MPC Marathon Petroleum Corp. Common Stock

Marathon Oil Corporation (MRO) has agreed to acquire a private energy firm – Paloma Partners II LCC – for $750 million in cash.

Houston, Texas based Paloma possesses about 17,000 acres of land, mostly in Karnes and Live Oak counties in the Eagle Ford shale play. As of April 1, production from the acreage was about 7,000 barrels of oil equivalent per day.

The deal, pending customary approvals and conditions, is expected to be closed in the third quarter of 2012.

Located in South Texas, Eagle Ford Shale is a booming play with a high potential for oil and gas drilling. The region is estimated to hold about to 10 billion barrels of recoverable reserves.

With this transaction, Marathon Oil targets to expand its footprint in the resource rich Eagle Ford shale in order to cope up with the shadowy natural gas price.

Marathon Oil is a leading integrated oil and gas firm with extensive upstream operations. The company’s business is organized into three segments – Exploration and Production (accounting for more than 80% of Marathon’s total income), Oil Sands Mining, and Integrated Gas.

Last week, Marathon Oil reported weak first quarter 2012 profits, hurt by lower volumes. The company’s earnings (excluding special items) of 67 cents per share were well below the Zacks Consensus Estimate of 87 cents and the previous quarter’s adjusted profit of 78 cents.

Marathonshares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining a Neutral recommendation on the stock.

We believe that Marathon has exposure to a large and geographically diverse reserve base and solid project pipeline. Additionally, the company possesses a healthy balance sheet that helps it to capitalize on attractive investment opportunities.

However, we believe these positives are already reflected in the company’s valuation, leaving little room for significant price movements. We also believe that upside potential will remain limited until Marathon has fully reaped the benefits of the spin-off of refining/sales business into a separate, independent and publicly traded company Marathon Petroleum Corporation (MPC) in July 2011.

 
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