Marathon Oil Corp

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NYSE: MRO MARATHON OIL CORP Report created Mar 27, 2017 Page 1 OF 5 Marathon Oil is an international energy company engaged in exploration and production, oil sands mining Argus Recommendations and integrated gas. The company is headquartered in Houston, and has operations in the U.S., Europe, the Middle East and Africa. The company was formerly known as USX Corporation and changed its name to Marathon Oil Corp. in July 2001. Marathon Oil separated from Marathon Petroleum in 2011 and there is no Twelve Month Rating SELL HOLD BUY connection between the two companies. Five Year Rating SELL HOLD BUY

Analyst's Notes Under Market Over Sector Rating Weight Weight Weight Analysis by Bill Selesky, March 27, 2017 ARGUS RATING: BUY Argus assigns a 12-month BUY, HOLD, or SELL rating to each stock under coverage. • Marathon Oil adds 21,000 Permian acres for $700 million • BUY-rated stocks are expected to outperform the market (the benchmark S&P 500 Index) on a risk-adjusted basis over the • On March 21, Marathon Oil agreed to buy 21,000 acres in the oil-rich Permian's Northern Delaware next year. basin for $700 million in cash, adding to shale holdings in the area it acquired earlier in the month. • HOLD-rated stocks are expected to perform in line with the • The Permian acreage, largely in New Mexico, was purchased from closely held Black Mountain Oil & market. Gas LLC and other sellers. The company will now hold about 91,000 acres in the Permian basin after • SELL-rated stocks are expected to underperform the market on a risk-adjusted basis. selling oil-sands assets in Alberta for $2.5 billion. The distribution of ratings across Argus' entire company • Marathon Oil continues to shed high-cost noncore assets in favor of higher-return North American universe is: 47% Buy, 47% Hold, 6% Sell. unconventional oil, gas and NGL assets. We have a positive view of this strategy and believe that a rebound in oil and gas drilling will begin in the U.S. onshore market, where MRO has a dominant position. Key Statistics Key Statistics pricing data reflects previous trading day's closing • On February 15, Marathon reported an adjusted 4Q16 net loss of $83 million or $0.10 per share, price. Other applicable data are trailing 12-months unless compared to an adjusted loss of $323 million or $0.48 per share a year earlier. The 4Q net loss was otherwise specified narrower than our loss estimate of $0.13 and the consensus loss estimate of $0.14. Market Overview Price $14.61 INVESTMENT THESIS Target Price $52.00 We are reaffirming our BUY rating on Marathon Oil Corp. (NYSE: MRO) with a price 52 Week Price Range $9.77 to $19.28 target of $52. Our aggressive price target includes a sum-of-the parts methodology as well Shares Outstanding 847.21 Million as potential M&A activity. Since becoming an independent E&P company in 2011, Dividend $0.20 Marathon Oil has made significant progress concentrating and simplifying its portfolio to Sector Overview focus on oil-rich U.S. resource plays. Marathon has divested non-core conventional assets, Sector Energy and in mid-2016, it added STACK acreage, in Oklahoma, which together with its other Sector Rating MARKET WEIGHT U.S. resource plays, offers materially better-than-average growth opportunities. We have a Total % of S&P 500 Market Cap. 6.00% positive view of this strategy and believe that a rebound in oil and gas drilling will begin in Financial Strength the U.S. onshore market, where MRO has a dominant position. Financial Strength Rating MEDIUM In addition, Marathon continues to realize sustainable cost savings through technology Debt/Capital Ratio 29.3% and efficiency gains. Since 1Q15, it has been able to lower total E&P expense by 40%, Return on Equity -- North American E&P costs by 30%, and International E&P unit production costs by Net Margin -52.4% Payout Ratio -3.33 Market Data Pricing reflects previous trading week's closing price. Current Ratio 1.64 200-Day Moving Average Target Price: $52.00 52 Week High: $16.65 52 Week Low: $14.30 Closed at $14.61 on 3/24 Revenue $4.09 Billion Price After-Tax Income -$2.14 Billion ($) Valuation

