Marathon Oil: Dependent on High Energy Prices

Marathon Oil Corp. (MRO) explores, produces, and markets liquid hydrocarbons and natural gas. It operates through these two segments: United States (U.S.) and International. The U.S. segment is involved in oil and gas exploration, development, and production activities in the United States. The International segment engages in oil and gas development and production across international locations, mostly in Equatorial Guinea and the United Kingdom.

I am bearish on MRO stock. Its sales growth has been in decline, the company turned unprofitable in 2020, and its financial health is moderate. The dividend yield is also not impressive.

Marathon Oil Business News

On October 27, 2021, Marathon Oil declared a third-quarter 2021 dividend of 6 cents per share. This is a 20% increase from the previous 5 cents per share.

Chairman, President, and CEO Lee Tillman said, “This is the third consecutive increase to our quarterly base dividend, representing a cumulative 100% increase since the end of last year.”

He then added, “This decision is fully consistent with our commitment to pay a competitive and sustainable dividend to our shareholders. It also reflects the increased confidence we have in our business due to the substantial improvements we have realized in our cost structure and free cash flow breakeven.”

Marathon Oil Third Quarter 2021 Financial Results

MRO’s Q3 2021 financial results were mixed.

EPS GAAP of $0.23 was a miss by -$0.09, but revenue of $1.45 billion was a beat by $144.86 million.

During the third quarter of 2021, Marathon Oil raised its base dividend 20% and implemented $200 million of share repurchases. Furthermore, the firm announced a share repurchase authorization increase to $2.5 billion.

Marathon Oil reported free cash flow generation of $478 million and more than $1.3 billion of free cash flow generation through the third quarter and a year-over-increase in total revenue of approximately 93%.

MRO stock earnings have improved in 2021 and turned positive after net losses in 2020.

Income from operations was $347 million versus ($242 million) in Q3 2020. Net income was $184 million compared to net income of ($317 million) in the same period one year ago.

There has been a balance sheet improvement as the firm, in the third quarter of 2021, fully redeemed the $900 million 3.85% senior notes due 2025. The total gross debt reduction in 2021 was $1.4 billion, which is expected to contribute to approximately $50 million of annualized cash interest expense savings. This is positive and is a trend that is expected to be continued with further debt reduction at maturity.

Fundamentals – Risks

MRO’s revenue has been on a long-term downtrend, even though the company has a Piotroski F-Score of 7, indicating a very healthy situation.

High crude oil prices are supportive for profitability, but as we are already in mid-winter, any decline in energy prices during fall would be bad news for profitability.

The $485 million of cash and cash equivalents on the balance sheet compared to the long-term debt of $4.04 billion is a major concern.

MRO’s net profit margins have declined over the past few years, and even worse, turned negative in 2020. On a TTM basis, the net margin is at -0.9%.

Valuation

MRO stock price is close to close to a three-year high, and its price/sales ratio of 3.2 is also near three-year highs.

The stock has a P/E GAAP (FWD) ratio of 22.9 and a price/sales (FWD) ratio of ~3. The energy sector has median values of 15.3 and 1.6 for P/E and price/sales, respectively, indicating that MRO stock is relatively expensive.

Wall Street’s Take

Marathon Oil has a Moderate Buy consensus based on nine Buys, six Holds, and one Sell rating. The average Marathon Oil price target of $21.88 represents 12.9% upside potential.

Conclusion

Marathon Oil has made a turnaround in the first nine months of 2021 after reporting a net loss of -$1.45 billion in 2020. The long-term growth is weak, and a decline in high oil prices may make a recovery fragile. The stock seems to be relatively expensive now.

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