2023-03-07 12:42:03 ET
Summary
- Marathon Oil remains focused on returning capital to shareholders.
- 2023 will see at least $1.8 billion being returned to shareholders if WTI prices average $80.
- A discussion of where oil prices are next headed.
Investment Thesis
Marathon Oil ( MRO ) has fallen out of favor with investors. Indeed, for more than 4 months the stock has been sliding down leading MRO to underperform the S&P500 ( SPX ) as well as several, although not all, of its peers.
However, I make the argument that MRO is actually a very good investment. And that investors will be rewarded for sticking with this stock. Here's why.
What's Next for Oil?
After investors got extremely hopeful about oil prices in 2022, 2023 has seen oil prices take a breather.
There are two primary considerations weighing down oil prices. China's growth outlook and whether the Fed's rate hikes will end up going on for longer than investors expect, choking off economic growth in the US.
However, my argument is that oil prices don't need to be high for investors to be rewarded. Investors don't need WTI to be at say $90 for MRO to be a rewarding investment.
Indeed, I argue that the more pressing aspect is whether or not oil prices can remain consistently above $70 over the next twelve months, as that will be a bigger consideration for MRO.
In sum, I believe that at the present valuation, investors are thinking more of the downside than the upside.
Before we go further, consider this, economic activity fell during the Great Financial Crisis of 2008. Meanwhile, crude demand fell by slightly over 1.5%, surpassing the 2007 peak in 2010.
So, unless an economic shutdown or Global Financial Crisis-like scenario is expected in 2023 into 2024, then there's going to be quite a muted drop in oil demand from 2022.
But isn't this a supply-demand equation? What about the supply side? Here's the bearish argument displayed in a graph.
HFIR substack
Inventories remain really high. And until we start to see inventories coming down, then, oil prices will remain range bound.
And so, we once again, circle back to my argument, is it a problem if oil prices remain around $80 WTI? The short answer is no, it's not. And here's why.
MRO is Focused on Capital Returns
Looking ahead to 2023, MRO is once again committed to returning ''40% of cash flows'' back to shareholders.
As a reference point, at $80 WTI, this translates to $1.8 billion or 10.9% capital returns to shareholders.
What's more, this $1.8 billion of capital return to shareholders is a figure that already factors in the 28% increase in capex expected for 2023.
More specifically, in 2022, MRO's capex was $1.5 billion, and its now expected to reach close to $2 billion in 2023. Although, we have to acknowledge that a portion of this capex increase will be tied to MRO's recent Ensign Eagle Ford acquisition.
That being said, this my contention, this increase in capex isn't solely tied to inflation capex, as MRO is striving to increase its total oil production from 169 mbopd (thousand barrels of oil per day) in 2022 to 190 mbopd this year, see below.
As noted already, a portion of this increase will be due to its recent Ensign acquisition. But for all intents and purposes, we can see that production volumes are going to end up high in 2023 and shareholders will still be amply rewarded too.
The Bottom Line
Marathon Oil is cheaply valued, with a strong capital return framework. However, valuation alone isn't likely to get investors' interest to back into the stock. What investors want to see is ''certainty'' on where oil prices are likely to head.
However, I argue that when oil prices stabilize and there's ''certainty'', MRO won't be cheaply priced. By the time there's certainty that will be the time to sell this stock, not to buy it!
In sum, my argument is twofold. MRO did benefit from a very strong 2022 oil environment. But oil prices don't need to return to an average of $95 WTI for this stock to be a rewarding investment.
For further details see:
Marathon Oil: The Place To Be For Shareholder Returns