Marathon to split off refining arm, shares up

By Matt Daily

NEW YORK (BestGrowthStock) – Marathon Oil Corp (MRO.N: ) said it would split off its refinery and pipeline operations into a stand-alone company in an effort to drive up its market value, and its shares rose 6 percent.

The move, to take effect on June 30, would turn the fifth-largest U.S. refiner, reviving a plan the company had shelved in December 2008, when the financial crisis hit commodity markets.

Analysts and investors have long called on the Houston-based company, with a market capitalization of $43 billion, to split into two to unlock value that Wall Street was overlooking.

“It’s trading at a significant discount on earnings, cash flow and EBITDA to its peers,” said Fadel Gheit, an analyst with Oppenheimer & Co. “I think the valuation gap will diminish significantly. We’re talking about 20 and 40 percent upside.”

Marathon made the decision because it has largely finished a major capital expenditure program that has been running between $7 billion and $8 billion per year, Marathon Chief Executive Clarence Cazalot told Reuters.

Capital spending for the combined companies should now run between $5.0 billion and $5.5 billion per year, Cazalot said.

“We are seeing strong financial and commodity markets that enable us to capitalize these companies much more easily,” Cazalot said.

“The outlook that we see for the businesses in terms of their financial results is strong, and that’s a significant change from two years ago,” he said.

Marathon’s shares are trading at 14.8 times its earnings, in line with companies such as Apache Corp (APA.N: ) and Devon Energy Corp (DVN.N: ), which do not have refinery operations.

Valero Energy Corp (VLO.N: ), the largest pure-play refiner in the United States is trading at more than 26 times earnings.

After regulatory approvals, Marathon would distribute one share of the new Marathon Petroleum Corp for every two shares of Marathon Oil Corp held.

Marathon Oil would continue to hold the company’s exploration and production business and its Canadian oil sands operations, while Marathon Petroleum Corp would include its six refining plants, pipeline transportation and the Speedway gas station chain.

On a conference call with analysts, company executives said there would be no fundamental changes to the way the two businesses would be run.

CEO Cazalot would continue to head up the exploration and production business. Gary Heminger, the current head of Marathon’s refining business, would become CEO of the split-off company.


Earlier this week, analysts at Deutsche Bank said the company should split because Marathon’s refining arm was outperforming its exploration arm, and its newly expanded Garyville, Louisiana, refinery was one of the lowest-cost plants in the country.

Last year, Marathon completed the expansion of its 436,000 barrel-per-day Garyville refinery. Since then, the plant’s capacity has grown to 464,000 barrels per day.

“We’re very pleased with how the refinery has performed out of the blocks,” Heminger told analysts.

The build-out, which improves feedstock flexibility and refined product yields, took four years and cost $3.9 billion. Its completion should allow Marathon to spin off the refining company in a strong financial position.

The company’s refineries are located in the mid-continent and southeast U.S. markets and have 1,142,000 barrels per day (bpd) of crude oil refining capacity.

Marathon’s plants are seen at an advantage because the Gulf Coast plants are close to export markets, and the refineries in the mid-continent are situated closer to cheaper sources of feedstocks.

But one analyst was skeptical of the move.

“I’m not convinced it creates value,” said Mark Gilman, an analyst at Benchmark Co. “We’ve been through this a couple times with this name, haven’t we? Making a decision like this in response to short-term market trends, in my view, is just not appropriate.”

Marathon itself was spun off from USX Corp in 2002, two decades after USX, then known as U.S. Steel Corp (X.N: ), purchased the company.

Prior to the current spin-off, Marathon’s refining arm plans to take on $2.5 billion to $3 billion in new debt to establish an initial cash balance of $750 million. Any cash above that level would be used to repay existing debt with the company’s exploration business.

JP Morgan and Morgan Stanley would provide a $2.5 billion 364-day short-term loan to the refining company. The banks have also committed to provide Marathon Petroleum Corp with a $2 billion four-year revolving credit facility.

Marathon’s shares rose 6 percent to close at $42.98 in trading on the New York Stock Exchange. Earlier in the session the stock rose to $44.90, its highest in more than two years.

(Additional reporting by Ernest Scheyder and Mike Erman in New York and Anna Driver and Kristen Hays in Houston; editing by Dave Zimmerman, Gerald E. McCormick and Andre Grenon)