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Why Marathon Oil Corporation Stock Could Be Off to the Races

Higher oil prices and lower costs make MRO stock a buy

MRO stock - Why Marathon Oil Corporation Stock Could Be Off to the Races

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What a difference a year can make. For independent E&P firm Marathon Oil Corporation (NYSE:MRO), it makes all the difference in the world.

Thanks to its ill-timed spinoff from refiner Marathon Petroleum Corp (NYSE:MPC) and crashing oil prices, MRO stock has spent much of the last few years in the doghouse. Losses, on both share price and in operations, have continued to pile up.

But for Marathon Oil, the last quarter could be the real start of its turnaround.

Great analyst-beating results, higher oil prices and a continued focus on the right shales is starting to work its magic on the earnings front. For investors, this is just the news we need to hear.

Marathon’s Big Beat

A $28-million loss. On the surface, that may make investors shake their heads. But for the struggling energy sector and MRO stock, in particular, that loss is actually pretty darn good. That’s because last year at this time, Marathon Oil was losing about $1.4 billion per quarter.

The key for MRO has been rising oil prices and a shift in its strategy.

Marathon Oil was particularly vulnerable to the lower energy price environment that has been pretty constant since 2014. As prices imploded, MRO stock was and has been at the mercy of crashing crude oil. As an independent energy producer, the cushion that refining typically provides was no longer there.

The firm was basically spun off from refiner Marathon Petroleum at just the wrong time. But with prices for West Texas and Brent benchmark crude surging, Marathon Oil is singing a different tune.

With oil now above $50 per barrel, MRO has managed to achieve coveted free cash flow neutrality, which includes dividends and CAPEX spending. For many oil firms, this has been a tough nut to crack.

But part of the reason why Marathon has been able to now perform well has been its new focus. MRO was once a hugely diverse energy firm. That’s fine when oil is close to $100 per barrel. You can afford to have deepwater projects and oil fields across the Middle East and other places. Not so much, with oil in the lower $50s.

Prices that low take cheap shale to make it work. And that’s exactly what MRO has been focusing on.

Today, Marathon Oil’s focus sits squarely in Eagle Ford, Bakken and the SCOOP/STACK in Oklahoma. Those are literally three of the cheapest and most prolific places to drill for crude oil in the entire United States.

As a result, Marathon was able to reduce its production costs down to $5.33 per barrel of oil equivalent (BoE) during the fourth quarter. That was even lower than what it recorded during the third quarter of last year, and represented a record low for MRO since becoming an independent E&P in 2011. Meanwhile, SG&A costs have dropped 45% since the oil bust began.

When you combine the continued focus on lowering costs, while realizing higher oil prices, it’s easy to see how Marathon Oil has begun to turn it around.

Marathon Is Just Getting Started

The real beauty is that Marathon is doubling down in its efforts in these low-cost shales. The energy stock expects more than 90% of its $2.3 billion in development CAPEX spending to be allocated to these high-return/low-cost regions. That should help boost these plays to be more than 70% of MRO’s production mix and help grow its output by 18%.

That puts MRO in a very powerful position. For one thing, it’ll continue to be cash flow neutral with oil priced in the $50s per barrel. This includes the firm’s dividend payout. But it’ll be able to deliver meaningful cash flows and dare I say it, profits, with oil at $60 per barrel.

Marathon plans on using extra cash flows to enhance its abilities even further with bolt-ons, continued debt reduction and strengthening its balance sheet. Management even hinted at raising the dividend if all goes according to plan.

This is exactly what we’ve been looking for and could be the light at the end of the tunnel for long-suffering MRO stockholders. Marathon is clearly turning the corner, and continued focus on low-cost drilling is paying big benefits. This last quarter is perhaps the turning point for MRO stock.

Time to Buy MRO Stock

With things finally getting better for Marathon Oil, the time to buy MRO stock could be now. Even better, the recent overall market selloff has knocked shares down a few pegs, even though things are moving in the right direction. This gives investors a chance to buy Marathon below its potential.

And they may want to do just that. Shares managed to jump 5.48% on just the less-than-expected loss this quarter. Imagine what will happen when it reports a profit? Which it should when it next reports. Oil prices have gone higher, and MRO’s costs have gone down. If oil prices keep rising, it should be off to the races once again.

For investors, that means taking advantage today of all the good fortune that MRO’s recent quarter has brought.

Disclosure: None

Article printed from InvestorPlace Media,

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