Marathon Oil Has Significant Upside: Citi Raises Target To $16

Marathon Oil Corporation MRO has announced the acquisition of PayRock Energy Holdings for $888 mm in cash. Citi’s Robert S Morris maintained a Neutral rating, while raising the price target from $14 to $16. The analyst commented that while the price seems fair, there is significant upside potential.

With the PayRock Energy acquisition, Marathon Oil has added ~9 MBOE/d to its current Anadarko Basin production of ~27 MBOE/d and 61k net surface acres in the normal-pressured oil window of the emerging STACK play.

Valuation Fair

Analyst Robert Morris believes that the valuation is fair based on NYMEX strip prices. The analysis points towards a valuation of $11.3k per acre for the undeveloped leasehold, versus management’s stated price of $11.8k per acre.

Upside Potential

“Marathon’s acquisition economics are based on six wells per section in the Meramec and Woodford formations,” Morris wrote.

Devon management has highlighted, however, that the optimal spacing could be greater. “Based on 8 wells per section, but excluding value for other formations such as the Osage, our aforementioned NYMEX-based valuation increases by ~$130mm to almost $13k/net acre,” the analyst commented.

Morris said that the PayRock Energy deal makes strategic sense and “we now model Marathon averaging five rigs in the STACK play next year (vs. 2 previously) and we have increased our 2017 estimates with 'organic' growth now pegged at ~4% (up from ~0%) though our full-resource NAV is still ~$19.50/share.”