Is Marathon Oil Worth Holding Despite Low Crude, Gas Costs?

We issued an updated research report on Marathon Oil Corporation MRO on Dec 22, 2015.

The leading upstream energy player has a large and geographically-diverse reserve base and solid project pipeline. However, we believe that Marathon’s earnings and cash flows are bound to feel the heat from the ongoing oil price slump.

The company’s current Zacks Rank #3 (Hold) implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.

Marathon Oil’s strong inventory of development projects indicates steady production growth over the coming years. Even with a sizeable reduction in its capital program, we expect Marathon Oil to achieve its guidance of 7% production growth rate for 2015.

We also believe that the acquisition of sizeable acreage in the burgeoning Eagle Ford shale formation in South Texas from Hilcorp Resources Holdings, L.P. has offered Marathon meaningful production growth opportunity in the high-margin North American unconventional resource plays. This should further drive overall volumes of the company.

Moreover, management has not been shy of divesting assets, particularly those that do not fit into the company’s long-term growth plan. During 2014, Marathon sold approximately $45 million worth of non-core oil and gas properties around the world, thereby freeing up capital to concentrate on its longer-term high-grade prospects. Further, the company remains on track to offload more upstream and midstream properties of almost $500 million.

However, with crude prices remaining low, Marathon has been able to extract less value for its products. This has pressured the group’s profit margins.

We also remain concerned by Marathon Oil's focus on unconventional fracking as this leads to a higher cost structure – another headwind for the company amid low oil price environment.

Stocks to Consider

Some better-ranked players in the energy sector are Murphy USA Inc. MUSA, Energy Transfer Equity, L.P. ETE and Northern Tier Energy LP NTI. All the stocks sport a Zacks Rank #1 (Strong Buy).

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