Expect Strong Upside to Sustain for Marathon Oil
- By Faisal Humayun
The oil and gas exploration sector is likely to see better times in terms of average oil price realization in the coming quarters. I expect positive momentum for fundamentally strong players in the industry.
Marathon Oil (MRO) is one stock that I have tracked for a long time, and the stock deserves attention considering the fundamentals and the attractiveness of assets. Marathon Oil touched 2017 lows of $10.8 on Aug. 21, and the stock has bounced back sharply by 28.9% to a current level of $13.9.
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The intrinsic value of MRO
I see this upside sustaining, and I want to mention at the onset that Marathon Oil provided post-Harvey operational update on Oct. 3. The company expects third-quarter oil sales at the higher end of the guidance of 230,000 to 240,000boepd. With minimal impact from Hurricane Harvey, the positive tone is set for the third quarter and the coming quarters.
The fundamental perspective
Marathon Oil has among the best fundamentals in the exploration industry.
The first point to note is that, as of June 30, Marathon Oil reported cash and equivalents of $2.6 billion as compared to cash buffer of $2.5 billion as of Dec. 31, 2016. Even with capital expenditure of nearly $1.0 billion for the first half of the year, Marathon Oil has managed to improve its cash position. With a strong policy of keeping investments in sync with cash flows, the company's balance sheet fundamentals are likely to remain strong. I must add that with $3.3 billion in undrawn credit facility, Marathon Oil has total liquidity buffer of $5.9 billion for investment. The company is fully financed for the next 24 months even with an increase in capital expenditure from current levels.
The second important point to note is that Marathon Oil had debt maturities in the period 2017 to 2019. The company repaid some debt with existing cash in hand and through successful debt offering, extended maturity of debt due in 2018 and 2019. With only $600 million debt due for repayment through 2021, Marathon Oil has no refinancing pressure and the company has ample cash to pay 2021 debt maturity instead of refinancing.
With these two points in consideration, I don't see any credit-related concern, and my points are underscored by the fact that Marathon Oil commands investment grade credit rating.
Healthy production growth
With Marathon Oil having 2017 capital expenditure guidance of $2.1 billion to $2.2 billion, the company's production is likely to see decent growth. For fiscal 2016, Marathon Oil reported total sales volume of 329mboepd; for fiscal 2017, the company expects sales volume to be in the range of 345 to 360mboepd. With 7% growth and potentially higher realized oil price, Marathon Oil is likely to report healthy numbers for the second half of this year and fiscal 2018.
The company's U.S. assets are likely to see production growth of 23% to 27% in the fourth quarter as compared to fourth-quarter 2016. With Bakken resuming production growth in the second quarter and with Eagle Ford delivering high capital efficiency, I am bullish on U.S. resource plays for the next three to five years.
Another key point to mention here is that for the second quarter, Marathon Oil acquired 91,000 net acres in the Permian basin. This includes more than 70,000 net acres in the Northern Delaware basin of New Mexico. With high financial flexibility and with the company still pursuing acquisition and divestiture, I expect further inroads in the Permian. This will be bullish for Marathon Oil.
International assets and conclusion
The key international asset for Marathon Oil is in the West African nation of Equatorial Guinea. For the second quarter, the Equatorial Guinea production available for sale averaged 107,000boepd as compared to production of 105,000boepd in the previous quarter.
The important point to note related to Equatorial Guinea is that the asset has low production cost; for the second quarter, the asset delivered EBITDAX of $134 million. While the company also has assets in the United Kingdom, I see main growth focus related to Equatorial Guinea besides U.S. resource plays.
Marathon Oil has strong fundamentals and the company's U.S. assets are likely to deliver strong production growth in the coming years. Further, as oil trends higher, I would not be surprised if Marathon Oil pursues inorganic growth in the U.S. considering that the company has a healthy cash buffer of $5.9 billion.
At current levels, Marathon Oil looks attractive for long-term exposure, and the near-term upside is also likely to sustain.
Disclosure: No positions in the stock.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Signs with MRO. Click here to check it out.
The intrinsic value of MRO
