Summary
- Marathon Oil's sales and production numbers slip in Q4.
- Fiscal 2022, however, was an excellent year for the company concerning free cash flow generation and capital returned to shareholders.
- MRO shares look like they're looking for direction. With the recent Eagle Ford acquisition, shares are now more leveraged to higher energy prices.
Intro
Although Marathon Oil (MRO) met its bottom-line earnings estimate in its fourth quarter report, production numbers and corresponding top-line sales came in down over the same period of 12 months prior. Although there was ample volatility in the stock both before and after the announcement, shares continue to consolidate ,which means investors are none the wiser concerning future share-price direction.
In one way, the mute response to the report by the market does not surprise us. We were actually long Marathon Oil not long ago but decided to liquidate our position as we saw this consolidation or stagflation taking hold. Suffice it to say, irrespective of how impressive fiscal 2022 was concerning the company's share-price appreciation and shareholder compensation, this does not mean these trends will repeat in fiscal 2023. Yes, Marathon has excellent assets and remains highly leveraged to energy prices (especially oil) in that if oil prices begin to rise sharply, shares of the exploration company should continue to appreciate.
However, if we look at the technical chart, we still have the risk of a double top formation (reversal pattern) playing out in due time. This is why we're worried about the recent consolidation which has gone on for almost three months now. In effect, the longer, the price remains below the up-trending trendline depicted below, the more elevated the risk that indeed a topping pattern is playing itself out here.
Sound Management
When deciphering the share-price direction of a stock, we tend to look at associated trends in profitability, valuation, and how well management has been treating its shareholders. With respect to management, it can not be found wanting in a number of areas. First, we have seen a significant reduction in the number of shares outstanding since the buyback plan was enacted in 2021. $3 billion of capital was returned to shareholders in fiscal 2022 and 15% of the number of shares outstanding were bought back by the company. Furthermore, strong cash flow generation has resulted in rising equity, significant debt repayment, and a series of consecutive increases in the dividend payout. All shareholder-friendly trends.
Management reiterated on the recent Q4 earnings call that share buybacks and dividend payments will be given priority over other uses of cash going forward. 55% of total operating cash flow was actually distributed to shareholders in fiscal 2022 with 40% being the base number with WTI at $60 a barrel. Therefore, when an investor sees management exceed the quota for shareholder returns, this obviously attracts attention. Shares rose by 30%-plus in fiscal 2022 (excluding dividend payments) which was an excellent 12-month return.
Marathon Oil's Profitability
Such strong cash flow generation in fiscal 2022 obviously speaks of very strong profitability. Furthermore, the approx $2 billion capex budget for fiscal 2023 is expected to keep cash flow generation levels elevated which will obviously benefit shareholders. Furthermore, the CEO stated on the recent Q4 earnings call that $1.8 billion is expected to be returned to shareholders in fiscal 2023 which is an estimate based on $80 crude oil, $20 TTF and $3 Henry Hub. Therefore, MRO has a considerable buffer before it stops generating meaningful cash flow but the company still remains at the mercy of energy prices as we can see in forward-looking earnings revisions below.
In fact, due to crude oil and nat gas prices remaining well down from their highs of last year, analysts who cover Marathon Oil have dialed down their quarterly expectations pretty convincingly over the next four quarters. Suffice it to say, if trends continue (with respect to the sustained dialing down of forward-looking earnings estimates), we may see shares lose their 200-day moving average ($26.46) which could lead to a sustained consolidation or worse in the stock for a sustained period of time.
MRO Stock Valuation
Although Marathon's earnings and cash flow in particular are keenly priced, the company's assets continue to trade above the historic average. Although Marathon's assets are cheaper than the sector in general (P/B of 1.78), the company's forward book multiple of 1.42 remains meaningfully higher than the corresponding five-year average of 1.05. Assets are essentially what create sales and earnings so buying them as cheaply as possible is always beneficial. Furthermore, valuation multiples usually revert to their mean over time which may suggest shares may need to consolidate here before embarking on the next leg up.
Conclusion
To sum up, shares of Marathon Oil continue to look for a sustained trend post their fourth quarter earnings numbers. The move out of the stock's 2020 lows has been explosive to date but we're now seeing signs that the uptrend is weakening. We look forward to continued coverage.
For further details see:
Marathon Oil: Shares Looking For Direction Post Q4 Earnings