Is Iraq Exposure a Threat to Marathon Oil Corporation?

Sectarian violence in Iraq has riled global markets, sending Brent crude to a nine-month high above $115 per barrel last week. Not only is continued unrest in OPEC's second-largest oil-producing country a major risk to the price of oil, but it also poses a threat to Western companies with operations in the country, including Houston-based Marathon Oil  (NYSE: MRO  ) .

Let's take a closer look at Marathon's exposure to Iraq and whether or not it's a material risk to the company's future.

Photo credit: Flickr/Paul Lowry

Marathon in Iraq
Marathon Oil has interests in roughly 145,000 net acres in the Kurdistan Region of Iraq, including a 15% working interest in Atrush, a 25% working interest in Sarsang, and a 45% operated working interest in the Harir block. But these properties are all exploratory prospects, with the majority of Marathon's activity consisting of testing and appraisal, and are not currently contributing to its production.

Only the nonoperated Atrush block, where the company plans to drill three wells that will yield first oil in early 2015, is expected to contribute to near-term production. Gross production from Atrush Phase 1 is estimated at roughly 30,000 barrels of oil per day, of which 4,500 barrels per day would be net to Marathon -- a mere drop in the bucket compared to company-wide production that averaged 457,000 barrels of oil equivalent per day (boe/d) in the first quarter of 2014.

Kurdistan unaffected so far
Further, the risk of a disruption in the Kurdistan Region, a semiautonomous region in northern Iraq, is relatively low. Despite extremists belonging to the Islamic State in Iraq and the Levant, or ISIL, having seized additional cities north of Baghdad, production from Iraq's main producing regions -- southern Iraq and Kurdistan -- has so far been unaffected.

Kurdistan is also quite well fortified with an estimated 190,000 troops protecting the region's interests, according to a recent note by Morgan Stanley analysts. The Kurds have also taken control of Kirkuk, their historic capital and an oil-rich region, which further limits the risk of oil production disruptions.

In fact, recent news reports suggest that Kurdistan is actually planning to boost its oil exports in coming months. Exports from the region are currently at around 120,000 barrels per day and could increase by 100,000 barrels per day by year-end, if a revenue-sharing agreement with Iraq is instituted, experts say.

Marathon's key growth drivers
In short, Marathon's exposure to Kurdistan represents a minimal risk to its production and earnings. The company's key drivers of growth are its onshore U.S. assets, primarily in Texas' Eagle Ford shale, North Dakota's Bakken shale, and Oklahoma's SCOOP and STACK resource basins, which are expected to drive onshore U.S. production growth of 17%-22% annually through 2017.

They will also account for the bulk of the company's capital spending. Of the company's estimated $5.9 billion capital spending budget for the year, a whopping 72% will be directed toward North American exploration and production activities, while an additional 5% has been set aside for oil sands mining ventures. Only 21% will be allocated toward its international operations.

With its Bakken and Eagle Ford returns currently in excess of 70%, the company is planning to accelerate its activity in the plays by 20% this year. This should provide a meaningful boost to its upstream cash margins and cash flows. Meanwhile, the company will continue to return more cash to shareholders through share buybacks and dividend increases, as it culminates an asset sale program that has raised some $6.2 billion worth of divestment proceeds since 2011.

Investor takeaway
Marathon's interests in Kurdistan do not currently contribute to the company's production and represent an insignificant portion of its capital spending. The key region investors should watch is North America, which accounts for nearly two-thirds of the company's production and should provide a boost to margins and cash flows as Marathon accelerates activity across the Bakken and Eagle Ford.

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