One of the stores that seems to have really gotten lost in the jumble and noise of the stock market sell off coming in to the end of the year is the way oil prices have tanked at the same time. Questions about a global economic slowdown have played a big role in that decline, but the overall skittishness in the stock market certainly isn’t helping matters. Since the beginning of October, West Texas Intermediate (WTI) crude is down almost 39%, while Brent crude is down about 33% over the same period. That decline significantly outpaces the stock market’s decline, and yet all of the market noise is about whether the stock market is finally going to turn bearish, what the Fed is going to do with interest rates, and what will happen in China.
All of the factors that news outlets seem to be focusing on are playing a role in the price of oil, but one that doesn’t seem to have gotten much more than a brief glance of attention is the fact that OPEC, along with a few non-OPEC nations agreed to cut production beginning of January of the new year. Not too surprisingly, the market seems to be pricing some of that impact into prices already; in the meantime, U.S. crude production growth seems to have also started to show signs of a slowdown.
As fall started to move into winter, there were some reports and analysts I could see that speculated about oil getting back to early 2014 levels, when WTI and Brent crude were both above $100 per barrel. With prices now back to levels the market hasn’t seen since early in the fourth quarter of 2017, it seems that the real question could be if we aren’t moving into another protracted oil downward trend that will take a year or more to reverse again. Even if it doesn’t, the rapid decline in oil prices over just the last two months have pushed stocks like Marathon Oil Corporation (MRO) even further off of their high prices.
Higher oil prices have helped the profits of oil & gas explorers and producers like MRO grow very nicely for the past few years, and that helped MRO stand out as a star performer in an uncertain stock market for most of the year; but after touching a high a little above $24 per share in October, the stock has dropped more than 42% and is threatening to revisit lows it hasn’t seen since late summer of 2017. Does that mean opportunity from a value -based standpoint in a stock with good fundamentals, or that there is even more risk ahead?
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 $11.6 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, with earnings jumping 400% while sales increased about 33%. These numbers also improved in the last quarter, with earnings growing 60% and sales 17.6%. Growing earnings faster than sales is difficult to do, and is generally not sustainable in the long term, but it is also a positive mark of management’s ability to effectively maximize the company’s business operations. MRO operates with a healthy margin profile, with Net Income growing from about 11% of Revenues over the last year to about 16.5% in the most recent quarter.
- Free Cash Flow: MRO has very healthy free cash flow of a little over than $1.2 billion over the last twelve months.
- Debt to Equity: MRO’s debt/equity ratio is .46, which is a generally conservative number. The company shows about $1.5 billion of cash and liquid assets on its books versus $5.5 billion in long-term debt. Their balance sheet shows that operating profits are more than adequate to service the debt they have.
- Dividend: MRO pays an annual dividend of $.20 per share, which at its current price translates to a dividend yield of 1.44%.
- 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 $14.10 per share. At the stock’s current price, that translates to a Price/Book Ratio of .98. The historical average for MRO is .92, which means that MRO is slightly over-valued by about 64.% at current price levels. The stock’s Price/Cash Flow ratio differs a bit, since it is current trading about 12% below its historical average. Neither number is sufficient to suggest the stock is at a compelling price level to make a value-based investor anxious to take on a new position.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The chart above gives a good look at the stock’s price movement over the last two years, including its impressive run from September of 2017 to October of this year, when it more than doubled in price. That positive run is a sharp contrast to the stock’s decline from that peak; the slope and severity of the drop in just a little over two months speaks to the sharp downturn in momentum and sentiment that has pushed this stock to a new set of 52-week lows. It is currently sitting right on what could be a support level at around $13.50 based on a brief consolidation period from a year ago, but given the bearish strength of the stock’s current trend, it seems more likely the stock will test its multi-year low support level between $10.50 and $11.50.
- Near-term Keys: If the stock breaks below $13.50 as just mentioned, there could be an interesting opportunity to short the stock or buy put options to play the roughly $3 per share distance to the lower end of the stock’s next support level. A short-term bullish play is hard to justify given the strength of the downward trend. At its current levels, it’s also hard to argue that the stock is a great buy; however if it does drop below $11, and gets closer to the $10.50 range, that story will become very compelling.