40 Current FY P/E -- Prior FY P/E -- Price/Sales 3.03 20 Price/Book 0.71 Book Value/Share $20.71 Market Capitalization $12.38 Billion Rating BUY HOLD SELL Forecasted Growth EPS 1 Year EPS Growth Forecast 0.07 0.09 ($) -0.11 -0.10 -0.04 0.00 -0.01 0.00 0.04 0.05 N/A -0.37 -0.23 -0.20 -0.48 -0.43 -0.23 5 Year EPS Growth Forecast 8.00% Quarterly 1 Year Dividend Growth Forecast Annual -1.28 -0.87 -0.06 0.25 ( Estimate) 0% Revenue ($ in Bil.) Risk Beta 1.81 Quarterly 1.5 1.5 1.4 1.2 0.8 1.0 1.1 1.2 1.4 1.4 1.5 1.6 1.7 1.7 1.8 1.8 Institutional Ownership 83.13% Annual 5.6 4.1 5.9 ( Estimate) 7.0 ( Estimate) FY ends Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Dec 31 2015 2016 2017 2018

Analyst's Notes...Continued 40%. We believe that in the current energy environment, with The transaction is expected to close in 2Q17, with an effective crude now at $48-$49 per barrel, Marathon should be able to date of March 1. The company plans to triple drilling in the region, generate compound annual earnings growth of 10%-15% over the adding two rigs mid-year to the one rig operating now. next few years, which is significantly higher than its average Finally, MRO announced the sale of its stake in the Athabasca peer-group competitor. Oil Sands Project in Alberta to Royal Dutch Shell and Canadian RECENT DEVELOPMENTS Natural Resources Ltd. on March 9. At the same time, it agreed to spend $1.1 billion to enter the Permian. The company has now MRO shares have underperformed since the beginning of 2017, established stakes in four of the most active shale plays in the U.S., dropping 15.6% while the S&P 500 Energy index has fallen 9.3%. including the Eagle Ford of Texas, the Bakken in North Dakota, However, they have outperformed over the past year, rising 43.8% and the Scoop and Stack in Oklahoma. We view the recent while the Energy index has climbed 8.9%. acquisition, along with the prior transaction, as significant and On March 21, Marathon Oil agreed to buy 21,000 acres in the strategic positives for the company. oil-rich Permian's Northern Delaware basin for $700 million in In their most recent quarterly results, on February 15, cash, adding to shale holdings in the area it acquired earlier in the Marathon reported an adjusted 4Q16 net loss of $83 million or month. $0.10 per share, compared to an adjusted net loss of $323 million The Permian acreage, largely in New Mexico, was purchased or $0.48 per share in the prior-year quarter. The net loss was from Black Mountain Oil & Gas LLC and other sellers. The narrower than our loss estimate of $0.13 and the consensus loss company will now hold about 91,000 acres in the Permian basin estimate of $0.14. after selling oil-sands assets in Alberta for $2.5 billion. The narrower-than-expected loss was attributable to improved Drilling in the Delaware basin has surged after a recovery in oil financial results in all operating segments, especially in North and natural gas prices, with rig counts rising 24% since the end of America. December 2016, according to a report from Bloomberg Fourth-quarter revenue fell 6% to $1.389 billion, but rose 13% Intelligence. A land rush has driven values to more than $50,000 sequentially. Marathon ended 2016 with 12 rigs in U.S. resource an acre in some places. Marathon confirmed that it paid $23,400 plays, up from 7 at the end of 2015. per acre in this most recent deal after adjusting for current Fourth-quarter net production available for sale from production. continuing operations (excluding Libya) averaged 396,000 barrels

