[Editor’s note: “Despite Recent Rally, Marathon (MRO) Stock Remains a Buy” was previously published on April 7. It is updated regularly to reflect the most relevant information.]
What’s next for Marathon Oil (NYSE:MRO)? MRO stock is up more than 212% off its 52-week low, as investors continue to bet on an oil price recovery.
Crude prices dipped a bit last week, but now they are trading above the $40 per barrel price level for the first time in months. And, with experts saying demand could eventually rise beyond pre-virus levels, it’s still possible oil continues bouncing back towards prices above $50 per barrel.
But, keep things in perspective. There’s still a long ways to go before oil retraces its high-water mark. With Marathon’s breakeven point just below $40 per barrel, it may be a while before the oil exploration company returns to profitability.
Yet, Marathon may still be a buy. Even after shares have bounced back from their lows. Let’s dive in, and see why the ship hasn’t sailed for this contrarian energy play.
MRO Stock: Predicting the Unpredictable
Given its dependence on oil prices, you can put Marathon stock in the “predicting the unpredictable” category. An end to “shelter-in-place” orders could mean oil demand bounces back to prior levels. On the other hand, a weakened global economy may mean energy prices remain depressed for an extended period.
In short, tough times for the oil exploration company. Marathon is in a better place financially than near-bankrupt Chesapeake Energy (NYSE:CHK). But, while Marathon probably won’t be totally wiped out, it may take a full oil demand recovery to move shares significantly higher from where they are today.
Even then, it could be awhile before the company can resume share buybacks or big exploration projects or find other ways to move the needle. So why should investors buy Marathon’s stock now?
I can think of one reason: potential for big gains if oil prices continue to bounce back. Marathon continues to trade below where it was just a few months back. Earlier this year, shares were changing hands at prices well north of $10 per share.
Granted, don’t expect shares to double again in the next few months. Yet, with its potential gains outweighing its possible losses, Marathon’s stock could be a buy, as shares pull back after going parabolic earlier this month.
An Asymmetric Wager on Oil Price Rebound
It’s still uncertain whether oil can continue to climb higher. But that doesn’t mean we should write off Marathon Oil stock as an investment idea entirely. In light of its risk/return ratio, it may be worthwhile considering a position in the shares.
Think of MRO as an asymmetric wager. In other words, the stock’s potential gains outweigh its possible losses.
So how much could the shares rise? As InvestorPlace’s Will Ashworth wrote May 27, Marathon’s breakeven point for its operations is $37 per barrel. If oil holds steady, or continues to climb, the company will again generate positive free cash flow.
In other words, its buyback program can resume. Given that the amount left in the company’s buyback plan ($1.4 billion) represents a fair chunk of its current market capitalization ($5 billion), buybacks could move the needle in a big way.
Marathon’s stock may not climb back to prices seen in prior years. But if oil prices keep on heading higher, the shares could continue to rally back towards double-digits.
How much could the shares drop? With shares moving from around $3 per share to $6.50 per share since April, Wall Street has priced-in a lot of this company’s upside. If oil prices dip after reaching the $40 per barrel price level, expect a pullback to happen with this stock.
Yet, said pullback could mean a solid entry point for those who missed out on buying this stock at lower prices. Given the trend (rising energy prices) remains this company’s friend, there’s still share price upside potential left on the table.
Marathon Could Be Worth the Risk
Marathon is not a slam-dunk opportunity even as the shares remain far below their prior price levels. However, as oil demand bounces back, the exploration company’s stock could generate massive gains as its free cash flow goes from negative to positive.
However, keep in mind it could be a long road to oil price recovery. Prices are back to where they were before the pandemic sell-off. But there’s no guarantee they will continue to climb. Or worse yet, fall back to prior lows.
Nevertheless, Marathon Oil remains a high-risk, high-return opportunity. Consider stock in MRO a buy, as shares could continue to climb higher.
Thomas Niel, a contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.