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Financial Analysis of Marathon Oil

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Financial Analysis of Marathon Oil
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Netra Shetty
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Financial Analysis of Marathon Oil - February 12th, 2011

Marathon Oil Corporation, (NYSE: MRO) is a United States-based oil and natural gas exploration and production company. Principal exploration activities are in the United States, Norway, Equatorial Guinea, Angola and Canada. Principal development activities are in the United States, the United Kingdom, Norway, Equatorial Guinea, and Gabon. In addition, Marathon operates other businesses that market and transport its own and third-party natural gas, crude oil and products manufactured from natural gas, such as liquefied natural gas and methanol, primarily in the United States, Europe and West Africa. Marathon's headquarters facility is the Marathon Oil Tower in Houston, Texas
Marathon Oil (NYSE:MRO) is a global integrated energy company that drills for, refines and sells oil and natural gas . Although the company sells some of the crude oil that it produces to other refineries, it makes most of its money from the sale of its finished petroleum products (gasoline, lubricants, heating oil) to resellers and to consumers through its own retail locations. The critical shortage of refining capacity within the U.S., where strict environmental regulations have prevented the construction of new refineries since 1976, and growing oil demand have supported healthy refining and marketing margins in recent years. Moreover, as oil prices have continued to rise, labor and technologically intensive projects such as deep sea drilling and oil sands have become more economically feasible. The company earned $53 billion in revenue and $1.5 billion in net income in 2009.[1]

Company Overview

Steady increases in global crude prices affects Marathon in a two-fold manner; higher crude prices benefits its E&P segment which sells crude to refineries, however, their refineries incur higher operating expenses as a result. Marathon's operations include a seven-plant refining network with 974,000 barrels per day of crude oil throughput. With the majority of the business generated from the R&M segment, Marathon must ensure that its refineries remain in top condition.

Business Segments[2]
1 Company Overview
1.1 Business Segments[2]
2 Business Growth
2.1 FY 2009 (ended December 31, 2009)[1]
3 Trends and Forces
3.1 Focus on Upstream Growth
3.2 Jumping on the Ethanol Bandwagon
3.3 Fluctuating oil prices
3.4 Environmental Concerns
3.4.1 Marathon Often has to Pay Recompense for Environmental Damages
3.5 Alternative energy threat
4 Competition
5 References
Exploration and Production (E&P) - explores for, produces and markets liquid hydrocarbons and natural gas on a worldwide basis.
Oil Sands Mining (OSM) - mines, extracts and transports bitumen from oil sands deposits in Alberta, Canada, and upgrades the bitumen to produce and market synthetic crude oil and vacuum gas oil.
Integrated Gas (IG) - markets and transports products manufactured from natural gas, such as liquefied natural gas (“LNG”) and methanol, on a worldwide basis.
(Refining, Marketing, and Transportation (RM&T) - refines, transports and markets crude oil and petroleum products, primarily in the Midwest, upper Great Plains, Gulf Coast and southeastern regions of the United States.
Business Growth

FY 2009 (ended December 31, 2009)[1]
Net revenue fell 30% to $53 billion. The company attributes part of the loss to declining crude oil prices, which averaged $62.09/barrel, compared to $99.75/barrel in the previous year. Revenues in all of the company's business segments fell by more than 30%.
Net income fell 59% to $1.5 billion.
Trends and Forces

Focus on Upstream Growth
Although Marathon is small compared to Exxon Mobil (XOM) or ChevronTexaco (CVX), it is focused on growing its upstream E&P segment to reap the profits of a high-price oil environment. Marathon is choosing focus on developing a large presence in select geographic areas with proven trends in Norway, Equatorial Guinea, Angola and the Gulf of Mexico.

Jumping on the Ethanol Bandwagon
Marathon is well-poised to benefit from a rise in ethanol, which is becoming an increasingly attractive oil alternative due to the fundamental rise in oil prices. Marathon formed a 50/50 joint venture to coruct and operate ethanol plants, the first of which will be located in Greenville, Ohio. Marathon is already quite experienced with ethanol blending with 15 years of experience underneath its belt. [3]

Fluctuating oil prices
Higher oil prices translate into higher profits for Marathon, but market fluctuations make it difficult to know for certain what the oil outlook will be like.

The market price for oil depends largely on world oil supply, so the actions of the Organization of the Petroleum Exporting Countries (OPEC) have a huge impact on oil prices. OPEC accounts for approximately 40% of the world's crude oil supply and can increase or decrease the amount of oil on the market to maintain attractive oil prices for its member countries. However, OPEC has been increasingly losing control over the oil market--oversupply from non-OPEC production has cut away at OPEC's influence.

Oil prices may also be hurt the recent spike in interest towards alternative fuels like ethanol (see below, Alternative Energy). Together with oversupply and loss of OPEC control, competing alternative fuels could force a downturn in oil prices. A slowdown in economic growth could also reduce demand for energy and lower oil prices.

Environmental Concerns
Fossil fuels, though highly cost-efficient forms of energy, are heavy polluters when burned. Increasing environmental concern over environmental degradation and global climate change is fueling a consumer-driven push away from dirty forms of energy toward cleaner forms like wind energy and solar power. These concerns are also causing political movements, which are leading to increased regulation in the fossil fuels market. Government regulations like emissions caps, renewable energy subsidies, and carbon trading schemes all facilitate transitions away from dirty, nonrenewable fuels. Natural gas is being touted by a number of sources (few of them environmental advocates) as "the" alternative to oil and coal. While natural gas does burn more cleanly than either oil or coal, and releases fewer greenhouse gases than either, natural gas is still a carbon-emitter. The current international focus on slowing carbon emissions is very likely to slow the market for both oil and natural gas, hurting Hess's business immensely.

Marathon Often has to Pay Recompense for Environmental Damages
Every stage of oil production, refining, and use have aspects that are damaging to the environment. Drilling leads to deforestation and groundwater contamination on land and coastal ecosystem damage offshore, refining leads to chemicals being released into groundwater and harmful fumes being released into the air, and the burning of oil and its products leads to the release of particulate emissions and greenhouse gases into the air. When the environmental damages caused by Marathon's operations occur to the extent that they break environmental protection laws, the company is often sued by NGOs or government agencies like the Environmental Protection Agency. These lawsuits are usually settled out of court.

Alternative energy threat
The rise of petroleum prices has been slowly countered by the increasing financial feasibility of alternative energy replacements for traditional oil products. Alternative energy is still some years off from widespread adoption; alternative energy challenges like low production volume, low of production efficiency, and lack of infrastructure (some new fuels require distribution infrastructure separate from existing oil pipelines) all have yet to be overcome. However, energy sources such as ethanol, solar or wind end up taking off, the negative impact on the oil and gas industry could be huge.


Companies in the oil and energy sector operate and compete with each other in different areas, such as chemicals, refining, oil exploration, etc. Marathon faces direct competition from companies, such as:

Chevron Corporation (CVX)
ConocoPhillips (COP)
Motiva Enterprises
Sunoco (SUN)

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