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1、Top picks,Buy,Deutsche BankMarkets Research,North AmericaUnited StatesIndustrialsIntegrated Oil,IndustryMarathon Oil&Occidental,Date2 December 2012RecommendationChangePaul SankeyDavid T.Clark,CFA,The Fox and the Grapes,Research Analyst(+1)212 250-6137,Research Analyst(+1)212 250-8163,david-,A thesis
2、 and a thesis driftHaving spent time on the road with respective managements,we are raisingour price target on Marathon Oil to$40,and reiterate it as a top pick with aBUY.We are cutting Occidental to HOLD on thesis drift.Marathons patchyexploration&development track record and refining leverage gave
3、 it a lowmultiple.But having split off refining and stepped aggressively into the hottestplay in global oil,the Eagle Ford,the company has given itself a growth story,beaten&raised targets,increasing management credibility,taking pressure offits exploration programme,allowing de-risking.It can sell
4、major decliningassets to leverage up to the Eagle Ford.All should generate a higher multiple.A billion$over and a year behind becomes a day late and a$shortThe US unconventional revolution has forced all the US major oils to shiftemphasis away from global mega-developments and high risk exploration,
5、towards the chase for exploitation,growth,cost control,and price realisation,in North America,globally the most developed,competitive,&dynamic oilmarket.There are challenges,notably staff retention and development,drillingspeed and efficiency,infrastructure access and price differentials.From a stoc
6、kmarket perspective,higher expected growth and better expected disclosurealso present challenges.We think Marathon is addressing these challengesvery well.New regional management are driving Eagle Ford volume upgrades&cost downgrades.Infrastructure&realisation are not an issue in SouthTexas.Better l
7、abour&materials availability are another advantage.Returns arehigher.Marathon has quickly stepped up to improve its disclosure,pursue,Silvio Micheloto,CFAResearch Analyst(+1)212 250-Winnie NipResearch Associate(+1)212 250-Marathon Oil(MRO.N),USD30.85Companies FeaturedMarathon Oil(MRO.N),USD30.85 Buy
8、2011A 2012E 2013EEPS(USD)4.31 2.66 3.79P/E(x)6.6 11.6 8.1EV/EBITDA(x)3.3 2.9 2.7Occidental Petroleum(OXY.N),USD75.21 Hold2011A 2012E 2013E,growth,and in Q3 demonstrated increased earnings in a flat oil priceenvironment.Three kickers:disposal of major decline-prone asset NorwaysAlvheim would reduce M
9、ROs elevated tax rate,giving more confidence in,EPS(USD)P/E(x)EV/EBITDA(x),8.4011.45.6,6.9410.84.7,7.5410.04.3,growth sustainability,strengthening an already-strong balance sheet,pushingit towards the elixir of current markets:higher dividends.A low multiplediscounts exploration success,despite a 13
10、 well 13 programme.We have to hit reset on Oxy after chronic thesis drift(Hold,$80 PT)We pushed Oxy on the California story,then buyback.Where previously theUS was low growth/high free cashflow,the Middle East the growth driver,nowthe quest for organic growth in the US has seen capex soar while volu
11、mes areforecast to drop below the 5%target next year.Disclosure has been relativelylimited,making it difficult to understand either muted volumes our P/E methodology yields$80(12xtarget P/E,mid-cycle EPS estimate$6.66).OXYs returns vs growth trajectoryis shifting geographically and thematically with
12、 uncertain results.Delivery ordisappointment would present both upside/downside risks._Deutsche Bank Securities Inc.Deutsche Bank does and seeks to do business with companies covered in its research reports.Thus,investors shouldbe aware that the firm may have a conflict of interest that could affect
