Marathon Oil (MRO) Down 44% in 3 Months: Can It Rebound?

The oil and gas sector is walking a tight rope, thanks to persistent turbulence in 2018. West Texas Intermediate (WTI) initiated the year at just above $60 per barrel of oil and touched multi-year highs of more than $76 in early October.

However, the rally was short-lived as commodity plunged more than 40% since then due to apprehensions of oversupply and economic headwinds. The downside in oil prices and other headwinds have weighed on the shares of Marathon Oil MRO that plunged more than 44% in the past three months, wider than the industry’s fall of 33.6%.

As mentioned above, declining crude prices in the past few months have weighed on the stock. Crude is reeling under the effects of supply glut along with fears of economic slowdown, which has been weakening commodity demand. However, crude woes are not the only concerns; it just adds to the list of problems in Marathon Oil’s story.

The company’s third-quarter earnings beat and raised 2018 guidance have not been able to raise investors’ optimism. Notably, Marathon Oil’s reluctance toward returning value to shareholders is a major dampener. The firm’s high emphasis on strategic acquisitions and balance sheet strengthening at the cost of dividend growth and share buyback programs do not bode well.

Further, one also needs to consider Marathon Oil’s struggling international operations, with production declining 23% in the quarter ended on September. The company’s divestment strategies that have enhanced cash flows are likely to affect volume growth.

Notably, Marathon Oil’s ROE of 4.4% compares unfavorably with the industry’s 12.4%. This reflects on the company’s inefficiency to use shareholders’ funds.

Nonetheless, we believe that Marathon Oil, which carries a Zacks Rank #3 (Hold) enjoys multiple tailwinds. Hence, investors should consider retaining this stock for long-term prospects.

In the past two years, the Texas-based energy explorer inked several deals to divest non-core assets that are not in sync with its long-term growth plan. Marathon Oil’s strong inventory of development projects (in liquid rich resource plays and other focus areas such as Equatorial Guinea) depicts visible production growth in the upcoming years.

The company has boosted growth momentum in the key low cost-high margin resource plays that include Oklahoma, Eagle Ford, Bakken and Northern Delaware. With exposure in other shale plays apart from Permian, the company does not face geographical concentration risk. Further, it is less exposed to the pipeline pinch and cost inflation woes in Permian region when compared with the Permian-pure plays.

Marathon Oil is improving the quality of assets and is well positioned to enhance production and revenues. In the last quarter, the company posted production available for sale of 304,000 oil-equivalent barrels per day (BOE/d), up from 245,000 BOE/d in the third quarter of 2017. Marathon Oil expects 2018 production growth for these shale plays in the range of 30-34%. The company’s diverse operation is likely to boost revenues and profits in the upcoming years.

Marathon Oil’s strong financials bode well. The company lowered total debt by $1.75 billion in 2017. It carries a manageable debt-to capital ratio of 31.3% that provides financial flexibility and enables it to tap on growth opportunities. Importantly, the company generated organic free cash flow of $320 million during the September quarter with year-to free cash flow amounting to $632 million.

Volatility in the oil and gas environment is likely to persist in the near term and raises concern about the stock. Nevertheless, Marathon Oil’s impressive portfolio of diverse operations and balance sheet strength provide some ray of hope. Notably, long-term earnings per share growth rate is projected at 9%.

Meanwhile, investors interested in the energy space can consider better-ranked players like Cabot Oil & Gas Corp. COG, SilverBow Resources, Inc. SBOW and Archrock, Inc. AROC, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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