Marathon believes two halves better than one whole

Marathon Oil, the US’ fourth biggest integrated oil and gas company, is lost under the radar. And they really should not be.

David Pursell, head of Macro Research at Tudor Pickering Holt, the energy investment and merchant banking firm, notes:

They’re certainly in the right zip codes.

Indeed, they have everything from unconventional shale gas to global oil in their portfolio. And a very strong refining, marketing and pipeline business.  

But they do not get much of a mention because, as an integrated, they are measured against others in their class. We are talking the ExoxnMobils and Royal Dutch Shells of this world. And, let’s be honest, Marathon really should not be in the same ballpark.

And so it is going to separate its refinery and pipeline operations into a standalone company, away from its exploration and production business. The split, which was announced Thursday, was welcomed by investors, resulting in a 6 per cent rise in its share price.

Marathon Petroleum, will be the US’ fifth biggest refiner. Marathon Oil will focus solely on global exploration and production, with growth leveraged to crude oil production. And now each company can do what is best for its own business segment, which will attract the right talent and, if all goes well, produce strong metrics when compared with competitors.

Of course, by being separate, the companies will lose the buffer created by having the other business in its portfolio when there is either a downward cycle in refining or oil prices.  Moody’s Investors Service placed Marathon’s Baa1 senior unsecured bond rating under review for possible downgrade, noting the split would reduce scale and eliminate benefits of integration. Francis Messina, Moody’s vice president, explained:

Separating Marathon’s upstream and downstream businesses would reduce the company’s present scale and eliminate the benefits of integration, which provide substantial support to its existing Baa1 rating. If the company decides to proceed with this separation, then the existing long term rating likely would be downgraded one notch.

Marathon says its companies will target investment grade ratings with a financing plan that includes reducing long-term debt by about $2.5bn. But there is no doubt, in this respect, there will be disadvantage to getting smaller.

The company will be relieved however that investors share their view that the advantages outweigh the disadvantages.

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