13、 the objectivity of this report.Investors shouldconsider this report as only a single factor in making their investment decision.DISCLOSURES AND ANALYSTCERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P)072/04/2012.,2 December 2012Integrated OilMarathon Oil&OccidentalMarathons grapesEagle Ford success
14、changes everything including the multipleWe outlined our positive view of Marathon Oil in some detail before we accompaniedthe company on a European roadshow.Our positive view was reinforced.For a fullhistory of Marathon,analysis of relative performance,exploration upside,and potentialfor multiple e
15、xpansion,please refer to our November 23rd note“Marathon Oil:History,Management,Strategy”.Eagle FordIn the run-up to its split,Marathon undertook a global resource play review and targetedthe Eagle Ford as a key potential high growth/returns driver.Management understoodthat an additional core growth
16、 area was needed for the stock to be an attractive E&Pstandalone.There were few Eagle Ford candidates that offered the right access,but adeal was successfully struck with privately-held Hilcorp that catapulted Marathon into thefive key Eagle Ford core players,namely COP,Pioneer,EOG,BHP and MRO.,Figu
17、re 1:Eagle Ford Acreage by Companyk acres700600500400300,Figure 2:Eagle Ford Production by Company,2012Ekboe/d7060504030,200201001000,Source:Deutsche Bank,Company data,Source:Wood Mackenzie,Deutsche Bank,There were some early missteps,as it took a couple of quarters to start performing afterthe Hilc
18、orp acquisition,partly because the existing wells were run with a view tomaking them attractive for a takeover,partly because of Marathons own longer termprocess and standards.The hiring of subsequently-promoted Lance Robertson fromPioneer as a regional Eagle Ford head was a key step in establishing
19、 performance.Bymid-2012 the company hit an inflection point,as connection was made between drillingorganization and infrastructure,which are now operating seamlessly;performance isimproving,evidenced by Marathons earnings rising sequentially Q2-Q3 in a flat oilprice environment.The net result is tha
20、t Marathon management now feel they have very strong visibility onthe next five years of growth for the overall company,allowing them to de-risk globalexploration efforts and continue to pursue disposal of more mature assets.The EagleFord business is humming and they are really confident they can de
21、liver to recentlyincreased production targets.The importance to Marathons growth overall is clear.,Page 2,Deutsche Bank Securities Inc.,EagleFord(kboe/d),0,2 December 2012Integrated OilMarathon Oil&Occidental,Figure 3:MRO Total Production:EF driving growthkboe/d,Figure 4:MRO Liquids Production:EF vs
22、 other assetskb/d,600500400300200100,Eagle Ford,25%20%15%10%5%0%,45040035030025020015010050,Eagle Ford,25%20%15%10%5%,2005,2006,2007,2008,2009,2010,2011,2012E 2013E 2014E 2015E 2016E,0,0%,Eagle Ford,Other US,International,EF%of Total,2005,2006,2007,2008,2009,2010,2011 2012E 2013E 2014E 2015E 2016E,E
23、agle Ford,Other US,International,EF%of Total,Source:Deutsche Bank,Company data,Source:Deutsche Bank,Company data,Excludes discontinued operationsIn terms of volumes,the play has generated the much-loved(and needed based on apatchy history)upgrade-to-target cycle.So far Marathon has beat and raised(a
24、fter ashaky start in its very first quarter)targets on its Eagle Ford volumes.Figure 5:MRO Eagle Ford Volumes vs Target125,1007550250,Nov 2012 raised guidance,2011,2012,2013,2014,2015,2016,Actual&DB forecastMarch 2012 guidance,Sep 2011 guidanceAug 2012(2Q12 call)guidance,Nov 2011 guidanceNov 2012(3Q
25、12 call)guidance,Source:Deutsche Bank,Company dataMarathon management are conservative in terms of chokes and flow tests,preferringto focus on well costs and long term resource.Down-spacing plans are a key issue,asit takes inventory from over a thousand to over three thousand wells,and resource from
