As little as a month ago, a rare thing happened in the energy market. The spread between the prices of U.S. crude (as measured by West Texas Intermediate, or WTI prices) and OPEC-driven crude (as measured by Brent prices), which normally hovers in a range between $3 and $5 per barrel, increased to about $10 per barrel. WTI crude sank to as low as about $65 per barrel while Brent hovered in a range around $75. Digging into news reports and analysis, it seemed that the difference could be attributed in large part not to U.S. production, which was and remains highs, but rather to problems in the infrastructure (namely, pipelines and storage facilities) that delivers raw product to market. Those problems are focused primarily on the emerging, oil-rich Permian Basin that spans western Texas and eastern New Mexico, where production is being hampered by ongoing infrastructure projects that aren’t scheduled to be completed until sometime in 2020. In the meantime, that limited delivery capacity worked against high production levels to over-inflate inventory levels, which then put severe pressure on crude prices from that region in early June by as much as $11 per barrel lower than standard WTI.
Over the last couple of weeks, the WTI-Brent spread has returned to mostly normal levels, despite the ongoing capacity issues that linger in the Permian Basin. As of this writing, WTI crude is a bit above $73, with Brent slightly below $78 per barrel. Part of the shift, I think can be attributed to explorers and drillers with the ability to work not only in the Permian, but also in the more established, but still prolific Eagle Ford and Bakken areas. These are areas not only with excellent drilling capability but also plenty of capacity available to get product to market. Marathon Oil Corporation (MRO) is one of the largest exploration and production companies in the Energy sector, with major resources in, and the largest portion of their year-over-year production rise coming from the Eagle Ford and Bakken areas. Since the U.S. Energy Information Administration (EIA) predicts global crude demand will grow to 1.4 million barrels per day through the rest of the year. Most analysts expect the U.S. economy will continue to grow at a healthy pace as well, which should further support crude demand. That bodes well for oil prices, and so for stocks like MRO.
Fundamental and Value Profile
Marathon Oil Corporation is an exploration and production (E&P) company. The Company operates through two segments: United States E&P and International E&P. The United States E&P segment explores for, produces and markets crude oil and condensate, natural gas liquids (NGLs) and natural gas in the United States. The International E&P segment explores for, produces and markets crude oil and condensate, NGLs and natural gas outside of the United States, and produces and markets products manufactured from natural gas, such as liquefied natural gas (LNG) and methanol, in Equatorial Guinea (E.G.). MRO has a current market cap of $17.7 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, with earnings more than tripling, while sales increased about 61%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of a management’s ability to maximize their business operations. It is also noteworthy that the company’s Net Income is nearly 25% of revenue, which means their profit margins are very healthy right now.
- Free Cash Flow: MRO’s Free Cash Flow is very strong, at almost $3 billion. That number has increased since the beginning of 2016, which roughly corresponds with the point where oil prices stabilized after dropping strongly through the last half of 2014 and all of 2015.
- Debt to Equity: MRO has a debt/equity ratio of .46, which is conservative. Their balance sheet indicates operating profits are more than sufficient to service their debt, with good liquidity to provide additional financial support and flexibility.
- Dividend: MRO pays an annual dividend of $.20 per share, which at its current price translates to a dividend yield of about 1%.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MRO is $14.16 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.47. The average for the Oil, Gas & Consumable Fuels industry is 2.2, while the historical average for MRO is .9. If you work from the historical average, the stock is overvalued right now; however I also take into account the reality this average is skewed by the effect of the collapse of oil prices in mid-2014, from a high around $105 per barrel to a low at the beginning of 2016 at around $30. Energy stocks in general struggled to recover from that 70%-plus drop until late 2017. More appropriate in this case could be the industry average; by this measure the stock’s long-term target price could easily be in the $31 range.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The stock has been holding in a pretty narrow range between $20 and $22 per share since late May, and is currently in the middle of that range. The stock has built a solid upward trend dating back to August of last year. The stock’s current level is the highest it has seen since mid-2015.
- Near-term Keys: If the stock can find a new surge of bullish momentum, it could push as high as $25 in the near term, based on previous pivot levels seen in early 2015. That kind of move would reconfirm the stock’s long-term bullish trend, which should make the $28 to $30 level attainable over a longer period of time. A break below $20, however would probably push the stock somewhere between $17 and $18 per share to test the long-term trend’s overall strength.