Growth & Valuation Analysis Financial & Risk Analysis GROWTH ANALYSIS ($ in Millions, except per share data) 2012 2013 2014 2015 2016 FINANCIAL STRENGTH 2014 2015 2016 Revenue 15,513 16,287 14,468 9,941 5,059 Cash ($ in Millions) — — — COGS 7,041 5,137 5,005 4,382 2,440 Working Capital ($ in Millions) — — — Gross Profit 8,472 11,150 9,463 5,559 2,619 Current Ratio 1.05 1.50 — SG&A 527 570 707 638 570 LT Debt/Equity Ratio (%) 25.2 39.2 — R&D ————— Total Debt/Equity Ratio (%) 30.3 39.2 — Operating Income 4,918 6,418 4,947 579 -2,916 Interest Expense 138 241 251 256 350 RATIOS (%) Pretax Income 4,780 6,177 4,693 343 -3,221 Gross Profit Margin 57.2 53.9 — Income Taxes 3,111 4,629 2,940 48 -886 Operating Margin 14.2 -45.9 — Tax Rate (%) 72 61 29 — — Net Margin 27.1 -37.6 — Net Income 2,367 1,548 2,519 1,621 -2,335 Return On Assets 8.5 -6.5 — Diluted Shares Outstanding 713 711 705 678 691 Return On Equity 15.1 -11.1 — EPS 3.33 2.18 3.58 2.40 -3.41 RISK ANALYSIS Dividend 0.72 0.68 0.74 0.82 0.31 Cash Cycle (days) -90.1 -133.0 — GROWTH RATES (%) Cash Flow/Cap Ex 1.1 0.7 — Revenue -17.7 -6.2 -4.6 -47.2 — Oper. Income/Int. Exp. (ratio) 5.7 -7.9 — Operating Income -31.1 -19.7 -40.1 —— Payout Ratio 8.0 28.9 — Net Income -46.3 10.8 73.8 — — EPS -49.8 8.3 8.4 — — The data contained on this page of this report has been Dividend -15.0 5.9 11.1 -41.2 -68.1 provided by Morningstar, Inc. (© 2017 Morningstar, Inc. Sustainable Growth Rate — — — — — All Rights Reserved). This data (1) is proprietary to VALUATION ANALYSIS Morningstar and/or its content providers; (2) may not be Price: High — — — — — copied or distributed; and (3) is not warranted to be Price: Low — — — — — accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or Price/Sales: High-Low — - — — - — — - — — - — — - — losses arising from any use of this information. Past P/E: High-Low — - — — - — — - — — - — — - — performance is no guarantee of future results. This data Price/Cash Flow: High-Low — - — — - — — - — — - — — - — is set forth herein for historical reference only and is not necessarily used in Argus’ analysis of the stock set forth on this page of this report or any other stock or other security. All earnings figures are in GAAP.

Analyst's Notes...Continued of oil equivalent per day (boe/d), down 8% from the prior-year Total outstanding debt, consisting primarily of long-term debt, quarter and down 2% from 3Q16. The decrease was primarily the was $7.285 billion at the end of 4Q16, down from $7.277 billion result of planned maintenance activities in the Oil Sands segment. at the end of 4Q15. EARNINGS & GROWTH ANALYSIS Marathon had cash and cash equivalents of $1.950 billion at the end of 4Q16, compared to $1.221 billion at the end of 4Q15. In 2017, Marathon expects full-year capital spending of $2.2 Cash flow from operating activities was negative $733.0 million in billion, up from $1.1 billion in 2016. The increase assumes higher 4Q16, down from positive $352.0 million in 4Q15. The company spending on U.S. resource plays this year. Approximately 90% of has an undrawn $3.3 billion revolving credit facility. the additional spending will be allocated to the company's Eagle On October 29, 2015, the Marathon board cut the quarterly Ford, Bakken, and Oklahoma assets. dividend to $0.05 per share from $0.20 per share. The current yield The company projects 2017 production of 335,000-355,000 net is about 1.4%. Our dividend estimates remain $0.20 for both 2017 boe/d, compared to 342,000 net boe/d in 2016. It expects full-year and 2018. The dividend reduction will save the company an North American unit production costs of $5.00-$6.00 per boe, and average of about $425 million per year. International unit production costs of $4.50-$5.50 per boe. We are maintaining our 2017 loss estimate of $0.06 per share MANAGEMENT & RISKS and our 2018 profit estimate of $0.25 per share, representing a Lee M. Tillman, formerly the vice president of engineering at swing from an operating loss to an operating profit over the next Exxon Mobil, has been president and chief executive officer of two years. Marathon Oil since August 2013. FINANCIAL STRENGTH & DIVIDEND We have a favorable view of the company's enhanced well-completion designs, which have led to higher resource We rate Marathon's financial strength as Medium, the midpoint recovery and lower per-barrel costs in the unconventional drilling on our five-point scale. The company's debt is rated BBB-/stable by regions of Oklahoma, the Eagle Ford shale, and the Bakken shale. Standard & Poor's and Ba1/stable by Moody's. Fitch rates We expect these regions to remain the primary drivers of Marathon's debt at BBB/negative. Marathon's production and future earnings. We also note that At the end of 4Q16, MRO's total debt/capitalization ratio was MRO has increased its exposure to U.S. unconventional production 27.9%, down from 28.2% a year earlier. The total debt/cap ratio as a result of recent asset sales. was significantly below the peer average.