26、800 mmboe to 1.2bn boe.Pilots are currently underway on downspacing.MRO believesthat“interference”(amount of cannibalization an infill well takes away from adjacentwells)at 40 acres is less than 10%for a large portion of their position.At 40 acrespacing,the company believes they have well over a dec
27、ade of drilling inventory,over230k core acres primarily in Gonzales and De Witt counties(alongside original favouriteKarnes where natgas and NGL cuts are higher).Originally,MRO bought Hilcorp using a120 acre spacing assumption.,Deutsche Bank Securities Inc.,Page 3,2 December 2012Integrated OilMarath
28、on Oil&OccidentalWell costs around$8.6m right now(down from$10m on acquisition in 2011),and thecompany is keen to continue improving performance to lower that$8m.There is verylittle pad drilling now(multiple wells drilled from a single site)but Marathon believethey can undertake over 60%of wells on
29、pads in 2013.That will take drilling daysdown,from a current 23,in 2013 drilling days could fall to about 13 days(so$300k ofsavings per well,rule of thumb each drilling day is worth about$30k of costs).Thecompany is running six frac crews right now,pulling back to four through December tobuild up so
30、me inventory.Hilcorp frac crew contracts-three of the six can beimproved going forward.Increased use of sliding sleeves instead of plug and perforatecompletions can also lower costs.By following the leaders in Eagle Ford fracking,Marathon can achieve rapid cost savings advances.DB comment:It is inte
31、resting to note that there is seemingly little major intellectualproperty advantage in drilling and completion techniques in the US unconventionalrevolution between E&P companies,and that competitive advantage is arguably limitedto geology/acreage and infrastructure positioning.Essentially drilling
32、and completion bestpractice is for open sale and so commoditised.Marathon is considering buying into its own fracking/completion activity,simply to saveservice company margin costs,but will not get in to sand mining,which would bringadditional and unwanted liability risk,such as silicosis,the health
33、 risk associated withsand production and distribution.Essentially the quest is on to force$8.5m well costsinto the$7.5m range.They are skeptical of well costs lower than$7m,in terms of whatis included and cost.Figure 6:Comps in the Eagle Ford,Total,2012 Wells,Condensate Window Total Production kboe/
34、d,Operator,Acres,Oil,Cond,Dry,2012 Capex 2013 Capex,Rigs,Gross,Net,Avg Well Cost($m)Drill Time,EUR IP(30-day)1Q prod 2Q Prod 3Q Prod,Marathon,230,000,149,500,57,500,23,000 1,500-2,000 1,500-2,000,18,253,200-210,8.6,25,300-1000 650-1,225,14,21,41,EOGAnadarkoMurphyChesapeakeConocoPhillipsBHPSM Energy,
35、644,000200,000201,800460,000228,000332,000149,000,572,0000141,260299,00068,40066,4000,26,000200,00020,180161,000159,60099,600119,200,46,000040,36000166,00029,800,1,9208761,3002,4532,5002,190925,1,9038501,3001,8692,5002,549425,23101025142615,320250175420NA18074,320125NA280180NANA,5.55.86.5-8.35.5NANA
36、7,157201815NANA,460450500-730590NA1,500450,7106005504301,200400575,7728112354NA44,10330143661NA45,1093717527610055,Source:Deutsche Bank estimates,Company data,Wood MackenzieThe company is looking to achieve its stated 120kboe/d target,from 60kboe/d at yearend 2013,and 100kboe/d 2013 average,but not
37、necessarily push beyond that,if aplateau production for more years would add more value.As a result MRO has restrained infrastructure spending somewhat,believing that manycompanies have overspent,then failed to fill capacity they paid for.MRO has put$250m into infrastructure so far.All Eagle Ford in
