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Marathon Oil’s stock is more than 60% up YTD. With such an impressive increase in such a short time frame, potential investors are going to want to know if the trend is reliable.
While Wall Street is bullish on the stock, the key question is whether the company’s fundamentals align with the analysts’ expectations.
In this article, we will present you with what upside analysts forecast and the fundamentals of the company. Then, you will be able to make up your own mind about whether this stock is a buy or not.
Let’s get into it…
Table of Contents
Business Overview of Marathon Oil
Marathon Oil, founded in 1887 and headquartered in Houston, Texas, is an independent exploration and production company, operating all over the globe.
Specifically, the company explores, produces, and markets crude oil. It condensates liquids, natural gas liquids, and natural gas. Additionally, it produces and markets products manufactured from natural gas, such as methanol and liquefied natural gas.
Marathon Oil was spun off by the parent company Marathon Petroleum back in 2011 to focus on the exploration and production of hydrocarbons. Since then, it has established itself in some of the most productive oil and natural gas areas in the US. The Texas-based company has major operations in Delaware, Eagle Ford, Bakken, and Stack/Scoop areas, from Texas to Montana.
Moreover, it owns and operates 32 central gathering and treating facilities, as well as the 42-mile Sugarloaf gathering system.
Marathon Oil (MRO) Stock Forecast 2023
Source: CNN Business
Based on Wall Street’s 12-month median price target and the stock’s price, Marathon Oil has a 27.1% upside.
It’s interesting to examine Raymond James analyst John Freeman’s take on the stock:
“Marathon represents one of the few companies in our coverage with steady/rising per-share metrics thanks to their incredibly aggressive buyback program. 4Q22 will be the low point, with MRO stating they intend to repurchase ~$300M of stock during the quarter, representing an estimated 51% of CFFO on the year. Assuming the same payout next year, we estimate a 13% yield on buybacks and 15% total shareholder return. […] Given Marathon’s strong balance sheet, and top tier return strategy, we reiterate our Strong Buy rating.”
This analyst’s price target of $48 implies an 82% gain in one year.
However, we need to take a look at the fundamentals before we can have a verdict on the attractiveness of the stock…
First of all, share buybacks have been going strong. According to MRO, returning capital to shareholders is a top priority. As part of its program, it will return at least 40% of cash flow to shareholders above $60 oil, and at least 30% between $40 and $60 oil. Beyond the base dividend, shareholder returns would be limited below $40.
Additionally, production growth is limited to 5%, so as oil gets above $60, more capital is returned to shareholders since capex budgets are limited. In fact, 55% of cash from operations have been returned to shareholders since October.
A total of $1.2 billion was returned to shareholders by MRO during Q3 2022. Annually, this amounts to approximately $4.7 billion. Annualized, that’s a return of 24%.
Moving on to the creditworthiness of the company, Marathon Oil has a very conservative capital structure. Its debt is just 0.35 times its equity and the ratio has remained steady over the last 10 years.
What’s more, its interest coverage was at 12.89x based on the latest report.
When it comes to liquidity, the company has current assets that are 1.1 times its current liabilities, per the latest annual report.
While this is dangerously close to current assets being lower than current liabilities at any time, the trend of increasing interest coverage is very promising. Over the last decade, it has increased by 50.24%.
Another positive trend is Marathon’s increasing net income and free cash flow. Specifically, its net income has increased by 136.3% over the last 10 years.
Relative to some of its peers, the company seems to be doing well in terms of generating earnings. While APA Corp has increased its net income by 39.69%, another big name in the industry, Chesapeake Energy, has witnessed an unpredictable profit trend downwards.
Marathon’s free cash flow growth was also much better than its peers’. It had its free cash flow increase by 754.1% since 2014.
APA had a modest FCF growth in comparison (165.2%), while Chesapeake’s free cash flow decreased by almost 100%.
When it comes to price, Marathon Oil is trading at relatively attractive multiples right now.
While the market prices its stock at 2.4 times the company’s revenue, much higher than APA’s P/S ratio of 1.3x, its P/B ratio is lower than APA’s by an impressively wide margin.
At the same time, Marathon’s enterprise value is at 4 times its free cash flow, while APA’s and Chesapeake’s are 7.7 and 9.4 times, respectively.
