Marathon Oil (NYSE:MRO), investors in MRO stock, and other energy companies received great news recently. Over the weekend, the Organization of the Petroleum Exporting Countries announced that it had reached a deal to slash oil production.
OPEC member countries, along with Mexico, will reduce petroleum production by around 10 million barrels per day going forward. This is a huge move. World oil production was just under 100 million barrels per day, meaning that this will take more than 10% of global supply offline.
Crude oil futures initially advanced on the news, but profit-takers came in and pushed oil back down on Monday. Some traders reasoned that, thanks to the novel coronavirus, global oil demand is down nearly 30 million barrels a day right now, thus exceeding the supply reduction. However, that’s a shortsighted view. As the economy comes back online, oil demand will recover. Meanwhile the production cuts will be, in effect, limiting supply.
Sure, it won’t be an overnight process. But this OPEC+ agreement has set the stage for a powerful rally in oil prices once the economic pendulum starts to swing upward again. And when it does, companies with strong resource bases and savvy management teams, like Marathon, will be in a position to benefit.
OPEC+ Deal Could Be a Game-Changer for MRO Stock
Last weekend’s dramatic OPEC+ deal to slash oil production should be a big help to most energy companies. But the market hasn’t reached that point yet. Some of the major oil stocks, like ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX), have bounced significantly from their lows and priced in a lot of good news already.
Exxon stock, for example, has already advanced 40% from its recent lows, recovering much of this year’s losses. Marathon Oil, by contrast, has only slightly bounced after getting decimated in the first three months of 2019.
Yet, the bounces in Exxon, Chevron, and other leading energy companies seem to be more based on brand name than any particular strengths. Exxon is tied to much of the same shale dynamics as Marathon is, for example. Meanwhile, Chevron has issues with its LNG projects, given low oil prices and falling international demand. Yet investors have overlooked those flaws and bought their shares back up. MRO stock is deserving of at least a similar rally.
Marathon has historically been one of the larger and more successful players in the shale space. With plays in the Permian, the Bakken, and other emerging oil patches, Marathon has a portfolio that will be worth multiples of today’s prices once oil returns to $50+. For now, all the shale players have to tighten their belts to endure the current decade-low energy prices. But when shale comes back, Marathon is positioned to be one of the leading survivors.
Taking the Right Steps to Overcome Oil Prices
To conserve capital, Marathon recently suspended its drilling programs in Texas’ Permian Basin. The company is describing this as a “frac holiday” that will run through at least the end of the second quarter. CEO Lee Tillman explained that: “We’re maintaining our returns-first mindset with a focus on preserving value through the cycle.” This is a shrewd move that will enable the company to produce cash flow from existing operations and to defer exploration expenses until oil prices are higher.
This continues Marathon’s record for responsible behavior during the energy bust. Already, Marathon had cut costs aggressively and used hedges to protect its profitability. Despite difficult oil and gas conditions in recent years, Marathon has managed to produce eight straight quarters of positive cash flows from operations.
Admittedly, that streak may be in jeopardy this quarter with oil’s recent decline. However, the OPEC+ deal should quickly get the oil market back on a firmer footing. Meanwhile, Marathon’s oil hedging program remains strong through 2020, giving the company considerable protection from current rock-bottom crude prices.
MRO Stock Verdict
Investors are understandably nervous about the energy sector. A lot of energy companies have already failed. More appear to be in serious trouble. With that in mind, some investors might look at Marathon Oil, see the sub-$5 stock price, and assume a similar fate. But that would be a big mistake.
Marathon has a decent balance sheet and very strong oil production capacity. Despite the low share price, the company still has a more than $3 billion market capitalization, and produces around 400,000 barrels of energy per day. This is no fly-by-night oil company, and management has already proven resilient in recent years during the energy bust.
Now, with the OPEC+ deal, energy stocks are starting to come back to life. Many of them, anyway. And yet, Marathon stock’s share price is still depressed. That could change in a hurry. Last weekend’s deal could kick this stock into high gear.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.
