The current economic climate is making life difficult for many businesses right now, but for those in the oil and gas sector, the situation could hardly be better.
One company that’s benefited from rising worldwide demand for hydrocarbons is the US resource play Marathon Oil Corporation (NYSE:MRO). The firm is having something of a renaissance at the moment, and has seemingly been overlooked by investors up until now.
But what makes this enterprise so special, and is it worth buying at the present time?
What Happened To Marathon Oil?
Having spun off the refining and marketing aspect of its business to Marathon Petroleum in 2011, Marathon Oil was left to concentrate on the exploration and production part of the company’s operations going forward.
The firm had a few rocky years to start with, especially when the market suffered a horrendous downturn at the outset of the crisis in 2020. Its shares fell almost 80% in a matter of weeks, at one point trading for less than $4 toward the end of March that year.
However, the company staged a resolute fightback, and its stock has been on the rise ever since. Indeed, the firm’s value has risen 135% over the last twelve months, with no imminent sign of a slow down anywhere to be seen.
What’s especially encouraging about Marathon’s recent sustained price action is the fact that the company appears to have used this growth phase as a springboard to fundamentally reorient the direction of its business.
Not only were the firm’s latest earnings results highly encouraging, but there were also statements by the company’s C-suite that there would now be a shareholder-first approach from here on out.
For example, the board outlined plans to authorize a generous share buyback scheme to the tune of $2.5 billion, building on a strong base of over $1.6 billion worth of repurchases since last October. As such, Marathon has already reduced its shares outstanding by 11% in just seven months, with those having been acquired for under $19 a piece, over 30% less than its stock is currently trading for today.
Furthermore, the company isn’t just returning value to its stakeholders through buyback programs – it’s also raised its base dividend payout for five consecutive quarters now as well.
And although MRO doesn’t pay a huge yield at the present time – it currently stands at 0.92% – its increase of $0.03 to $0.08 per share represents a 167% jump in just over a year.
In fact, reporting its latest first quarter 2022 results, the company returned 50% of its cash flow from operations to equity investors, with $592 million going on its share repurchases, and another $52 million boosting its dividend too.
Source: Unsplash
Marathon Oil Stats
Fortunately for MRO, those ambitious plans are underpinned by an excellent financial performance of late as well.
The company improved its top-line by 49.2% during the last quarter, bringing in revenues of $1.76 billion, while its EPS of $1.02 beat analysts’ expectations by $0.04. Indeed, that bottom-line actually rose almost 400% year-on-year, going from $0.21 per share in 2021 to where it is today.
In its original financial outlook for the year ahead, MRO estimated it could produce an adjusted FCF of $3 billion. That assumed a reinvestment rate of 30% on a $1.2 billion capital budget, and that West Texas Intermediate (WTI) stayed at $80 a barrel, and Henry Hub at $4 per MMBtu.
However, with the rise of oil and gas prices, the company updated this guidance, suggesting alternatively it could generate a total FCF of $4.5 billion instead, implying a lowered reinvestment rate of ~20% on a budget of $1.3 billion, with WTI at $100 and Henry Hub at $6.
Risks and Valuation
Marathon is significantly de-risked due to its multi-basin portfolio, with locations not just in the Permian and Eagle Ford, but also Bakken and, increasingly, in Equatorial Guinea too.
Indeed, the company’s gas business gives it indirect exposure to the European TTF gas index, which buffers the business from territorial concentration issues as well.
From a valuation perspective, MRO comes across as pretty cheap, despite its strong share price performance over the past couple of years. At 5.6x, its forward GAAP P/E ratio is almost twice as good as the Energy sector’s median of 9.9x, while the firm’s EBITDA margin is excellent at 61.8%.
The business is also showing strong growth metrics too, with a forward free cash flow per share growth rate of 255.8%, and a year-on-year EBITDA growth of 171.5% as well.
Running a discounted cash flow forecast, MRO has a fair market value of $35.69 per share, representing 27.1% upside at the time of research.
Is Marathon Oil Stock A Good Buy?
Interestingly, MRO’s chairman, Lee Tillman underlined the firm’s commitment to shareholder returns, emphasizing that the business would not continue to chase production growth simply for the sake of it. Instead, he and the company would prioritize sustainable and “significant free cash flow generation”, a policy that would, in the future, deliver strong corporate execution and ESG excellence.
While it would once have appeared perverse for an oil mining company to forego production expansion, in today’s environment it seems altogether sensible. Rather than perpetuate a cycle of boom-and-bust, the firm feels that reducing capital spending actually increases cash flows, making shareholder returns that much easier.
And although the fortunes of the business do rely heavily on the fluctuations in global oil prices, the company remains lightly hedged. Combine that with a low earnings multiple, sector-beating growth, and a sensible management team, and Marathon is a perfect option to ride the oil-industry tailwinds for as long as they last.
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