But we need to mention some worrying indicators as well…
First of all, the company’s sales have decreased in the last decade by 35.91%. Although, that’s a worrying sign, it seems it’s something related to the industry as a whole. Marathon’s competitors’ revenues have experienced a similar trend.
On another note, the company’s buybacks are going to decrease.
Marathon Oil stated that buybacks in Q4 will be reduced to $300 million from $1.2 billion in Q3. The company believes that it needs to increase its cash balance on its balance sheet in order to buy up Eagle Ford assets.
Marathon Oil (MRO) Stock 2022
The stock’s price has been going strong this year. The trend could be attributed to the improving fundamentals of the company. For this reason, we are going to dive into some of the highlights of Marathon Oil throughout 2022…
- Non-GAAP EPS of $0.77 for Q4 beats the consensus by $0.21
- In terms of revenue, the company reached $1.73B (+110.5% Y/Y) compared to $190M a year earlier
- The company generated $898 million in free cash flow in the fourth quarter, with a reinvestment rate of 22%
- At a 32% reinvestment rate, free cash flow for 2021 was $2.2 billion
- The first quarter’s non-GAAP earnings per share were $1.02, exceeding expectations by $0.04
- The company’s revenue of $1.76B (+49.2% Y/Y) missed by $70M
- A $2.5 billion increase in share repurchase authorization was approved by the Board of Directors
- A new range of $480M to $520M has been set for Equatorial Guinea equity income for 2022
- Under a $1.2B capital budget and an oil price of $80/bbl and $4/MMBtu Henry Hub, the company forecast over $3B in adjusted free cash flow in 2022
- A $100/bbl WTI and $6/MMBtu Henry Hub price would generate over $4.5B of 2022 adjusted free cash flow at a 20% reinvestment rate on a $1.3B inflation-adjusted capital budget
- Production guidance for 2022 remains unchanged, as oil and oil-equivalent production are expected to remain flat with 2021 levels
- The Non-GAAP earnings per share of $1.32 beat by $0.04 in the second quarter
- With $2.3B in revenue (+101.8% Y/Y), the company beat expectations by $190M
- E.G. equity income guidance for full year 2022 was raised from $520M to $560M
- Earnings per share of $1.24 were $0.07 higher than Q3 GAAP earnings
- A revenue of $2.25B (+55.2% Y/Y) beat expectations by $220M
- In the third quarter, 82% of adjusted operating cash flow was returned to shareholders
- The company distributed $1,176 million in dividends and share repurchases to equity holders in the third quarter, a record for shareholder distributions
- Returned 61% of adjusted operating cash flow to shareholders ($2.6 billion) through first three quarters of 2022
- As a result of achieving leverage objectives in October 2021, the company repurchased $3.4 billion worth of shares, reducing the outstanding share count by 20% and enhancing growth per share by 20%.
- The Board of Directors approved a $2.5 billion buyback authorization on November 2 as well as a 13% increase in the quarterly base dividend on November 2.
- Marathon Oil has reached a definitive agreement to buy Eagle Ford assets from Ensign Natural Resources for $3.0 billion. It is expected that the transaction will close by the end of the year.
As it’s evident from what we presented above, there is a strong case to be made about the future of the company. At the same time, the stock is not undervalued to make it a clear buy.
To be sure, there are very positive aspects about Marathon’s fundamentals. If you have a diversified oil exposure in which this stock will represent a small portion, its purchase won’t be speculative.
In the end, it all comes down to your specific situation. Make sure that you understand the risks involved in including this stock in a concentrated portfolio before you make a decision.
Is Marathon Oil a good stock to buy?
Marathon Oil’s stock can qualify as a good investment if you make sure that you have a well-diversified portfolio. In addition, ensure that you pick a few other quality oil stocks to increase your exposure to the industry as Marathon Oil may or may not correlate with that market well in the future.
Is Marathon Oil a good dividend stock?
The forward dividend yield of Marathon Oil is 1.38%, which is a bit low. However, the company also buys back shares which can provide shareholder value. But if you’re looking for income here, there are surely many better dividend stocks to buy.
What is the forecast for Marathon Oil stock?
Wall Street believes that Marathon Oil will increase by 27.1% in the next 12 months. This is based on 22 analysts with a median price target of $33.5 and the trading price of the stock.
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