Marathon Oil (MRO) Should Keep Soaring: Here's Why
The S&P 500 finished the first half of 2021 with a gain of 14.4% for its second-best January-June performance since 1998. As the index made a stunning recovery following last year’s pandemic-induced crisis, Oil/Energy stocks were the standout trades. While most energy companies had a strong six-month period, one stock gained more than 100%.
Hopes of faster demand recovery and a rally in crude prices to multi-year highs of around $75 a barrel helped spark a 104% surge in the Marathon Oil MRO stock. It was the top performer on the S&P 500, ahead of other energy high-fliers like Diamondback Energy FANG, Devon Energy DVN and Occidental Petroleum OXY.
Image Source: Zacks Investment Research
Marathon Oil Emerges as S&P’s Star Performer in H1
Let's dig into this a little more.
The upstream energy company’s oil and gas operations are mainly concentrated in the United States (including Oklahoma, Eagle Ford, Bakken and Northern Delaware) and Equatorial Guinea. It boasts some 10 years of North American unconventional inventory at a breakeven price of less than $40 per barrel that extends to 15 years if the breakeven points are in the $40-$50 range. Overall, the wells drilled by Marathon have extremely low oil price breakeven costs and need oil prices of just $35 a barrel to be profitable.
As far as quarterly earnings are concerned, Marathon reported a strong first quarter in May. The Houston, TX-based company reported adjusted earnings per share of 21 cents, outpacing the Zacks Consensus Estimate of 13 cents. The bottom line also reversed the year-earlier quarter’s loss of 16 cents per share. Results were favorably impacted by stringent cost control and better-than-expected contribution from its International E&P segment. Precisely, the International E&P reported a profit of $50 million, beating the respective Zacks Consensus Estimate of $30.9 million. As a matter of fact, Marathon has a good earnings surprise history. It surpassed estimates in three of the last four quarters and met in the other, delivering an earnings surprise of 26.19%, on average.
Moreover, with the company sticking to its $1 billion capital spending budget despite the higher oil price environment, it looks well positioned to achieve its targeted free cash flow of $1.6 billion in 2021 (at $60 WTI).
Marathon continues to cut down costs substantially and is striving to achieve a 30% decrease in production and G&A costs in 2021 compared to the 2019 levels. The upstream operator has already implemented a broad-based reduction to CEO and board compensation, rightsized the workforce and even gave up its corporate aircraft.
Meanwhile, Marathon has achieved its initial $500 million gross debt reduction target for 2021, which was largely funded by the first-quarter free cash flow of $443 million. It is now aiming to double it to at least $1 billion. It’s also important to remember that the company’s significant debt maturities mostly fall after 2025 and as such there does not appear to be much risk here. On a further positive note, Marathon recently increased its quarterly base dividend to more than 30% from 3 cents to 4 cents per share, signalling its commitment to shareholder return.
Can it Go Further?
Following the dramatic surge in Marathon’s stock price, investors might be wondering whether the oil and gas finder has enough firepower left to keep chugging along. While there are some apprehensions that the company may have gotten too far ahead of itself, Marathon’s robust operational metrics suggest strong long-term cash flows that should support higher price points for the shares.
As proof of this, the company — currently with a Zacks Rank #2 (Buy) and VGM Score of A — has a long-term expected EPS growth rate of 38.4%, which compares favorably with the industry's growth rate of 14.8%. Moreover, the Zacks Consensus Estimate for 2021 earnings implies year-over-year growth of 164.66%.
Finally, despite the incredible year-to-date revaluation of Marathon shares, the company is still cheap. On the basis of the trailing 12-month EV/EBITDA ratio — the multiple that most analysts use for the oil and gas exploration and production industry — Marathon is currently trading at 8.72X, lower than the industry average of 11.74X.
In fact, an improving macro environment and management’s committed actions helped Marathon win upgrades at BofA Securities and Morgan Stanley, while prompting Truist Securities and UBS to raise their price targets on the company.
So, if you want to capitalize on oil’s bull run, Marathon might still be the stock to place your bets on. The company currently carries a Zacks Rank #2 (Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Infrastructure Stock Boom to Sweep America
A massive push to rebuild the crumbling U.S. infrastructure will soon be underway. It’s bipartisan, urgent, and inevitable. Trillions will be spent. Fortunes will be made.
The only question is “Will you get into the right stocks early when their growth potential is greatest?”
Zacks has released a Special Report to help you do just that, and today it’s free. Discover 7 special companies that look to gain the most from construction and repair to roads, bridges, and buildings, plus cargo hauling and energy transformation on an almost unimaginable scale.
Download FREE: How to Profit from Trillions on Spending for Infrastructure >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Devon Energy Corporation (DVN) : Free Stock Analysis Report
Marathon Oil Corporation (MRO) : Free Stock Analysis Report
Occidental Petroleum Corporation (OXY) : Free Stock Analysis Report
Diamondback Energy, Inc. (FANG) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
