2023-03-30 11:04:00 ET
Summary
- The Marathon Oil Corporation share price has lagged many of its peers since the beginning of the year.
- Energy stocks have, of course, high correlation to West Texas Intermediate oil prices.
- On March 23, 2023, Goldman Sachs maintains MRO with a sell (PT from $29 to $24), and Citi went from Hold to Buy with a PT of $27.
- MRO, given its valuation and rising production, combined with a likely WTI pricing ascent, will enable a share price break to the upside by mid-summer, 2023.
Marathon Oil Company (MRO) is a USA focused oil and gas exploration and production company, with assets in Equatorial Guinea, Africa, that in 2022 collectively averaged 343,000 barrels of oil and equivalents per day, broadly grouped at 70% oil and liquids, and the remaining 30% being natural gas .
MRO closed at $22.90 on March 25, 2023, in the bottom quartile of its $19.42 - $33.42 range from the past year. Although general macro-economic indicators continue to suggest a possible recession, the outlook for MRO is positive per my analysis.
My financial analysis scrubs asset choices through a lens of Macro, Sector, Valuation, Technical, and Brand discovery. The interlock of all five components contributes to my conclusion and recommendation.
The Macro Outlook: MRO is not Immune to Economic Uncertainty
I simplify the macro exploration to seven agents to broadly illustrate whether we are in a bull or bear cycle. Specific macro targets are derived from an analysis of key economic data over ten-years (2012-2021), and as of March 24, 2023, I collar the following seven data-sets.
The macro review begins with the Presidential Approval rating, a broad sentiment indicator that captures how people feel about the country's general direction, and per fivethirtyeight.com, it currently aggregates to a 43% approval.
Both the Consumer Price Index ((CPI)) and Unemployment rate are monthly issuances from the U.S. Bureau of Labor Statistics ((BLS)), an agency of the Department of Labor. The CPI sits at 6.0% for February, 2023, slightly down from January's 6.4%. At 6.0%, CPI is considerably above the Federal Reserve's Federal Open Market Committee's ((FOMC)) 2.0% target. February's Unemployment rate nudged to 3.6% from January's 3.4%, but remains within my desired bull target of 0% - 3.8%. Note that as of August, 2020, the Federal Reserve's stated unemployment target rate of 4.4% or better was removed from its dual mandate objectives as: "The FOMC does not specify a fixed goal for employment because the maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market; these factors may change over time and may not be directly measurable ."
Our fourth macro indicator is the annualized, quarter over quarter rate of Gross Domestic Product ((GDP)) growth from the U.S. Bureau of Economic Analysis, an agency of the Department of Commerce, and it advises that for Q4, 2022, the Second Estimate is a healthy 2.7%.
A key macro indicator is the yield difference of the 10-Year Treasury Constant Maturity Minus 2-year Treasury Constant Maturity treasuries, and it currently sits at a negative 38 points. This inversion of the 2-year yield being greater than the 10-year yield is often a harbinger of a recession.
Our second-last indicator is the price of a barrel of crude oil (bbl), sitting at $69.20/bbl. My correlation analysis of ten years of WTI pricing to stock market bull conditions reveals that WTI in the $55 to $80 range is healthy for the market and sufficient for producers. Of course, pricing above $80 would be superior for producers so long as it does not butt into demand destruction.
The China Purchasing Managers Index ((PMI)) concludes our macro analysis and its importance is due to U.S. - China trade being almost $700 billion/year. Moody's Analytics advises that the February PMI was 52.6, up from January's 50.1 .
Macro Summary
The seven macro datapoints reveal the following: a fragile economy that is neither bear nor bull. Furthermore, the economy could easily bend to the downside, particularly given that bank contagion possibilities are still to be determined. On the plus side, although the FOMC raised the Federal Funds Rate six times in 2022 (4 x .75%, 1 x .25%, 2 x .50%) and twice so far in 2023 (2 x .25%), many believe the dot plot is nearing to a final outcome range of 5.00% - 5.25%, a small step from the current 4.75% - 5.00. In other words, the worst of the interest rate climbs may be over. Overall, macro conditions, as illustrated in Figure 1, portray more of a wait n' see before entering a MRO trade.
Figure 1: Macro Register (Author)
Sector Review: The Goldilocks Macro Indicators Create Uncertainty
Generally, Energy stocks perform better in Bull markets, and we're somewhere in a Bull vs Bear grey zone per our macro review. Let's drill into the sector forces of supply and demand and position MRO accordingly.
Global oil supply was reconfigured with the Russian invasion of Ukraine in February, 2022 and many western democracies quickly found alternative sources to the world's 3rd largest oil producer. In fact, the Organization of Petroleum Countries (OPEC), producers of about 40% of the world's daily production, reduced its output in November, 2022 by about 2M bbl/day to maintain pricing thresholds.
USA oil supply in 2022 was helped by drawdowns from the Strategic Petroleum Reserve ((SPR)), with its current authorized capacity of 714 million barrels only 50% filled at 372M bbl, well under the 576M bbl it was at a year ago .
Supply is always subject to lessened availability shock arising from political strife in parts of the globe and muted exploration if oil prices decline substantially from current levels.
Oil demand has had a difficult year thus far arising from a perfect storm of brittle economic growth as learned from our macro register, the shroud of banking concerns, and weak Chinese consumption due to COVID malaise (China absorbs 15M bbl/day of the global 101M bbl/day). The demand result is confirmed by XLE, the largest energy ETF with $36B of assets under management, being down 10.4% since the beginning of the year .
