Marathon Oil (NYSE:MRO) was due to open for trade May 12 at $5.86 per share. That’s a market cap of $4.84 billion for a company that had $5 billion in revenue in 2019. MRO stock still trades at about 18 times last year’s earnings.
As with almost all oil companies, the problem is that there are no longer earnings. Marathon lost $46 million in its March quarter, on revenue of $1.23 billion. That doesn’t scratch the surface of the disaster to come. The Saudi-Russo oil war didn’t get going in earnest until March and accelerated into April.
Investors have begun nibbling on the MRO stock shares, wondering if this is as bad as it gets for the U.S. oil patch. The real question should be, which Marathon do you want?
Marathon Oil’s Story
Just six months ago, Marathon was beginning construction of a new headquarters building, 16 miles west of downtown Houston. Since then it cut capital spending twice, retreating from commitments to North Dakota’s Bakken and south Texas’ Eagle Ford plays.
Marathon had previously retreated from its international operations, including Iraq, the North Se,a and Libya – 10 countries in all. It still has natural gas operations in Equatorial Guinea, but that government has given it a two-year moratorium on drilling.
MRO stock could have kept its dividend. It had enough free cash flow to pay it. But as our Mark Hake noted, the company decided to prioritize its credit rating. Fitch reaffirmed that rating in March at BBB, but revised its outlook to negative.
There’s some hope in the future for Marathon in the derivatives markets. It lost money on trading in the first quarter but should do better in the June quarter.
The Other Marathon
Since then Marathon Petroleum is up 58%, although in mid-2019 it was up over 200%. During that time Marathon Oil is down over 70%. As a stand-alone company, MPC made some major deals, buying refinery operations from British Petroleum (NYSE:BP) in 2013, and buying out a huge independent called Andeavor in 2018. In the process it nearly doubled in size.
But the pandemic has hit Marathon Petroleum just as hard as it hit Marathon Oil. MPC lost $9 billion during the March quarter. “Crack spreads,” the difference between what oil costs and refined products sell for, briefly turned negative.
Like MRO, MPC is husbanding cash. In April it raised $2.5 billion in debt at 4.5-4.7%. New CEO Mike Hennigan said he will be “extremely” disciplined in allocating capital. MPC said last year it would spin-out its Speedway gas station operations. This includes stations branded to Marathon, which are building larger units on interstates with fast food partners like Restaurant Brands (NYSE:QSR).
The Bottom Line on MRO Stock
Global oil prices seem to have bottomed, with Brent North Sea oil now at over $30 and U.S. West Texas Intermediate over $25.
But the worst may indeed be over. Marathon Petroleum still hopes to spin-off its stores by the end of 2020. The company tried to sell the Speedway chain for $22 billion to the Japanese parent of 7-11, but that fell through.
It may be a blessing in disguise. MPC’s total market cap is $21.4 billion. Its retailing operations should remain profitable. If I were interested in oil stocks, MPC stock would be my play. Then I would sell the refiner after the spin-off and keep the stations.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.