Naureen Malik, Barron’s analyst, recommended Marathon Oil:

a. Shares of the integrated oil-and-gas company have tumbled 24% since Dec. 31, a dramatically bigger decline than other big oil companies. The problem: Marathon is viewed by investors as primarily a refining business at a time when refiners are struggling with high costs due to the sharp rise in commodity prices over the past year, a recent drop in prices notwithstanding.

b. The company has turned its underperforming exploration-and-production business into a powerful earnings driver. E&P income doubled and contributed to nearly 90% of Marathon’s total after-tax income in the second quarter, up from $24 a year earlier.

With production expected to grow 7% a year through 2011, it’s an attractive opportunity for investors.

c.  To combat market apathy, Marathon could separate its upstream E&P business from the downstream operations with two independently traded stocks. Shares popped 9% on the news but have since fallen.

d.  A commodity pullback could make Marathon and its integrated peers “defensive” portfolio plays because of cheap valuations and solid cash flow.

e. New oil and gas production could drive Marathon shares to the mid-$60 range.

f. Thanks to two production start-ups in Norway and the Gulf of Mexico, the company is about to embark on a period of the company’s most significant upstream production growth,” says Benchmark Co. oil and gas analyst Mark Gilman.

g.  A breakup could make Marathon an intriguing takeover target, particularly for a major integrated or independent producer looking for reserves.

h. Unlike its competitors, Marathon is “more of an asset value story than an earnings story,

i. Marathon has operations in some of the most promising North American markets, including the Canadian oil sands, Alaska, Bakken Shale in North Dakota, Piceance Basin in Colorado, along with Libya, and Angola.

j.  North American demand for refined products will likely remain weak for several years, but diesel should hold up well due to global demand. Marathon is increasing production of diesel and ethanol-blended gasoline while adding capacity to refine cheaper sour crude.

CONCLUSION:

But when it comes to the survival of the fittest, Marathon is proving that it has the ability to evolve and build endurance for the long run.

Track Naureen’s picks at:

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