It has been almost nine years since Marathon Oil (NYSE:MRO) spun-off Marathon Petroleum (NYSE:MPC), the company’s downstream business. Since the 2011 spinoff, MRO stock has lost 78% of its value, falling from $26.52 (adjusted for splits and dividends) before the spinoff, to $5.89 as of the May 22 close.
Owners of Marathon Oil got one share of MPC for every two shares of MRO. Assuming the 20 shares of Marathon Oil were worth $530.40 before the spinoff (20 times $26.52), today, those shares are worth $117.80. However, shareholders got one share of MPC for every two shares of MRO.
Those 10 shares of MPC are worth $355.70 for a total of $473.50. Throw in the Marathon Petroleum dividends over the past nine years and you’ve probably made a cumulative total return of 18% over the past nine years.
I’m spit-balling, of course, but I think you get the picture. Marathon Oil did not live up to its end of the bargain.
The question I have is: Can MRO stock ever get back to $30, where it traded just before the spinoff?
MRO Stock Doesn’t Have a Chance
Marathon reported a first-quarter adjusted loss of $125 million on $1.23 billion in sales. Interestingly, while the revenues rose by 2.8% over last year, the adjusted loss was 148.8% lower than its $256 million profit in Q1 2019.
The company’s production in the first quarter was 419 million barrels of oil equivalent per day (mboed), up from 385 mboed a year earlier. Unfortunately, average price realizations during the quarter for crude oil averaged $44.23 a barrel, 18.2% less than a year earlier.
It’s not surprising, given the slackening demand during the Covid-19 pandemic. As Gianna Bern, energy expert and finance professor at the University of Notre Dame’s Mendoza College of Business, wrote in an email to InvestorPlace, “Markets have never seen negative WTI prices … driven by colossal lack of demand. As most driving and flying has stopped, the May futures contract is taking the brunt of this historic collapse to negative WTI prices. … Crude oil demand, from the transport sector, is at a standstill.”
Morgan Stanley analysts lowered their Marathon rating on May 19 from “neutral” to “underweight” with a 12-month price target of $5, 15% below where it’s currently trading. MarketWatch points out that of the 3,204 stocks Morgan Stanley covers, only 17% have underweight ratings.
Marathon is in an exclusive group of 545 stocks expected to underperform over the next 12 months.
“While the company is taking the right steps to preserve liquidity in response to low oil prices, [Marathon Oil] screens challenged versus peers with a 2021 [West Texas Intermediate] break-even of $37 a barrel (in the upper half of our coverage), and year-end 2021 leverage that rises to 4.5X at strip, above the peer median of approximately 2X,” McDermott wrote in a note to clients.
Debt is not something you want at a time when the supply and demand for oil are expected to remain out of whack for months, if not years.
Oil Prices Are Rising
A barrel of West Texas Intermediate started the year at $61. Then the price went negative in April due to the use of derivatives by speculators, etc. Now, it’s managed to make its way up to $34.50, less than three dollars from Marathon’s breakeven.
InvestorPlace’s Ian Cooper believes that MRO stock has the potential to double soon as the economy continues to reopen and the world consumes more oil in the process.
First, Cooper points to the lower supply, as the initial catalyst for moving Marathon higher.
“[T]he Energy Information Administration (EIA) has even said U.S. crude production could fall to 7.8 million barrels per day in June. That’s a steep drop from 8 million in May. The EIA also just reported a fall of 5 million barrels in weekly supply,” Cooper wrote May 22.
Second, for oil prices to move significantly higher, there needs to be a significant uptick in demand to create a positive imbalance. Cooper points to China, suggesting that China’s consumption is back to levels seen before the novel coronavirus. He wrote:
Reopening economies in the U.S, and across Europe are helping to fuel demand, as well. With improving oil fundamentals, and the worst of the worst priced into the MRO stock, now may be a great time to accumulate. I strongly believe MRO could double from current prices.
While $10 and double digits might be possible, getting back to $30 where it was before the spinoff, seems very unlikely given the world’s push to greener fuels.
If you’re a long-term buy-and-hold investor, MRO stock is probably not for you. However, as Cooper suggests, if you’re speculative by nature, it does present a possible buying opportunity.
Only aggressive investors need apply.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.