Peer & Industry Analysis The graphics in this section are designed to P/E allow investors to compare MRO versus its Growth industry peers, the broader sector, and the COPCOPCOP P/E not available market as a whole, as defined by the Argus OXYOXYOXY Universe of Coverage. DVNDVNDVN • The scatterplot shows how MRO stacks 0 up versus its peers on two key HESHESHES Price/Sales characteristics: long-term growth and MRO vs. value. In general, companies in the lower Market left-hand corner are more value-oriented, MRO vs. while those in the upper right-hand corner -100 Sector are more growth-oriented. More Value More Growth • The table builds on the scatterplot by Price/Book displaying more financial information. MRO vs. • The bar charts on the right take the Market -200 analysis two steps further, by broadening MRO vs. the comparison groups into the sector Sector level and the market as a whole. This tool MROMROMRO More Value More Growth is designed to help investors understand PEG how MRO might fit into or modify a Value 7 8 diversified portfolio. P/E MRO vs. 5-yr Growth Rate(%) Market MRO vs. 5-yr Net 1-yr EPS Sector Market Cap Growth Current Margin Growth Argus More Value More Growth Ticker Company ($ in Millions) Rate (%) FY P/E (%) (%) Rating 5 Year Growth COP Conoco Phillips 54,641 8.0 63.0 -15.3 131.4 BUY MRO vs. OXY Occidental Petroleum Corp 48,014 8.0 45.5 -5.7 41.3 BUY Market DVN Devon Energy Corp. 20,316 7.0 25.0 -31.9 76.8 BUY MRO vs. Sector HES Hess Corp 14,596 7.0 -16.4 -128.8 13.5 BUY More Value More Growth MRO Marathon Oil Corp 12,378 8.0 -243.5 -52.4 516.7 BUY Debt/Capital Peer Average 29,989 7.6 -25.3 -46.8 155.9 MRO vs. Market MRO vs. Sector More Value More Growth

Analyst's Notes...Continued Investors in Marathon Oil, as well as in other energy companies, face risks. The company's revenues, operating results and future growth are highly dependent on the pricing of crude oil and condensate, NGLs, natural gas and synthetic crude oil. Additionally, Marathon is impacted by worldwide supply and demand for these products. COMPANY DESCRIPTION Marathon Oil is an international energy company engaged in exploration and production, oil sands mining and integrated gas. The company is headquartered in Houston, and has operations in the U.S., Europe, the Middle East and Africa. The company was formerly known as USX Corporation and changed its name to Marathon Oil Corp. in July 2001. Marathon Oil separated from Marathon Petroleum in 2011 and there is no connection between the two companies. VALUATION Marathon Oil has traded in a range of $9.77-$19.28 over the last 52 weeks and is currently above the midpoint of this range. The shares are trading at a meaningless 2017 P/E based on our loss estimate for this year, and at a still high 58-times our 2018 estimate. At the same time, they are trading at a discount to peers based on enterprise value/trailing 12-month EBITDA, enterprise value/reserves, enterprise value/daily production, price/cash flow, and price/book. Looking ahead, we expect Marathon to benefit from its focus on higher-producing North American assets as well as from continued cost-reduction programs. In addition, we expect the company to swing to modest full-year profitability in 2018, with help from gradually rising commodity prices, and to generate 10%-15% earnings growth in subsequent years. We also see Marathon as a potential takeover target for a larger E&P company. On March 27 at midday, BUY-rated MRO traded at $14.60, down $0.01.

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Argus Research, founded by Economist Harold Dorsey in 1934, And finally, Argus’ Valuation Analysis model integrates a has built a top-down, fundamental system that is used by Argus historical ratio matrix, discounted cash flow modeling, and peer analysts. This six-point system includes Industry Analysis, Growth comparison. Analysis, Financial Strength Analysis, Management Assessment, THE ARGUS RESEARCH RATING SYSTEM Risk Analysis and Valuation Analysis. Argus uses three ratings for stocks: BUY, HOLD, and SELL. Utilizing forecasts from Argus’ Economist, the Industry Analysis Stocks are rated relative to a benchmark, the S&P 500. identifies industries expected to perform well over the next • A BUY-rated stock is expected to outperform the S&P 500 on one-to-two years. a risk-adjusted basis over a 12-month period. To make this The Growth Analysis generates proprietary estimates for determination, Argus Analysts set target prices, use beta as the companies under coverage. measure of risk, and compare expected risk-adjusted stock In the Financial Strength Analysis, analysts study ratios to returns to the S&P 500 forecasts set by the Argus Market understand profitability, liquidity and capital structure. Strategist. During the Management Assessment, analysts meet with and • A HOLD-rated stock is expected to perform in line with the familiarize themselves with the processes of corporate management S&P 500. teams. • A SELL-rated stock is expected to underperform the S&P 500. Quantitative trends and qualitative threats are assessed under the Risk Analysis.

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