38、frastructure has been organised in a way that would allow an MLPstructure.Current EBITDA is below the critical$100m level,but in due course an MLP isan option.Marathon expect to be cash flow positive in 2014,ahead of our 2015 forecast.,Page 4,Deutsche Bank Securities Inc.,0,2 December 2012Integrated
39、 OilMarathon Oil&Occidental,Figure 7:Key Assumptions,Figure 8:EF DCF-Free Cash Flow,O per a t iona l As s um pt ions,P r oduc t ion,1,000,($m),Net Acreage(000 acres)Risking FactorRisked shale area(acres)Spacing(acre/well)#of potential wellsSuccess rateTotal#of wellsFina nc ia l As s um pt ions,230,0
40、0030%161,000802,01380%1,712,OilNGLGasPeak production(kboe/d)EUR(kboe/well)Total production(mboe)Dis c ount ed Ca s h FlowPV of FCF,66%15%18%170497851$4,135,800600400200,Capex/well($m)Opex($/boe),$8.00$9.50,Shares outstanding(m)NP V/s ha r e,709$5.83,2013,2014,2015,2016,2017,2018,2019,2020,Depreciati
41、on rateCash taxes,10%36%,WACCNPV/boe,9.28%$4.9,(200),(400),Source:Deutsche Bank,Source:Deutsche Bank,Longer-term the EF will move from the“brute force”phase to a more maturetechnology driven phase,and recovery rates will climb above the current 6-10%.Butthat is likely a decade away.Bakken,OklahomaMa
42、rathon broadly characterise their returns as 10%in the Oklahoma AnadarkoWoodford play,20%in the Bakken,and 40%in the Eagle Ford(EF),underlining theirprioritisation.With stronger natgas and NGL prices,Oklahoma production couldquickly ramp to 30kboe/d(from current 12kboe/d),assuming natgas prices coul
43、dreach$4.50 per mmbtu.For now,rigs have been moved to the Eagle Ford andactivity stepped down.In the Bakken for over six years,Marathon has upped its volume target from aprevious peak view of 20-25kboe/d to 50kboed+(by 2020).Overall volumes growth inthe play were flattered by a hard winter and flood
44、ing in 2010/11 followed by a mildwinter so far this year.However differentials have been withering,and activity islikely to be forced to slow.Figure 9:WTI-Clearbrook differential302520151050,J,F,M,A,M,J,A,S,O,N,D,-5-10,2010Source:Deutsche BankDeutsche Bank Securities Inc.,2011,2012,Page 5,2 December
45、 2012Integrated OilMarathon Oil&OccidentalSo although wells cost MRO$8.6m in both Bakken and EF,in the EF production is900Kbbl estimated ultimate recovery(EUR),and prices at Louisiana Light Sweet(LLS)minus($6)per barrel,while in Bakken yields 500-600Kbbl EUR and prices at WestTexas Intermediate(WTI)
46、minus($6-$9/bbl).DB notes:With LLS pricing close to Brent,and WTI over$20/bbl below Brent,the EagleFord pricing premium is the single greatest reason for our strong preference for the EagleFord.Additionally we believe that operational problems in both pipelines and particularlytrain reliability,and
47、a total lack of alternative outlets when pipes or trains are closed,maintained,or frozen out,will make realisations north of Cushing extremely volatile,andfundamentally less attractive.In terms of increasing scale in the Bakken,the company believes that they are best inclass in terms of well costs,t
48、hat competitors well costs are$10m+(bar one smallplayer),and further that Bakken assets has been way oversold in M&A,meaningacquisition costs are now much too high to be attractive.The company expects certainplayers to exit the Bakken.Growth continues though,as the rig count in region has gone from
49、an estimated 170to current 210+over the past year.However management are deeply skeptical thatBakken will ever drive total production much above 1.2Mbd,as the best acreage iscurrently being drilled,costs remain under upward pressure,and decline rates are high.Management agrees with our view,expresse
50、d in our note“Why the US WONT surpassSaudi as worlds largest oil producer(November 2012)”that current growth estimatesfor US oil production are too high.The same view was echoed by Oxy CEO SteveChazen,who is on record saying that there isnt a$10m well in North America thatmakes an attractive return.
