Can You Still Get in Marathon Oil (MRO) for Further Gains?
Oil/Energy has been the best-performing S&P 500 sector in 2022 and Marathon Oil MRO is one of the top stocks in the space. As the price of oil has rocketed, so has MRO's share price, which recently soared to a new 52-week high of $26.22.
The geopolitical crisis and spike in demand not only pushed up crude prices to more than $100 a barrel but also sparked off a 52.9% year-to-date surge in the Marathon stock through Thursday – the fifth highest on the S&P 500. Since the start of 2021, the company's share price has soared 283.2%.
Why Did Marathon’s Share Price Skyrocket?
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 earnings are concerned, Marathon came up with a strong fourth quarter in February. The Houston, TX-based company reported adjusted earnings per share of 77 cents, outpacing the Zacks Consensus Estimate of 55 cents. The bottom line also reversed the year-earlier quarter’s loss of 12 cents per share. Results were favorably impacted by stronger liquid realizations and better-than-expected domestic production. Precisely, volumes in the United States came in at 304,000 barrels of oil equivalent per day (BOE/d), beating the Zacks Consensus Estimate of 294 BOE/d. As a matter of fact, MRO has an excellent earnings surprise history. It surpassed estimates in each of the last four quarters, delivering an earnings surprise of 37.4%, on average.
Moreover, the company stuck to its $1 billion capital spending budget in 2021 despite the higher oil price environment, generating more than $2.2 billion of free cash flow. This year, MRO is planning to increase capital outgo by just $200 million, but will add in excess of $800 million to free cash flow (at $80 WTI).
Marathon is using the excess cash from a supportive environment to reward shareholders with dividends and buybacks. As part of that, MRO has executed $1 billion of share repurchases since October (with $1.7 billion remaining under the current authorization) and recently announced a dividend hike for the fourth time in as many quarters.
Meanwhile, Marathon is accelerating its debt-reduction efforts. The company was able to bring its gross debt down by approximately $1.4 billion between the first and third quarter of 2021. It’s also important to remember that the company’s significant debt maturities will mostly fall after 2025 and as such there does not appear to be much risk here.
Looking Ahead
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 and no material debt maturities this year suggest strong long-term cash flows that should support higher price points for its shares.
Despite the incredible revaluation of Marathon shares since 2021, 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 6.35X, lower than the industry average of 7.86X.
Finally, analysts have also raced to up their EPS guidance. Estimates for full-year 2022 earnings have risen 12.2% in the past 30 days — from $2.88/share to $3.23/share. Those recent revisions have earned MRO a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimates calls for a surge of 105.7% in Marathon’s 2022 adjusted earnings. At the top end, its revenues are expected to rise 13.8% higher this year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
On top of that, an improving macro environment and management’s committed prompted Mizuho Securities and RBC Capital 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.
Other Energy Stocks to Buy
Apart from MRO, some other top-ranked players in the energy space are Devon Energy DVN, Canadian Natural Resources CNQ and PDC Energy PDCE. Each of the companies sports a Zacks Rank of 1.
Devon Energy: Devon Energy is valued at some $40.2 billion. The Zacks Consensus Estimate for DVN’s 2022 earnings has been revised 17.3% upward over the past 60 days.
Devon Energy, headquartered in Oklahoma City, OK, delivered a 14.9% beat in Q4. DVN shares have gained around 168.6% in a year.
Canadian Natural Resources: CNQ beat the Zacks Consensus Estimate for earnings in each of the last four quarters. The company has a trailing four-quarter earnings surprise of roughly 18.7%, on average.
Canadian Natural is valued at around $73 billion. CNQ has seen its shares gain around 102.5% in a year.
PDC Energy: PDC Energy is valued at some $7.3 billion. The Zacks Consensus Estimate for PDCE’s 2022 earnings has been revised 33.5% upward over the past 60 days.
PDC Energy, headquartered in Oklahoma City, OK, delivered a 14.9% beat in Q4. PDCE shares have gained around 106.6% in a year.
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