Marathon Oil (NYSE:MRO) reports its first-quarter results on May 6 after the markets close. Shareholders are unlikely to get good news. If you own MRO stock, you might want to hedge your bet and sell before its earnings announcement.
Here are three reasons why.
The Consensus is Not Good for MRO Stock
Of the 23 analysts covering Marathon’s stock, the average earnings estimate for the quarter is 14 cents, 145% lower than the first quarter of 2019. In terms of revenue, analysts expect it to deliver sales of $1.06 billion, 11.3% lower than a year ago.
In the past 90 days, the Marathon estimate has gone from 11 cents (90 days ago), to 8 cents (60 days ago), -4 cents (30 days ago), to -14 cents (today). That’s a 227% reduction in the company’s quarterly earnings estimate.
That’s not good when you consider that out of its past four quarterly reports, its latest result (Q4 2019) missed the consensus estimate by 30%, delivering a 3-cent loss instead of a 10-cent gain. With the momentum clearly in reverse, it’s possible Marathon’s earnings per share loss in the first quarter could be much worse than 14 cents.
From an ownership standpoint, it’s hard to understand why you would want to hang on to a stock that’s expected to lose $1.41 per share in 2020 and 96 cents in 2021. That’s especially true given analysts expect its revenues to drop by 7% per year for the next five years.
There Have Got to Be Better Options Than MRO Stock
InvestorPlace’s Larry Ramer recently discussed why Marathon’s low production costs make it a very attractive buy.
“Marathon reportedly has very low oil production costs. With a $2.2 billion capital budget and its current dividend of 20 cents per share, the company estimated that it would break even from a cash flow perspective at an oil price of $47 per barrel,” he wrote April 15.
Ramer went on to say that since the novel coronavirus took hold, Marathon’s cut its annual capital budget by 40% and could cut its dividend by as much as 50%, lowering its breakeven to $40 a barrel.
The only problem with this rationale is that oil prices have to cooperate.
Sure, oil prices have moved off the floor as investors contemplate a world with greater demand and lower supply, but West Texas Intermediate is still only trading at $19 a barrel. It would need to double and then some before getting to Marathon’s $40 breakeven.
OilPrice.com contributor Anes Alic discussed low breakeven costs in December. He pointed to six companies that would be able to survive a shale bust. None of those was Marathon Oil.
One company on the list, EOG Resources (NYSE:EOG), is the largest shale producer in the U.S. with operations in six shale basins. Diversification helps in oil just like it does in stock picking.
“Unlike many of its shale peers, EOG Resources has been drilling for returns and not merely shooting just for high oil and gas volumes,” Alic wrote in December. “The company has set a high hurdle for new wells: They should be able to generate at least a 30% after-tax rate of return at $40 oil. The company has about 7,200 locations that meet this criteria.”
OK, so why would you own MRO stock that breaks even at $40 oil, when you can buy EOG that theoretically would make 30% pre-tax on the same barrel of oil?
I sure wouldn’t.
Marathon’s Hedges Leaking Oil
As part of Marathon’s earnings report, the company is expected to update its hedging strategy, which InvestorPlace’s Mark Hake suggests could generate significant losses in the first quarter.
“That could result in losses of $166 million or greater during the quarter (i.e. 80,000 x 90 days x $23). And this would be on top of losing money for the rest of its production. This portion of its production likely has a higher cost than the present price of crude oil,” Hake wrote April 29.
He goes on to suggest that the oil producer ought to make money off its hedges in the second quarter before returning to losses in the third and fourth quarters.
Unless you are an expert in commodities trading, Hake’s comments should be enough to scare you away from MRO stock.
If you own Marathon, the first-quarter results are not going to be the catalyst to push its shares back into double digits. Not by a long shot.
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.
