Thesis: The spin off is causing considerable confusion and irrational selling has been the norm the past month. On Capitalist Collective user JBrown had a great write up dissecting the merits of this spin-off regardless of irrational selling. As the link shows MRO has sold off considerably compared to all peers.
This has created an opportune time in my eyes to invest in MRO.
In table 1 we can see that by several metrics MRO trades at a substantial discount. Especially P/B which should create a formidable downside protector to an asset heavy commodity producer such as Marathon.
Table 1. Comparison
So why the divergence between them? I believe it is laziness coupled with lack of obvious information. I do not believe the majority of investors comb SEC filings and generally rely on handed out information from easily accessible (and often wrong) sources. While the exact values of MRO and valuation metrics aren't know the margin of safety that has been priced into the stock creates ample room for error.
In the 10-12B a simple calculated (read: crude) BV goes as follows: As of 12/31/2010 Total Assets of 50.014B and Total Liabilities of 26.243B. Following the spin-off Marathon Petroleum will retain 21.523B of assets and total liabilities of 14.379B. This leaves parent company MRO with assets worth 28.491B and liabilities costing 11.864B, giving a BV of 16.62B.
Clearly changes could have occurred between the audited results and today. Looking at the latest results from Q1 2011 and recently released results for Q2 I see no material reason for an abrupt descent in BV. A 3.5B acquisition for assets in Eagle Ford was accomplished in Q2 2011. This probably only added to BV. At an price of 22k/acre MRO gets already installed rigs and wells generating ~7000 BOEPD, leading to revenues of ~170-190M annually at 70/barrel. Well below current spot prices. Even if the optimistic increase in production (est. 80,000 BOEPD by 2016) doesn't occur the cash flows support the current acquisition so BV probably didn't change.
If we are concerned about possible drops in oil prices from a simple comparison can be applied. In Q1 2010 oil prices worldwide averaged 74.35 USD. Net income for the E&P segment totaled 502M. In Q1 2011 oil prices worldwide averaged 95.79 and E&P segment income totaled 668M. For a all hells breaking loose analysis in Q1 2009 when we were doomed MRO achieved E&P income of 74M on worldwide oil prices of 40.20 USD. Although the increased exposure to oil sands will prove determinedly to MRO if oil prices tank I take comfort in the profitability.
A reversion to the mean candidate MRO should be valued at least approximately as good as APC. OXY is the stand alone leader in the E&P segment, as >70% of reserves are proved liquids (MRO=>70%), most proven reserves (~3000 MMBOE vs. MRO's ~1500 MMBOE) and profit per barrel ($17/BOE vs. MRO's $13/BOE). Although OXY may have better fundamentals all around its hard to argue that MRO is worth considerably less. I see a dollar selling for 50 cents. As audited results emerge investors may begin to see the upside. Another upside is that management is now free from the restraints of the downstream business. A leaner, meaner E&P company at a significant discount even after adjusting for a precipitous drop in spot oil prices.
8/9/2011: Read the most recent (unaudited) 10Q released by MRO. Stockholders Equity was as calculated at 16.7B, Cash is slightly more than debt. FCF defined by multiple measures gives a range of 17-23% yield to EV. Even if oil prices are high and reset lower I feel confident this deserves higher multiples given the superiority of oil reserves and business history. Long MRO ~4% accounts
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