With more state economies opening up, demand for oil jumping, and oil prices surging, it’s a good time to buy Marathon (NYSE:MRO). While Marathon’s first-quarter results and Q2 guidance will likely be well below the results that the company posted during the same periods in 2019, analysts’ estimates and MRO stock already reflect those declines. Further, Marathon is one of the best oil stocks to buy for conservative investors.
As I predicted previously, many states have opened their economies in May and fears about the virus are dropping, causing demand for oil to jump.
For example, Alabama, Arizona, Texas, Florida, Georgia, Tennessee, Utah, and South Carolina are among the states that have allowed the majority of businesses to reopen in all or (in the case of Florida) most of their territory.
Many other states plan to reopen most of their economies soon. And even very cautious states, like California, Illinois and Colorado, are taking tentative steps towards reopening.
Meanwhile, multiple signs suggest that fears of the virus are greatly easing. For example, according to a May 5 tweet by CNBC anchor Carl Quintanilla, research firm Fundstrat says that cell phone data shows “a consumer emerging from hibernation.”
A Closer Look at MRO Stock
Importantly for MRO stock, gas stations are one of the sectors whose business appears to have picked up the most recently. Finally, as I pointed out in a previous column, “During the week of April 24-April 30, the number of airline passengers surged around 30% from the low point of 95,000 earlier in the month.”
Not surprisingly given these trends, oil demand is climbing. Exxon Mobil CEO Darren Woods told investors on May 1 that oil demand was increasing in the U.S.
Meanwhile, “Swiss bank UBS said the easing of restrictions would help lead to a balance in supply and demand for the oil market in the third quarter and even projected an undersupply by the fourth,” according to Reuters.
Moreover, “hedge funds and money managers were buyers of petroleum derivatives for a fifth straight week in the week ended April 28,” the news service stated.
Contradicting the expectations of bears who in mid-April were saying that oil prices could reach -$100 per barrel, the price of crude is climbing. As of May 5, West Texas Intermediate prices had increased for five straight trading sessions. At midday on May 5, WTI was trading around $24.30, close to double its closing price of $12.34 on April 27.
I think that WTI could easily reach $40-$45 by the end of the month. At those prices, the financial viability of oil companies, including Marathon will no longer be questioned. Moreover, the higher prices will cause MRO stock to rally further. And that rally will definitely be justified because, as I’ll explain below, Marathon looks poised to break even when the price of WTI reaches $40.
Marathon Is a Good Name for Conservative Investors
As I reported in my previous column on Marathon, “the company estimated that it would break even from a cash flow perspective at an oil price of $47 per barrel.”
But after the company cut its capital budget to $1.3 billion or lower and ahead of what I see as a likely reduction of its dividend, I predicted that “Marathon will be able to break even with oil at $40 per barrel.”
Consequently, the company will likely break even in the second half of May and become profitable in June and July, when oil prices rebound further as the economic rebound continues. Marathon’s relatively low production cost makes it a top oil stock for more conservative investors.
The Bottom Line on MRO Stock
Analysts on average expect the company’s Q1 earnings per share to fall to -0.14 versus 0.31 during the same period a year earlier. Similarly, the Q2 average EPS estimate is -57 cents, versus the EPS of 23 cents in Q2 of 2019. Additionally, the shares have tumbled 57% this year.
I believe that the company’s stock price reflects its poor results through the first four months of the year but don’t factor in its rebound that’s beginning and likely to gather steam going forward.
Consequently, I recommend buying MRO stock heading into Marathon’s results.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any of the aforementioned securities.
