Marathon Oil Corporation (MRO - Free Report) stock looks promising at the moment. We are positive about the company’s prospects and believe that it is the right time for you to add the stock to portfolio as it is poised to carry the momentum ahead.
Evidently, shares of Marathon Oil have increased 81% in the past year, vis-à-vis the stocks in this industry that have collectively gained about 41%.
Let’s take a look into the factors that make this leading upstream player a compelling choice for investors right now.
What’s Working in Favor of Marathon Oil?
Strategic Portfolio Puts Up a Stellar Show: As most of the drilling activities in the United States are centered in the Permian Basin, the shale play suffers from lack of takeaway capacity and widening differentials. However, with Permian accounting for just about 4% of Marathon Oil’s total production, the company remains largely unaffected by infrastructural bottlenecks and differential issues of the region.
Instead, Marathon Oil has accelerated its growth momentum in resource shales like Oklahoma, Eagle Ford and Bakken shale plays. These low-cost high-margin shale plays have less traffic than Permian, therefore leading to narrower differentials and higher pipeline capacity.
In the last reported quarter, the company recorded production available for sale of 284,000 oil-equivalent barrels per day (BOE/d), up from 208,000 BOE/d in the first quarter of 2017. With enhanced completion designs and effective spacing strategies, it has been improving the quality of its assets, and is well positioned to improve production and revenues.
In fact, Marathon Oil raised its 2018 production growth guidance for these shale plays to 25-30% from the prior projection of 20-25%. The firm’s strong development inventory will enable visible production growth over the coming years.
Divestment Spree Streamlines its Portfolio: Over the past few years, the Texas-based energy explorer inked several deals to sell non-core assets that do not fit into the company’s long-term growth plan.
In August 2015, the company divested its Wilburton, OK assets worth $102 million. In November 2015, Marathon Oil jettisoned Gulf of Mexico (GoM) assets for a total price of $205 million. In April 2016, the company inked a deal to divest its Wyoming upstream and midstream assets to Merit Energy for $950 million. Further, in October 2016, the upstream player signed a deal to sell some of its non-core assets in West Texas and New Mexico for $235 million. Additionally, in March 2017, the company exited the high-cost Canadian oil-sands operations for $2.5 billion. This year Marathon offloaded its oil acreage in Libya to France-based supermajor TOTAL S.A. (TOT - Free Report) for $450 million. Notably, Marathon Oil exited from seven countries since 2013.
These strategic sell-offs not only bolstered its portfolio, but also boosted financials. In fact, over the past two years, the company garnered proceeds of around $5 billion from its divestment deals.
Healthy Financials Bode Well: Marathon Oil’s balance sheet seems quite strong, with adequate liquidity and manageable leverage of around 31%, which increases financial flexibility and helps it to tap the profitable growth opportunities. Following the divestment of Libyan operations in March 2018, the company had a hefty cash balance of around $1.6 billion. While the company plans to grow its annual production, it has kept its capital expenditure budget for 2018 unchanged with the prior levels and is also gaining from operational efficiencies.
Delivering on its commitment, MRO achieved cash flow neutrality last year and is poised for strong free cash flow generation through the end of the decade. Needless to say, with improving FCF generation, we don’t expect management to shy away from resorting to more shareholder-friendly moves including dividend hike and potential buybacks like most peers including Hess Corporation (HES - Free Report) , Anadarko Petroleum Corporation (APC - Free Report) and Devon Energy Corporation, among others.
Other Favorable Readings
Considering the above factors, it should not come as a surprise that Marathon Oil sports a Zacks Rank #1 (Strong Buy) along with a VGM Score of A. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or #2 (Buy) offer the best investment opportunities for investors. You can see the complete list of today’s Zacks #1 Rank stocks here.
Investors should note that the company displays a decent earnings history, having surpassed estimates in each of the last three quarters. What’s more encouraging is the solid estimate revision that the company is witnessing of late. In the past 60 days, eight estimates have moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has been revised upward by 47.5% for the same period. The company expects long-term earnings per share to grow 15.10%, higher than the industry’s growth rate of 12%.
Marathon Oil currently has an average trailing 12-month EV/EBITDA ratio — which is one of the best multiples for valuing oil and gas companies as they have large amounts of debt — of 6.87, which is cheaper compared with the industry average of 9.09.
Marathon Oil appears to be a solid bet based on strong fundamentals, impressive portfolio/production profile and robust financials, along with healthy share price performance. Hence, if you haven’t taken advantage of the share price appreciation yet, it’s time you add the stock to your portfolio.
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