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Trimming Chevron Stake

BY Jim Cramer and Stephanie Link | 04/24/14 - 03:07 PM EDT
Action: CVX, MRO

--Sell 100 shares of Chevron (CVX:NYSE) at $124.24

This is a follow up to our Marathon Oil (MRO:NYSE) purchase. We recently took gains in Noble (NBL:NYSE) and after you receive this Alert we will trim 100 shares of Chevron (CVX:NYSE) at $124.24, which helps to fund our new position in Marathon Oil.

Marathon is an independent oil and natural gas exploration-and-production company. It has exploration activities in the U.S., Norway, Equatorial Guinea, Poland, Angola and Iraqi Kurdistan. It has production activities in the U.S., U.K., Norway and Equatorial Guinea. In the U.S., its big focus is on the liquids-rich shale plays, including Bakken and Eagle Ford. It also has interests in Athabasca oil sands in Canada and Waha Oil Company in Libya. The company spun off its downstream division, Marathon Petroleum, in 2011 and after heavy investment spending over the last few years, we believe the company is now more focused to grow production at an accelerated pace that isn't priced into the stock.

The MRO story is all about the U.S. production potential as international will likely remain flattish over the coming years. Of particular interest are the Eagle Ford and Bakken shale assets. It has 204,000 net acres in Eagle Ford, where the company has production to 100 million barrels of oil equivalent per day from nothing three years ago. It expects to see production to reach 155 mboe/d by 2017. This double-digit production growth in itself is impressive, but the company also is one of the better operators in the region on the cost side and could get its wellhead costs down to the $6.5 million area from $8.5 million. The combination of higher production and lower costs should lead to better operating leverage over time.

In 2013, the company's finding-and-development costs fell from $23 boe/d to $16 boe/d, which all came from the low cost positioning in the U.S. The Bakken exposure is 370,000 net acres, where production has doubled over the past three years to 40 mboe/d. Its guidance is for an increase to 70 mboe/d by 2017. Costs are near industry lows and investments in technology as well as efficiency initiatives should lead to better earnings and returns. The company also has 180,000 net acres in Oklahoma resource plays and has aggressive plans to build this out as well but off of a lower base; it should produce 14 mboe/d this year to 35 mboe/d over the next few years.

International production will be 250 mboe/d this year and remain flattish in the next several years. But it will spend $500 million per year to drill 10 exploration wells in Kurdistan, Poland and Indonesia -- which could provide some upside -- although we are not baking that into our models. The one wild card could be the contribution from Libya; it will certainly be the most volatile part of its portfolio given the uncertainties in the Middle East, but it is a small piece of the portfolio (low-single digits). Also, the company is currently looking to sell its North Sea assets (it plans are a sale by the end of the year). Proceeds would be used for buybacks and/or dividend increases. The yield at 2% certainly is a priority by management to increase. The company announced a $1.2 billion additional buyback in December and has $2.5 billion in total authorization.

As the company focuses on growing its U.S. production, keeping costs low and improving returns, we see upside to the valuation. Shares trade at 3.9x EBITDA , in line with its 10-year average, but the historicals are difficult to compare due to the downstream spin. We'd argue that MRO is the faster-growing, more consistent earnings performer and should trade higher than 3.9x EBITDA, especially given its potential for growth acceleration. It may not come this quarter, but we see it happening over time. So we'll start with a small position here and add opportunistically.

After our trade, we'll own 725 CVX shares, or 3.3% of the portfolio.

Regards,

Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUS was long CVX, MRO.

Correction to Email Subject Line -- GS, Not GE
Action: GS

Please note that the most recent purchase is Goldman Sachs, not General Electric

04/24/14 - 01:46 PM EDT
Making Five Buys
Action: JCI, XLNX, GS, SWK, MRO

We will add to four holdings and add a new position in Marathon Oil.

04/24/14 - 01:36 PM EDT
Weekly Roundup
Action: CELG, COH, COST, ESRX, FB, GE, GM, GOOGL, IBM, JPM, NKE, PVH

This week we put to work some of our large cash position and added to a variety of names.

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