Houston-based Marathon Oil (NYSE:MRO) announced Q1 earnings on May 6 after market close. Management also discussed them with investors the next morning. It’s no secret that shares of oil companies have not performed well this year. Year-to-date, MRO stock is down over 55%, hovering around $5.5.
Many states, as well as countries worldwide, are working on opening up their economies. And investors are wondering what may be next for the petroleum and gas exploration and production company.
Oil prices are still very choppy, highly influenced by market sentiment. Let’s take a closer look at what to expect from MRO stock price in the coming weeks.
Volatile Oil Prices and MRO Stock
In recent months, the outbreak of the COVID-19 crisis has monopolized global public agendas. Yet for energy companies like Marathon Oil, earnings have been further affected by the decline in the price of oil.
Physical oil comes in different grades. Markets in general look at two different prices for crude oil, i.e. the global benchmark Brent Crude and the U.S. benchmark West Texas Intermediate (WTI).
Both began 2020 above $60/barrel. By March, they were around $20. Russia and Saudi Arabia at the time spooked the markets. Russia declared it wouldn’t cut back on production, while Saudi Arabia said it’d increase it. Since then, they have both agreed to decrease production.
Later in March, the International Energy Agency (IEA) cut its forecast for global oil demand for the rest of the year. With global airlines and a wide range of manufacturing plants shut down, the world is consuming less oil.
Meanwhile oil companies pump out a lot of crude oil, but they are not able to get it off their hands. The demand is just not there. Storage tanks in the U.S. are full of oil. And to top it all, in April oil prices dropped below zero.
The eventual easing of lockdown restrictions both in the U.S. and worldwide will likely boost the market for oil. But will it be enough to alleviate the pain for these embattled oil companies?
What Q1 Results Show
It is no exaggeration to say that oil companies have in recent weeks been bleeding cash. Marathon Oil has cut capital expenditures. It has also decreased drilling activity in its Oklahoma operations and in the Permian Basin. Yet the most recent Q1 results were a testament to what a difficult quarter it has been for the group.
The company announced an adjusted net loss was $125 million, or –16 cents per diluted share. A year ago, earnings had been 31 cents a share.
Net operating cash flow was $701 million, or $550 million before changes in working capital. It also ended the first quarter with $3.8 billion of liquidity, including $817 million of cash and cash equivalents and an undrawn revolving credit facility of $3.0 billion.
It produced 207,000 barrels of oil per day (BPD), which was on the high end of guidance. Yet for full-year 2020, the company now expects its underlying U.S. crude oil production to decline by approximately 8%.
The group also reported further cost reduction measures. Management said, “consistent with a focus to continually reduce its cost structure, Marathon Oil expects to capture annualized cash cost reductions of approximately $350 million relative to its initial 2020 budget.”
Would I buy now MRO stock based on the Q1 report? No, not at this point. There is a great deal of uncertainty in the markets right now. Ideally, I’d wait yet another quarter and study the next earnings report. I’d also like to see the balance statement and how the company is managing its cash and debt levels. Unless oil prices recover, the company may start to have important financing issues.
InvestorPlace‘s Faisal Humayun has recently provided a detailed piece on the company’s valuation levels:
“Marathon Oil expected free cash flow break-even at $47 a barrel for the year. With oil at $20, the producer is likely to be free cash flow negative. Therefore, Marathon Oil will leverage in the current year and it’s likely that debt continues to increase in the coming year. This will weaken credit metrics and will be bearish for MRO stock in a soft oil price environment.”
Pre-Coronavirus Highs Are Unlikely Soon
The price of oil depends on various factors, including economic conjuncture, business cycle, and potential political crisis worldwide. Supply shortages or demand oversupply triggered by political or health events tend to affect oil prices.
Back in 2018, most oil had stocks reached multi-year highs. In October 2018, MRO stock was above $24. Then, the slump began.
Share prices of oil companies usually get penalized fast when oil prices head south. By January 2019, MRO shares were around $14, On April 1, they hit a 52-week low of 3.02. Now, they are at $5.5. I believe this increase of around 82% in price between early April and now already encompasses any potential good news that markets expect from the industry and the company.
I do not expect the MRO stock price to go back to the highs of early 2020 in the coming weeks. Like many other companies, the group has also suspended the quarterly dividend and its share repurchase program. Thus passive income-seeking investors are not likely to return to the stock anytime soon, either.
The Bottom Line on MRO Stock
Oil prices are subject to booms and busts. And so far in 2020 MRO stock has been under considerable pressure.
As we get ready to finish the first half of 2020, is this a great opportunity to buy up oil stocks? After all, the stocks look cheap. Should investors buy low now and in time sell high?
Unless you are bullish on the price of oil, it may still be too soon to be fully invested in MRO stock.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
