Marathon Oil Corporation Blows Off Harvey to Post Expectation-Beating Results

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Marathon Oil (NYSE: MRO) easily overcame the headwind of Hurricane Harvey during the third quarter to post better than expected production and financial results. The company did so by delivering strong results across its four U.S. resource plays as well as keeping a lid on costs.

Those drilling results put the company on pace to exceed its already lofty expectations for 2017, which led it to raise its full-year guidance. Even more remarkable, the company anticipates it will achieve that accelerated growth rate and pay its dividend while living within expected cash flow. That puts the company into an elite group of oil companies that are thriving in the current market environment.

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Drilling down into the results

Like many rivals, Marathon Oil suspended operations across its entire Eagle Ford Shale position in south Texas ahead of Hurricane Harvey, shutting down 1,500 wells in the process. However, the company quickly ramped back up after the storm passed, so it barely skipped a beat. Because of that, its production in the play was up slightly from the second quarter, thanks in part to strong drilling results.

In addition to that, it delivered excellent drilling results in the Bakken Shale of North Dakota and its Oklahoma's resource plays, where output was up 20% and 18%, respectively, from the second quarter. Meanwhile, results in its new Delaware Basin position in New Mexico were also solid. Those factors helped push Marathon's third-quarter production 3.1% above the high end of its guidance range.

That operational prowess, when combined with an 8% decline in production costs, enabled Marathon to report a narrower loss than analysts anticipated. However, don't let that loss fool you. The company generated a gusher of cash flow during the quarter, with net operating cash flow coming in at $564 million, which fully funded capital expenses with about $35 million to spare.

A look at what's ahead

Marathon's strong results position it to end the year producing 25% to 30% more oil and gas from its U.S. resource plays than it was at the end of 2016. That's an increase from last quarter's guidance range that output would be up 23% to 27% by year end, and well above its initial expectations for 20% to 25% production growth.

Further, Marathon can achieve that growth while only spending $2.1 billion, which is down from its initial $2.4 billion budget. At that spending rate, the company estimates it can live within cash flow this year even after paying its dividend, which is a remarkable achievement considering that oil has been weaker than anticipated for much of the year.

That ability to grow at a rapid rate within cash flow puts Marathon in an elite class of oil companies. One of those elite peers is Concho Resources (NYSE: CXO), which is on pace to boost its oil output 27% this year despite keeping its spending level below operating cash flow. In fact, Concho Resources has generated $440 million in free cash flow over the past two years, even with the wild swings in crude prices.

One of the reasons Concho and Marathon can grow at such rapid rates within cash flow is that both control top-tier shale positions, which enables them to get more oil and gas out of the ground for less money. Further, both have done an excellent job of pushing down costs so they can squeeze out more cash flow. Because of that, both will continue to thrive even if crude doesn't go any higher.

Going from good to great

Marathon Oil's third-quarter results show that the company's transformation plan is paying off. It now has the right resources in place to thrive in current market conditions, evidenced by its plan to deliver a 10% to 12% compound annual production growth rate through 2021 while living within cash flow as long as crude is in the low $50s.

However, for whatever reason, the market has yet to catch on to the fact that Marathon is quickly becoming an elite-level oil stock since shares are inexplicably down more than 15% this year despite flat oil prices. At some point, the market will realize that's a mistake and reward Marathon with the higher stock price it deserves.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.