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By Jessica Resnick-Ault

Of DOW JONES NEWSWIRES

NEW YORK -(Dow Jones)- Marathon Oil Corp. (MRO) may sharply shift its strategy away from the integrated model it has pursued over the past three years.

The company said Thursday it is mulling splitting into two entities - a company dedicated to exploring for and producing oil and gas, and a refining and marketing company.

The move would end a three-year experiment in which Marathon has operated as a fully integrated company, fully owning its exploration, production and refining assets.

In 2005, Marathon bought out joint venture partner Ashland Inc.'s (ASH) 38% interest in its refineries, saying it wanted to further invest in the assets and integrate them with their upstream assets. Marathon then acquired Western Oil Sands, a Canadian producer, in 2007, announcing plants to upgrade its refineries to run the thick, sludgy crude oil produced in those fields.

The company's 2007 annual report touted Marathon's efforts, saying it was " increasing value through integration."

Late in 2007, Chief Executive Clarence Cazalot told Dow Jones Newswires the company was pursuing an integrated strategy because the company saw long-term potential for the refining industry. "We find our selves with a belief in the downstream business," he said at the time. Unlike oil reserves, which can be diminished, Cazalot described refineries as legacy investments with the potential to provide the company with ongoing returns.

The new potential approach to the business comes at a time when refining, a cyclical business, has taken a downturn, and crude oil has hit record highs, bringing the company a growing bounty.

Separate And Equal

The two new potential companies would operate differently from Marathon's pre- 2005 structure, Howard Thill, the company's vice president of investor relations, said Thursday. While Marathon Ashland Petroleum, or MAP, was a privately held company controlled by publicly traded Marathon and Ashland, each of the companies that would emerge under Marathon's latest proposal would be entirely separate public companies.

"There would not be the linkage that was there in the MAP days," Thill said.

Marathon is currently the fifth-largest U.S. refiner, and a split would create the second-largest independent refiner, smaller than Valero Energy Corp. (VLO) and larger than Sunoco Inc. (SUN).

Refiners have been hit hard in recent months - all but two of the nine publicly traded refiners reported a first-quarter loss. The outlook for the second quarter is slightly better, but lags the substantial returns seen last year.

Still, Thill said Marathon wouldn't consider a split if it didn't think each entity could stand on its own.

"We've worked very diligently over the past several years to create two arms essentially of Marathon that are very strong companies," he said.

While the refining business is currently seeing weak margins due to pressure from high crude oil prices and low gasoline demand in the U.S., Thill was optimistic about the sector's future.

"Today, it is a challenged business. That said, we view it as a long-term viable business," said the Marathon executive.

Although refining has been weak, an independent Marathon might have the ability to outperform its peers, said industry analyst Ann Kohler of New York- based bank Caris & Co. "If you go back, historically, Marathon's refining business has been one of the most profitable," she said.

Marathon shares recently traded up $2.11, or 4.7%, to $47.27.

-By Jessica Resnick-Ault, Dow Jones Newswires; 201-938-4435; jessica.resnick- ault@dowjones.com

(Tatyana Shumsky and Brian Baskin in New York contributed to this report.)

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  07-31-08 1111ET
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