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The oil industry is on a roll. Prices are surging, and an attack on the world’s largest crude terminal in Saudi Arabia has sent prices higher still. Over the next 3 years, the Bank of America has said it expects oil prices to increase at a rate not seen since the 1970s.
Unsurprisingly, oil stocks have been reaping the benefits, and Marathon Oil (MRO) amongst them. Shares are up by a massive 87% year-to-date.
Rising oil prices, however, are a recent development, and the bullish case for Marathon, according to analysts, is down to the way it has rejigged its operations over the past few years to adjust to lower oil prices. It has also paid off debt, and gotten rid of higher cost assets. Its balance sheet reflects these efforts. In 4Q20, after financing its capital program, the company generated $162 million in FCF (free cash flow).
The company has continued with this strategy in 2021. Recently, the company said it intends to keep this year’s spending at around the $1 billion mark, no matter how high oil prices may go, so it can focus on paying off additional debt of more than $500 million.
The plan has impressed Truist analyst Neal Dingmann.
“The capital discipline will not only provide meaningful FCF,” Dingmann said, “But the program extends the life of the war chest of core Bakken and Eagle Ford locations to 10+ years, though an accretive acquisition is always possible.”
Although due to the recent hazardous Texas weather, Dingmann anticipates 1Q21’s production to be down quarter-over-quarter, he still believes the company “could reward shareholders soon in some fashion.”
As such, Dingmann rates MRO shares a Buy along with a $15 price target. The figure is set to yield investors gains of 22% over the next 12 months. (To watch Dingmann’s track record, click here)
Raymond James’ John Freeman is another analyst applauding Marathon’s decision to turn its gaze on FCF.
“We agree with the company's decision to focus on FCF generation/debt reduction and it's one the market rewarded (the stock traded up nearly 10% the day after the earnings report),” Freeman noted. “MRO also remains less than 40% hedged on oil providing the company with ample upside to the current price recovery.”
Freeman has a Strong buy rating for the shares and his price target is slightly more upbeat than his Truist colleague’s – at $16, the figure is set to generate upside of ~30% in the coming months. (To watch Freeman’s track record, click here)
Granted, not everyone is as enthusiastic about MRO as Dingmann and Freeman. Out of 12 analysts polled in the last 3 months, 5 are bullish on the stock, while 5 remain sidelined, and 2 are bearish. Some feel the stock has surged beyond its fair value; Given the $11.03 average price target, shares are anticipated to pullback by 10% from current levels. (See MRO stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.