Marathon's Spin-Off Holds Potential Upside
Marathon's current shares offer a 20% discount to the sum of its parts.
Earlier this year, Marathon Oil (MRO) announced plans to spin off its downstream operations on June 30, 2011, into a new company called Marathon Petroleum Company, or MPC. Shares have subsequently rallied to almost $53 on the news, and in part due to higher oil prices and strong refining margins. However, we still see further upside considering shares continue to be valued as an integrated firm rather than as the independent companies that will exist after the spin-off.
Based on the company's proposed spin-off, which gives current Marathon shareholders one share of MPC for every two shares they hold, we think Marathon could be worth $65 per share if the exploration & production and downstream segments are valued in line with comparable companies after the spin-off. We value MPC at $40 per share or about 4.2 times our 2011 EBITDA estimate of $4 billion and 4.5 times our 2012 EBITDA estimate of $3.6 billion. To derive our valuation of MPC we applied a range of multiples based on current market valuations of comparably positioned independent refiners. We value Marathon Oil after the spin-off at $45 per share or about 5.2 times our 2011 EBITDA estimate of $7 billion and 4.6 times our 2012 EBITDA forecast of $7.9 billion. Our valuation assumes MRO will trade at a discount to similarly sized E&P firms because of its relatively weaker growth outlook, exposure to risky international assets, and significant oil sands reserves.
Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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