EUR 850.00 For Business Accounts Only

Morningstar | Marathon Ratchets Full-Year Production Guidance for Third Consecutive Quarter

Our fair value estimate is unchanged after reviewing Marathon's third-quarter results. The firm delivered production of 419 thousand barrels of oil equivalent per day in the period, exceeding the high end of the 395-415 mboe/d guidance range. The beat was primarily driven by stronger than expected output from U.S. resource plays, which accounted for 294 mboe/d of the firmwide total (compared with guidance of 280-290 mboe/d). International production came in at the high end of guidance (115 mboe/d). On a divestiture-adjusted basis, firmwide volumes were 1% higher sequentially and 15% higher year over year. Because of this strong operational performance, management slightly increased full year estimates for both oil and total production, with no change to the outlook for capital expenditure. The firm's financial results were a hair ahead of Street estimates too, with adjusted EBITDA and adjusted earnings per share coming in at $1,022 million and $0.24 respectively (consensus estimates were $965 million and $0.20).

Not surprisingly, realized prices deteriorated in the Permian (with an average discount to WTI of over $14, up from $8 in the prior quarter). But this is no cause for concern, given that the Permian still accounts for only 5% of the firm's total output. And in any case, the pipeline congestion responsible for widening differentials should be resolved by mid-2019. On the conference call management also addressed basis volatility in the Bakken shale, citing the completion of refinery maintenance as a catalyst for pricing improvement (even though Marathon's differential improved by more than $1 versus the second quarter). Going into 2019 we expect deep discounts to persist in both plays (averaging $7 and $3 for the year, respectively).

For 2019, management remains optimistic about the outlook for crude but will set the budget at a level that delivers free cash flows at a more conservative price. This year the firm has delivered more than $600 million of free cash to date with a budget based on $50 WTI. There are no plans to compromise capital efficiency by ramping spending, whether prices rally, and as the firm already has a footprint in the four biggest oil-weighted shale plays it is not considering large-scale M&A. We applaud this commitment to efficiently harvesting the portfolio, even though excess returns will remain elusive in the next few years (mainly because the firm was a relatively late entrant to the shale arena, and paid handsomely for its assets as a result).