Marathon Oil Co., a subsidiary of Pittsburgh-based USX Marathon Group, has outlined plans to improve the performance of its upstream business during a conference call with investment analysts last week. New York-based investment firm PaineWebber Group Inc. outlined Marathon's five-point strategy in a subsequent "Research Note" on the company.
Marathon recently hired a new president, Clarence Cazalot, who PaineWebber said "confidently outlined a very credible, convincing, and achievable strategy for the company�s upstream operations."
"Given his training as a geologist and wealth of management experience gained in various executive positions during 28 years at Texaco," said the analyst, "we believe that Mr. Cazalot was hired with the mandate to turnaround Marathon�s underperforming oil and gas operations. In our opinion, he was an excellent choice to revitalize this business...[He] has the knowledge, drive, commitment, and the proper incentive to steer Marathon�s upstream business back on the right track."
Cazalot's strategy
Cazalot outlined five core elements of Marathon�s upstream strategic commitment for providing growth and shareholder value.
1. Reduce costs by $150 million, pretax, in 2001.
Half of the savings is expected to come from "above the field costs," says PaineWebber�mainly overhead and administration, which represent a reduction of 20%. Improved global procurement would contribute another $25 million, and "a leaner and more-focused exploration program should add another $50 million of savings," said the analyst.
"But beyond just cost savings, Marathon will look to rationalize and consolidate its upstream asset portfolio," said PaineWebber. "This is where Cazalot believes the real value is. The company will also look to dispose of certain properties over the next 6-12 months in order to high-grade its asset base."
As Cazalot�s put it, "There are no sacred cows." In other words, if a property does not meet Marathon�s definition of a strategic core asset, provide for growth, earn its cost of capital, and add value, then it is likely to be sold.
"Doing all of this should have a positive impact on the bottom line," said PaineWebber. "The company is targeting an improvement in its ROCE [return on capital employed] to the 9-11% range from about 6% in 1999, based on oil prices of $19/bbl for WTI and $2.30/Mcf for natural gas."
2. Grow profitable resource and production base.
Marathon intends to grow its resource base through development of discovered reserves, exploration, and opportunistic acquisitions. The company believes it has an advantage because of its relatively small size, because large projects would have a greater effect on its reserve base compared with a supermajor.
"Some additional strategies that Marathon intends to deploy to access development opportunities include capitalizing on its relationships with governments and partners; leveraging its existing relationships; focusing on being bigger in fewer areas, as performance hinges on scale and efficiency at a local or regional level; and utilizing its downstream leverage as one of the US�s largest importers of Kuwaiti and Saudi Arabian crude," said PaineWebber.
"Marathon also plans to have a more-focused exploration program, targeting high-impact projects. This exploration program will focus on the deepwater Gulf of Mexico, offshore eastern Canada, and deepwater West Africa."
Marathon plans to drill 8-10 wells in the deepwater Gulf of Mexico through 2001, including 3 or 4 in the remainder of this year. It has identified 42 prospects on its acreage in the gulf and is currently drilling the Berlin well.
Off eastern Canada, where its blocks are on trend with Sable Island, Marathon plans to drill two wells through 2002.
Its exploration efforts off West Africa are expected to have a longer-term effect on its production profile, with 3-5 wells expected in the next couple of years, says PaineWebber. Off Angola, Marathon has a 10% interest in Blocks 31 and 32. BP Amoco is the operator of Block 31, where 3D seismic has been shot and a well is planned for fourth quarter 2000. Drilling is scheduled to begin on Block 32 next year.
"Finally," said PaineWebber, "acquisitions will play an important role in Marathon�s growth. Through acquisitions, the company could look to establish a new core area, or simply look to strengthen its presence in an existing region, creating further synergies. However, it is not interested in another company�s decline curve�any acquisition must provide opportunities for growth.
"...Marathon has been very successful at managing its asset portfolio. The company has recently sold properties containing 58 million boe of reserves and purchased assets having 110 million boe. At the same time, the properties sold had operating costs of $6.53/bbl, and those acquired had lifting costs of $2.10/bbl."
3. Build a high-quality, balanced portfolio that is more focused.
"Marathon�s plan is to have a more-focused, profitable US business with three or four international core areas in the next 5 years," said PaineWebber. "As part of this plan, the company is establishing very realistic performance objectives. These include targeting annual production growth of 3-4%, reserve replacement of at least 120%, and competitive F&D [finding and development] costs in the $5-6/bbl range.
"...Cazalot identified several specific areas which have the potential to become new core areas, including offshore Eastern Canada, North Africa (Libya), West Africa, the Middle East (possibly through existing relationships), and possibly Asia-Pacific, by focusing on local and regional natural gas markets."
4. Maintain financial discipline and improving credibility.
This is a critical part of Marathon's overall strategy, and it could allow the company to take advantage of attractive opportunities as they arise, says PaineWebber. Marathon has lowered its debt-to-capital ratio to 37% at mid-2000 from 42% at yearend 1999, and the analyst expects it to reduce this further by the end of 2000.
"Marathon also expects to be more disciplined with its capital outlays. It intends to maintain its current capital spending in the upstream at about $1 billion/year�possibly a bit higher depending on opportunities. It will continue to test the economics of development projects using oil prices at $15/bbl WTI to ensure that projects will at least earn their cost of capital."
5. Deliver on its promises.
"This may sound simple, but Marathon intends to do this with a sense of urgency, understanding that its credibility and its reputation are on the line," said PaineWebber. "The company wants to create an externally focused, high-performance culture�one that is based on responsibility and accountability. And it submits that performance contracts are in place to properly motivate its personnel as well as independent contractors.
"In our opinion, the most important factor for the successful implementation of this strategy is execution. This is where we believe that genuinely strong leadership will play a critical role. Given Marathon�s improved leadership and commitment to results, we believe its strategy will succeed."
PaineWebber analyst Christopher Stavros lauded Marathon's overall plan as a "very creditable and very achievable one," adding that the company has a good leader at its helm to carry out its new strategy. While the company�s strategy will take time to unfold, "We think there are already a number of actions in the pipeline that, as announced, should increasingly provide momentum to the story," said Stavros.
As a result of the company�s renewed focus on improving overall returns and the implementation of a cost-cutting program, PaineWebber is raising its 2001 earnings estimate for Marathon by 20�/share to $3.10.