July 31, 2008 / 5:18 PM / in 9 years

UPDATE 4-Marathon mulls splitting in two; shares jump

(Adds CEO comment)

By Matt Daily

NEW YORK, July 31 (Reuters) - Marathon Oil Corp MRO.N may split its oil and gas production business and its refining and marketing operations into separate entities, the company said on Thursday, sending its shares higher.

Such a move would be a bid by Marathon to drive up the value of the company, analysts said. Its current market capitalization of about $32 billion makes it the sixth-largest U.S.-based oil company.

“When we look at Marathon, we think that the sum of the parts valuation is much, much more than what is getting rated in the market,” said analyst Derek Butter of Wood Mackenzie in Edinburgh.

“You’re effectively getting refining for free” by owning the stock, he said.

U.S. refiners have seen their share prices cut in half this year as crude oil’s rally to record levels has narrowed their margins.

Marathon said it was likely to decide during the fourth quarter whether to put its exploration and production, oils sands mining, and natural gas businesses into one entity and its refining, marketing and transportation operations into another. If it proceeds, the split would probably occur in the first quarter.

Should Marathon decide to proceed with the split, “You can rest assured that we will do it on a basis that both companies would not just be operationally strong, but financially strong and able to take care of again all of their funding requirements,” Clarence Cazalot, president and chief executive, told a conference call.

Earlier this year, EnCana Corp ECA.TO shares got a boost when Canada’s biggest energy company announced plans to split its natural gas operations from its oil sands production arm.

Houston-based Marathon itself was separated out of USX Corp in 2002. Two decades earlier, USX, then known as U.S. Steel Corp, had purchased the company.

Analysts have long said Marathon’s refinery business was a drag on its exploration and production operations.

“Marathon is still treated like a refiner in my view, and they really have a growing E&P business that has great prospects,” said Phil Weiss of Argus Research. “Maybe this is what is needed to get investors to recognize that growth.”

Cazalot also said the potential split would not affect its $2 billion to $4 billion in planned asset sales, and that new deals were likely to be announced during the third quarter.

Shares of Marathon closed up 9.6 percent at $49.47 on the New York Stock Exchange trade on Thursday, while the Standard & Poor’s Energy index .GSPE fell 3.4 percent.

EARNINGS DROP

Also on Thursday, Marathon said second-quarter net income fell to $774 million, or $1.08 a share, from $1.55 billion, or $2.25 a share, a year earlier.

Excluding a $220 million after-tax mark-to-market loss in the value of its trading positions and other one-time items, Marathon earned $1.51 per share.

That figure fell short of the $1.56 per share analysts had expected, according to Reuters Estimates.

Profit from the refining business fell to $158 million from $1.25 billion a year earlier, when the margins to make gasoline and other products were at record highs.

This year, however, the rally in crude oil prices has outpaced the increase in gasoline prices, narrowing those margins sharply.

In the second quarter, the price of oil in the United States averaged just under $125 a barrel, nearly double what it cost a year earlier. But gasoline prices were up only about 25 percent.

The jump in oil and natural gas prices caused Marathon’s profit from exploration and production to more than double to $828 million.

Sales from that business rose to 350,000 barrels of oil equivalent per day from 338,000 a year earlier as natural gas sales outside the United States increased. (Additional reporting by Anna Driver in Houston; Editing by John Wallace, Dave Zimmerman, Phil Berlowitz)

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