Marathon Earnings: Market Underestimating Equatorial Guinea Upside

We’re raising our fair value for Marathon MRO to $29 per share from $23, after incorporating the firm’s first-quarter financial and operating results. As we originally discussed in our first look on May 3, the firm’s operating results were pretty good. Compared with our model, production growth in the period was slightly higher and operating costs were lower. However, the improved outlook for the firm’s integrated gas business in Equatorial Guinea also supported the valuation increase.

Guidance for the net income contribution of this business, which is treated as an equity investment, was actually lowered for 2023 due to declining U.S. natural gas prices. Marathon has a stake in several gas processing assets in Equatorial Guinea, including an LPG plant and an LNG plant. The facilities process and export gas produced locally by Marathon and third parties in exchange for fees and profit sharing. This includes gas from Marathon’s Alba field, where it has a 64% working interest (production in Equatorial Guinea is consolidated and evaluated separately in our sum-of-the-parts model). Alba gas is liquified at Marathon’s LNG facility and exported, resulting in equity income. Associated revenue is currently linked to Henry Hub pricing, but this contract will expire at the end of 2023 and from 2024, such revenue will instead be linked to the Title Transfer Facility benchmark, resulting in a meaningful increase in equity income and cash flow for Marathon. This was previously announced, but while we were already incorporating a surge in equity income we were not fully capturing the upside with our previous estimate.