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Morningstar | Incorporating Above-Average Shale Decline Rates Weighs on Marathon Fair Value Estimate

After taking a second look at Marathon's first-quarter financial and operating results, we are reducing our fair value estimate from $18 per share to $12, making the stock look slightly overvalued at the current price. Approximately $2 of the reduction is attributable to marking our model to market for commodity prices. There is no change to our midcycle estimates, $55/bbl and $3/mcf, respectively, for WTI crude and Henry Hub natural gas. However, our methodology incorporates three years of strip prices before reverting to midcycle, and both commodities have slumped since our prior update.

The remainder of the fair value estimate change was driven by refreshing our type curve projections for cumulative production from Marathon's shale wells. We are now modeling stronger initial production rates in most of the plays the firm operates in, which by itself is accretive to net asset value. However, the benefit was more than offset by incorporating above-average decline rates, particularly in the Eagle Ford Shale and the Permian. For instance, recent Marathon wells drilled in the stand-out Karnes County area of the Eagle Ford have typically declined by over 80% in the first 12 months of production.

As a reminder, first-quarter volumes were 388 mboe/d in aggregate, which was within guidance and flat versus the equivalent prior-year period (on a divestiture-adjusted basis). Oil volumes were also in line with guidance, at 203 mbbls/d. As a result, the firm’s financial results were consistent with Street estimates, with adjusted EBITDA coming in at $773 million (the consensus forecast for the same was $766 million). The 2019 capital budget was unchanged at $2.4 billion, and the firm still expects 10% firmwide year-on-year oil growth this year, with 12% oil growth in the U.S. segment. Our updated forecast is consistent with this target.