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Pittsburgh-based USX Corp. may spin off or sell its USX-Marathon Oil Group (NYSE: MRO) business, or restructure its relationship to the Houston-based integrated oil in some other way. The company is studying those options, as well as the spin-off or other restructuring of its Troy, Mich.-based USX-U.S. Steel (NYSE: X) business, USX chairman and chief executive Thomas J. Usher announced to analysts during a luncheon in late November. The news was a bit of a surprise. "If you attended Marathon Oil's analyst meeting yesterday and left prior to hearing Tom Usher's luncheon presentation, you essentially missed the party," wrote UBS Warburg E&P analyst Chris Stavros. "After several hours of detailed business presentations by Marathon Oil executives, Mr. Usher calmly announced-almost matter-of-factly-a plan to undertake a comprehensive review of the corporation's capital structure." The tracking-stock structure of $8.2-billion-market-cap USX-Marathon and $1.5-billion USX-U.S. Steel is believed to have stunted the equity-market value of each business. Analysts say Marathon, in particular, is prevented from playing the mergers market because its stock structure makes an all-stock offering less attractive than the merger of two 100% oil companies. Marathon Oil had merged with U.S. Steel in 1982, in a $6.6-billion deal. Shares of MRO fell 75 cents to $26.375 on announcement day, with more than twice the normal number of shares trading that day. Bear Stearns Cos. Inc. analyst Fred Leuffer maintained his Buy on MRO and 12-month price target of $38 a share, after the news. Goldman Sachs upgraded the stock from Market Outperform to Trading Buy. Stavros maintained his Buy on the stock with a target of $32. "We believe this could be the first step toward the ultimate separation of Marathon Oil from the parent company, ,which we think could occur sometime during the second half of [2001]," Stavros says. "Such a change in the capital structure could allow Marathon's shares to move higher relative to its peer group, particularly when combined with the benefits of its ongoing upstream restructuring." Since becoming president of Marathon Oil Co. in March 2000, former Texaco Inc. executive Clarence P. Cazalot Jr. has been encouraging the early retirement of many Marathon employees, including fellow executives, and closing field offices in Cody, Wyo., and Tyler, Texas; an operations office in Lafayette, La.; and a research facility in Littleton, Colo. Approximately 1,000 employees had elected to take early retirement by July and additional, involuntary terminations were expected. Stavros says, "Marathon's upstream restructuring is moving ahead as scheduled, with total savings expected to reach $150 million by year-end 2001. Despite this progress, Marathon's path toward reaching its goals for upstream improvement is likely to be protracted, in our opinion. The company has identified 10 high-impact exploration prospects for 2001." Stavros believes a separation from USX would result in a more typical, widely accepted and investor-friendly equity structure for Marathon Oil. He and other analysts believe a separation will require some compensation-possibly $5 per share, or more than $500 million-to U.S. Steel shareholders to persuade the USX-U.S. Steel shareholders to vote for a split. "A more normal equity structure for Marathon Oil would likely allow the company to use its shares as higher-valued currency to pursue potential attractive acquisitions. A different structure could also provide the shares with a higher multiple by allowing the company to participate in further potential consolidation of the industry," Stavros says. Fitch placed on watch, with an evolving trend, its ratings of USX debt. Standard & Poor's Corp. placed its ratings on watch, with developing implications.
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