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Marathon to Offload Marcellus Acres

Zacks Equity Research

Houston, Texas-based Marathon Oil Corporation (MRO) plans to sell its natural gas-rich acreage in the Marcellus Shale formation as it aims to shed the non-core properties while reviewing its portfolio following last year's spin-off of its refining division. However, the company declined to comment on any such transaction.

A leading integrated oil and gas firm − Marathon − will likely shed about 80,000 acres in West Virginia and Pennsylvania and could receive up to $1,000 an acre. The company now considers its Marcellus assets as non-core and minor to its operations.

Marathon had drilled its first well in the Marcellus region sometime back in 2009. Last year, the company entered into a joint venture agreement with an independent oil and gas exploration company, Triana Energy Investments LLC, backed by Morgan Stanley Private Equity, for the development of its acreage in the region.

However, in response to the low gas price environment, Marathon and other energy giants are focusing more on liquid-rich profitable areas. A supply glut has resulted in cascading natural gas prices during the past year or so, as production from dense rock formations (shale) - through novel techniques of horizontal drilling and hydraulic fracturing - remains robust. The grossly oversupplied market continues to pressure commodity prices in the backdrop of sustained strong production.

Again, in July 2011, Marathon completed the spin-off of its refining/sales business into a separate, independent and publicly traded company Marathon Petroleum Corporation (MPC). We believe the transfer of the downstream assets (post-split) has left Marathon with a less diversified business. As a result, the business risk profile of the reorganized Marathon is weaker than that of the pre-spin-off company. Hence, this divestiture of non-core assets will likely reflect its endeavor to reposition its portfolio post spin-off.

We maintain our long-term Neutral recommendation on Marathon shares, which currently retains a Zacks #3 Rank (short-term Hold rating).

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