Back in November 2018, I highlighted Marathon Oil (NYSE:MRO) stock as an intriguing play for energy bulls. To be frank, that call hasn’t worked out. Marathon Oil stock has declined 28% since then, while the S&P 500 has gained 19%.
That said, my core thesis actually wasn’t that far off. Like pretty much every energy play, MRO stock needs crude prices to cooperate. They haven’t — but that key factor aside, Marathon Oil stock has performed much as I predicted it might.
MRO stock has underperformed diversified energy majors like Exxon Mobil (NYSE:XOM) and Chevron Corporation (NYSE:CVX) whose downstream operations provide an internal hedge against lower prices. But its losses haven’t been as severe as those at leveraged explorers Chesapeake Energy (NYSE:CHK) and Callon Petroleum (NYSE:CPE).
Admittedly, West Texas Intermediate (WTI) oil spot prices haven’t declined much in the last 14 months: prices have only fallen about 2%. But that includes a recent rally amid rising tensions in the Middle East, so it’s fair to say that long-term expectations for crude prices are lower than they were in late 2018.
Meanwhile natural gas prices,as measured by the Henry Hub spot price, have fallen roughly 40%. Those pricing pressures explain why MRO shares have fallen much more than any aspect of the company’s performance in that sector.
This discussion isn’t meant to explain away my late 2018 call on Marathon Oil stock. Rather, it’s meant to highlight an interesting aspect of MRO at the moment: the bull case, even at this lower price, isn’t all that much different than it’s been for years now.
The Narrow, Yet Intriguing Bull Case for MRO Stock
It is exceedingly unlikely that MRO stock winds up being the biggest winner in a rising oil price environment. That honor likely would go to a lottery ticket like CHK stock, whose enormous debt load amplifies movements in the value of its acreage (for better and for worse).
However, Marathon Oil probably isn’t the “safe” pick in energy either. Its balance sheet is in reasonably good shape, which can help minimize downward movements. But that’s not enough to avoid a downturn, as investors have learned for the past six years (shares are down more than two-thirds from 2014 highs).
For safety, majors like XOM, CVX, and BP (NYSE:BP) offer attractive dividends. Their refining and gasoline operations can drive higher profits in a lower oil price scenario. Marathon gave up that hedge when they spun off Marathon Petroleum (NYSE:MPC) back in 2011.
That said, there’s an interesting case for MRO stock between those two extremes. Shares don’t necessarily look cheap on a profit basis, at about 25 times the 2020 consensus earnings per share estimate. But it doesn’t take much of a pricing change to change that. A 10% increase in crude oil prices alone, from an average realized price of $55 in the third quarter, would roughly double earnings.
And in terms of what the company can control, the news looks good. Production costs in the U.S. on a per-unit basis were $4.75 in Q3, the company’s lowest cost since that 2011 spinoff, according to the earnings release. The balance sheet is in fine shape, with less than $5 billion in gross debt at the moment. Marathon Oil could look to acquire either more acreage or another operator: the company recently picked up 18,000 net acres in the Eagle Ford play and has the dry powder for more such deals.
Marathon Oil Stock Needs Help
Again, looking to 2020, the case looks much as it has since the oil bust arrived in 2014. MRO stock does need a boost from crude: shares simply are not going to be able to move higher in a so-called “lower for longer” price environment.
But Marathon has managed the past few years well enough to at least avoid precipitous declines for shareholders. And it’s set itself up well for an industry-wide rebound. Costs are at a low, and the balance sheet means the company can manage through another oil shock, or even a recession.
For investors bullish on oil, but wary of the risk and volatility involved in smaller, more leveraged plays, Marathon Oil stock remains an attractive play. The question is whether the pricing environment will cooperate.
As of this writing, Vince Martin held no position in any of the securities mentioned.