ~35% of its income from North American, and plans on expanding that further.

Bakken
In Marathon Oil's latest quarter it reported that Bakken production increased by 27% year-over-year and Marathon is guiding for Bakken exit production to be around 40,000 boe/d. That would be a 5% increase over its current ~38,000 boe/d in production region and will help Marathon continue with its double digit income growth.

Marathon has been able to utilize better drilling techniques, just like it has in the Eagle Ford, to reduce drilling times from 15 days to 14 days quarter over quarter.

The Bakken and the Eagle Ford are going to help Marathon Oil increase its production from North America to 49% of total output in the forth quarter, up from 47% in the third quarter.

Marathon Oil also has operations in the Gulf of Mexico and abroad that produce gas.

LNG and methanol
Marathon Oil produced 7,302 metric tons a day of liquefied natural gas, which was up versus 7,065 metric tons a day in the same quarter last year. For methanol production, Marathon produced 1,364 metric tons a day versus 1,146 metric tons a day last year.

One thing to keep in mind is that Marathon's LNG and methanol production seesaws up and down from quarter to quarter, but overall LNG production is trending higher while methanol production has stayed flat this year.

Final thoughts
Marathon Oil is relying on the Eagle Ford to offset international problems, such as strikes in Libya or turnarounds in Norway. Marathon Oil has several international operations worth taking a look at, but this quarter was all about the doubling of Eagle Ford production.

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