Marathon Oil Expanding E&P Global Interests

• The Company: Marathon Oil, the fourth largest United States-based integrated energy company.
• The Filing: FORM 10-Q filed with the SEC on November 07, 2008.
• The Finding: Marathon Oil said production of liquid hydrocarbons and natural gas sold during the fourth-quarter 2008 would be approximately 415,000 barrels of oil equivalent per day (boepd), at the low end of the company’s guidance. Despite the shortfall, production growth should show meaningful gains in coming quarters, as the company has invested heavily in new fields, particularly in natural gas assets and its 20-percent interest in bitumen mining from the Athabasca Oil Sands Project in Alberta.

The Upshot: Original production for the quarter was 400,000 to 440,000 boepd. The available for sale estimate was at the bottom of guidance due primarily to downtime at the offshore Equatorial Guinea Alba platform (due to pipeline issues); lower than expected Gulf of Mexico production from continued impacts related to 2008 hurricanes; and, the October sale of Marathon’s non-core interests in the Heimdal area offshore Norway.

Marathon’s upstream activities are located in 11 countries, from the U.S. to Norway to Libya, in geography as diverse as the Bakken Formation in North Dakota to deepwater in offshore Angola. The company had approximately 1.23 billion boe in proved reserves at December 2007, of which approximately 47 percent were natural gas.

The company has commenced production in (30 percent interest) in the Neptune development in the Gulf of Mexico, with a current capacity of 50,000 boepd and 50 million cubic feet per day of natural gas. A second attractive property is the Alvheim development located offshore Norway, which commenced production in June 2008, and is helping offset lost natural gas production in the Gulf (due to hurricane activity), with ten wells currently producing 75,000 boepd (net to Marathon).

Ignoring the current depressed price of natural gas, the company is focused on increasing its exposure to unconventional natural gas assets, too. Whereas smaller players are retreating from unconventional resources in the U.S., the company has added to its holdings in emerging plays in the Haynesville Shale (LA), Marcellus (PA, WV), and Woodford Shale (OK).

Management expects its 2009 capital investment and exploration budget, which will be announced in late January 2009, to be more than 15 percent lower than 2008 expenditures, which were budgeted at $8 billion.

The Question: Looking to unlock the value of its E&P assets, management expressed an interest in December to separate its upstream E&P businesses from its cyclical, downstream (refining & marketing) activities. Would such a course of action unlock shareholder value?