Leading integrated oil and gas firm Marathon Oil Corporation (MRO) is scheduled to report its first-quarter 2013 results on Tuesday, May 7, after the market closes.
In the fourth quarter of 2012, Marathon Oil delivered a negative 19.12% earnings surprise due to higher exploration cost. In fact, Marathon Oil hasdelivered negative earnings surprises in 3 of the last 4 quarters, with an average miss of 14.55%. Let’s see how things are shaping up prior to this announcement.
Factors to Consider This Quarter
As is the case with other exploration and production companies, Marathon Oil’s results are directly exposed to oil and gas prices, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flows.
Additionally, Marathon Oil’s Droshky development in deepwater Gulf of Mexico (that started production in Jul 2010) has seen its reservoir performance fall short of expectations. This is likely to result in a faster production decline and eventually reduce the amount of total recoverable resources.
Moreover, the transfer of the downstream assets (post-split) has left Marathon Oil with a less diversified business. As a result, the business risk profile of the reorganized Marathon Oil is weaker than that of the pre-spin-off company.
Our proven model does not conclusively show that Marathon Oil is likely to beat the Zacks Consensus Estimate in the first quarter. That is because a stock needs to have both a positive earnings Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method) and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. But this is not the case here as elaborated below.
Negative Zacks ESP: This is because the Most Accurate estimate stands at 71 cents while the Zacks Consensus Estimate is higher at 72 cents. This results in a difference of -1.39%.
Zacks Rank #3 (Hold): Marathon Oil’s Zacks Rank #3, however, increases the forecasting power of ESP. That said we also need to have a positive ESP to be confident of an earnings surprise call.
We caution against stocks with Zacks Rank #4 and 5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Here are some oil and gas companies you might want to consider on the basis of our model. These have the right combination of elements to post an earnings beat this quarter:
SemGroup Corp. (SEMG) has an earnings ESP of +22.50% and a Zacks Rank #1 (Strong Buy).
Delek US Holdings Inc. (DK) has an earnings ESP of +0.86% and a Zacks Rank #3 (Hold).
Northern Tier Energy LP (NTI) has an earnings ESP of +6.48% and Zacks Rank #3 (Hold).
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