Oil stocks are starting to enjoy a bit of a rebound. A couple weeks ago, oil briefly crashed below $0 per barrel and folks fled the energy sector. However, crude oil has been on a winning streak in recent days. NYMEX crude has hit $25, and Brent oil is back up to $30 per barrel. Now, to be clear, $30 oil is hardly a great scenario for bulls. But it’s infinitely better than zero. Some people are starting to give energy a second chance. Be careful with what you buy though. Many oil companies won’t enjoy a quick recovery. Marathon Oil (NYSE:MRO) stock is one such energy name to avoid right now.
The company just released a dismal earnings report. It announced losses, employee layoffs and a dividend freeze among other negatives. And sure, a rising oil price will help the ease the pain to a degree. But Marathon will have a long period of doldrums before things get significantly better.
A Crushing Earnings Report
For Q1, Marathon produced $1 billion in revenue, down 15% from the same period last year. And that was with the average oil price still up at $45/barrel. Revenues will plunge and losses accelerate going forward. Speaking of losses, Marathon swung to an operating loss in Q1, with non-GAAP earnings-per-share coming in at a loss of 16 cents per share. Both EPS and revenues missed analyst expectations.
The bad news didn’t stop there. The company withdrew earnings guidance for the rest of the year. On a production level, it sees oil output falling around 8% going forward. It also suspended both the company’s share buyback and the dividend thanks to the dire industry conditions. Given that the company is operating at a loss, it makes sense to stop the dividend, but it’s still a blow for loyal shareholders.
Massive Cost-Cutting
In response to the downbeat earnings report, Marathon Oil made major changes. For one thing, Marathon is laying off 16% of its work force going forward. In addition to that, it’s cutting its budget for contractors by more than half.
Not surprisingly, this coincides with a massive reduction in capital expenditures for the year. Marathon now envisions spending just $1.3 billion on CAPEX this year. That’s down sharply from its earlier guidance, and is also a cool 50% reduction from what it spent last year.
No Quick Turnaround
Now, Marathon’s bulls can argue that as oil starts to recover, the company could see its fortunes improve. That may be true in the long-term. But don’t expect a big reversal anytime soon.
First, we’d need to see greater improvements in the oil market — greater demand and higher prices. And it could take a while.
Consider the sheer amount of oil in storage right now. Kannan Ramaswamy, William D. Hacker chair professor of Management in global business at Thunderbird School of Global Management, wrote in an email to InvestorPlace:
“A lot will depend on the supply overhang and how quickly demand regenerates. From all reports, that could take a while because of the excess supply, currently estimated as high as 30% per day. One has to also take into account the fact that there are multiple oil tankers that have been leased by Saudi Aramco sitting just offshore from the U.S. Gulf Coast refineries, fully loaded with Saudi crude ready to be sold to buyers when demand picks up.”
Marathon has now made massive cuts to the core of its capabilities as an oil production firm. You don’t fire a major chunk of your workforce and slash spending in half without losing some major talent and expertise going forward.
The company, in its earnings release, for example noted that its well completions will virtually come to a halt in Q2. Given low oil prices and the slashed CAPEX budget, Marathon’s activity could remain limited for most of 2020, even assuming the novel coronavirus factor starts to fade. Marathon’s oil production should be down meaningfully for 2020, and will likely slide again in 2021 as the effects of its slashed budget set in.
The Verdict on MRO Stock
This could have been a truly awful period for Marathon Oil. The company’s latest earnings report was bad from start to finish. Firing tons employees and slashing spending will make it hard for the company to make a comeback anytime soon. And eliminating the dividend got rid of a major motivation to hold the stock in the interim. The company was fortunate to release its negative news during a major rally in the price of crude oil; otherwise, things would have gotten ugly.
With the energy sector battered, just about everything is reasonably priced or on sale. There’s little that makes Marathon Oil the most compelling play within the space. There are much larger, higher-quality companies on sale that are still profitable and haven’t stopped paying their dividends. And if you want to go for speculation, other energy companies with more leverage probably will serve as better trading vehicles in the short run.
Marathon Oil could turn things around sooner or later. It’s not a lost cause. But there’s no compelling reason to need to be involved in the stock right now. This one’s not going anywhere for awhile.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
