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Marathon Oil (MRO) Exits Iraq to Further Streamline Portfolio

Zacks Equity Research

In a bid to deepen focus on U.S. shale plays, Marathon Oil MRO recently closed the divestment of Kurdistan assets, marking a complete exit from Iraq. Details regarding the terms of the deal and acquirer of the assets have been kept under wraps. Notably, Marathon Oil held a 15% stake in the Atrush Block in the Kurdistan region, netting 2,400 net barrels of oil equivalent per day (Boe/d) to the firm during first-quarter 2019.

With the closure of this deal and divestment of U.K. assets agreed upon earlier this year, Marathon Oil bided adieu to 10 countries since 2013. Markedly, while the company will derive its entire oil production from the United States, it will retain LNG operations in Equatorial Guinea.

Marathon Oil on a Divestment Spree

Over the past few years, the Texas-based energy explorer inked several deals to sell non-core assets that do not fit into the company’s long-term growth plan.

In August 2015, it sold Wilburton, OK assets for an amount of $102 million. Marathon Oil vended Gulf of Mexico (GoM) assets for a total price of $205 million in November 2015.In April 2016, the company inked a deal to offload Wyoming upstream and midstream assets to Merit Energy for $950 million. Further, in October 2016, the upstream player signed a deal to jettison some of its non-core assets in West Texas and New Mexico for $235 million.

Additionally, in March 2017, the company exited high-cost Canadian oil-sands operations for $2.5 billion. In 2018, Marathon Oil offloaded its oil acreage in Libya to France-based supermajor TOTAL S.A. TOT for $450 million. The company had already announced the sale of Kurdistan assets during the second-quarter earnings report of 2018.

In February 2019, it also inked a deal with RockRose Energy to exit the North Sea business. In fact, of late, many of the U.S. energy companies including ConocoPhillips COP and Chevron CVX, among others, are pulling back from the North Sea basin to concentrate on U.S. shale plays.

These strategic sell-offs not only bolstered its portfolio, but also boosted financials of the firm.We believe that Marathon Oil’s high emphasis on exiting non-core business, and focus on strategic acquisitions and strengthening balance sheet will drive growth. However, management’s low priority toward dividend growth and share buyback programs may dampen investors’ confidence in the stock.

Plans in Sync With Marathon Oil’s Strategies

The divestment plan is part of Marathon Oil’s strategic review of global portfolio to determine the competitiveness of all its projects. The company, which intends to optimize its portfolio with high-return and low-risk investments, wants to deepen focus on prolific U.S. shale plays.

Over the past two years, the company has successfully positioned itself in the Delaware Basin and low cost-high margin STACK/SCOOP resource plays, while exiting non-core property assets with limited upside. 

The upstream player’s strategic portfolio in key resource-shale plays like Bakken, Eagle Ford, Permian and STACK/SCOOP signals visible production growth in the upcoming years. The company’s diversified profile makes it less exposed to pipeline constraints in the Permian Basin. As output from Permian accounts for just 8% of the firm’s total volumes, it largely remains unaffected by infrastructural bottlenecks and differential issues of the region. With enhanced completion designs and effective spacing strategies, the company has been improving the quality of assets, and is well positioned to ramp up production and revenues. For 2019, Marathon Oil targets 12% output growth in the United States.

Divestment deals are in sync with the company’s focus on boosting financials, as Marathon Oil remains committed toward strengthening balance sheet and driving cash flows. Importantly, the company generated an organic free cash flow of $80 million during the first quarter. Its cumulative two-year free cash flow for 2019 and 2020 is anticipated to be around $750 million at oil price of $50 a barrel and $2.2 billion at crude price of $60.

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