But looking forward, demand will increase as China enters a post-COVID economy and North Americans enters the summer driving season that should be strong regardless of current economic lethargy and persistent inflation. For example, on March 23, 2023, spectacular Banff National Park in Canada (2,500 sq. miles), located on the east side of the Rockies and a nice full day's drive north of amazing Yellowstone National Park (3,500 sq. miles), opened for summer bookings of its 2400 camp-sites at 8:00:00 AM MST. At 8:00:05, they had over 60,000 people in the on-line queue and the phone lines were overwhelmed, "We're sorry, we cannot take any more calls, please try again later."
Sector Summary
Despite the many challenges presented on the demand and supply side in 2022, West Texas Intermediate averaged $95/bbl over that year .
Furthermore, no production increases from OPEC and the ban on Russian imports will self-regulate supply to reasonable levels. Pricing at-the-pump will increase as producers transition from cheaper winter fuel to slightly more expensive summer fuel, estimated to add to 15 cents per gallon. Although the October 2022 Energy Information Agency forecast of $95/bbl in 2023 is likely at the upper end given oil is sub-$75 today, my forecast is for oil to move into the $75 - $85 range by YE, and this will uplift MRO.
Valuation: MRO is Moderately Undervalued
Base valuation metrics for MRO of PE FWD at a low 6.2 and Price to Sales (P/S) at 1.98 are superior in comparison to the broader market represented by the S&P 500 averages of 17.8 and 2.3 .
MRO's Operating Margin ((OM)) of 45%, Enterprise Value to Free Cash Flow (EV/FCF) of 4.9 and Debt to EBITDA are all strong, and I further note that MRO revenue is up one-third from 2021 to 2022, and more than double from 2020 to 2022 -although this is largely to be expected due to the 2020 oil prices being slammed by COVID. For 2022, the Company proudly stated it achieved " $4 billion of adjusted free cash flow generation, the strongest free cash flow yield in our peer group, and one of the top five free cash flow yields in the entire S&P 500 . "
It's important to compare MRO to its sector peers, notwithstanding that some of the companies in Figure 2 are more vertically integrated or substantially larger by revenue, including behemoths like Exxon Mobil (XOM), ConocoPhillips (COP), and Marathon Petroleum Corporation (MPC).
Comparative Financial Data (Author from Yahoo! Finance, March 24, 2023)
Valuation Summary
MRO outperforms its peers on OM% and EV/FCF, but is an outlier on PE FWD and P/S. The Debt/Ebitda metric, although above its peer average, is not a concern and debt carriage is unlikely to be affected by possible credit tightening from the Fed's dot plot.
Marathon's 2023 financial goals rest on a slightly generous view of commodity pricing. In a February 15, 2023 News Release regarding its 2023 Capital Budget and Q4/FY 2022 Results, the company states: "Expect $1.9 to $2.0 billion capital program to deliver $2.6 billion of adjusted FCF at reinvestment rate of approximately 40%, assuming $80/bbl WTI, $3.00/MMBtu Henry Hub, and $20/MMBtuTTF."
I note that on January 25, 2023 the company declared a quarterly dividend of $0.10 per share giving it a forward dividend yield of 1.82%.
Technical: MRO Momentum is Beginning
The MRO ((RSI)) of 39 leans to oversold, and in support of that reading, from March 22 to the 27th, MRO pushed off a double-bottom in the $21.50 area, as noted in Figure 3.
MRO Share Price, March 22-27, 2023 (MRO - Stock quote for Marathon Oil Corp - MSN Money)
Technical Summary
Irrespective of the fact that on March 24, 2023 MRO encountered the dreaded death cross of the 50 DMA falling below its 200 DMA, it likely found its support ~$21.50, and appears to be now trekking upward.
Brand: MRO is a Leader
The question is: how does Marathon Oil Corporation plan to build out its brand value-proposition for shareholders? Per the Q4 2022 Earnings Call Transcript from February 16, 2023, the company advised that it reduced its 2022 share count by 15%, and 20% since 2021. MRO is certainly impressive to the 27 Analysts that follow it, with 12 calling it a Buy or a Strong Buy, and the consensus PT averaging to $33.49.
We should also take a quick look at potential Black Swans, and they are twofold: a continued suppression of oil prices and potential failure to intelligently integrate Ensign Natural Resources, its $3.0B purchase in late 2022. Regarding the former, such is beyond Executive control. In respect to the latter, I believe MRO will fully realize all combined entity opportunity from adding 130,000 net acres and scaling to 290,000 combined Eagle Ford acres; this is an organization that beat EPS expectations in each of the last four Quarters.
Brand Summary
MRO believes it is "Empowered to Make a Difference" for its customers, employees, and shareholders. It's website fully details its strategy and ((ESG)) efforts. The Executive show a commitment to growth through the Ensign purchase and a particular appreciation of shareholders via the share buybacks.
Overall Conclusion: MRO is a Buy
Indeed, the current macro environment does not support significant upside share price movement, and this view is exacerbated by the MRO high oil and natural gas pricing forecast which has not yet materialized thus far in 2023. However, valuation and technical analyses tilt MRO somewhat positive to its peers, and sector and brand strength are strong. The company will be emboldened by my observations that consumer travel will increase, the SPR will re-fill, and OPEC will not increase oil production. I further conclude that MRO will benefit from a forecasted rise in oil prices and its savvy accretive scale purchase of Ensign, thereby leading to newfound operational efficiencies, revenue growth, and higher FCF generation.
For further details see:
Marathon Oil Is Not Running On Empty