Marathon Oil (NYSE:MRO) stock was a solid energy price rebound play, as I’ve discussed previously. But, as oil trades around $36 a barrel, it’s debatable whether prices will continue climbing back to where they were before the novel coronavirus. Granted, things are looking brighter for MRO stock than before. Yet, these improved fortunes are already reflected in today’s share price.
In other words, the ship’s likely sailed on big gains in this oil exploration stock. With Wall Street pricing-in a V-shaped recovery, it’s tough to see substantial upside going forward. That’s not to say shares are heading lower. As demand picks up post-pandemic, oil could continue to climb. The question is, will they bounce back to prices well above the company’s breakeven point?
According to the U.S. Energy Information Administration, the short-term forecast calls for crude oil prices to be around $43 per barrel in 2021. That’s not that far above Marathon’s breakeven price (around $37 a barrel, as InvestorPlace’s Will Ashworth wrote May 27).
That means the company’s cash flow situation may not improve anytime soon. And, without cash flow bouncing back to prior levels, potential needle-movers like stock buybacks are out of the question.
With minimal catalysts on the horizon, and continued oil price climbs uncertain, it may be best to skip out on Marathon for now.
Out of Stream
Like with many hard-hit names, if you bought MRO stock at the bottom, you’re sitting on some massive gains right now. With shares trading just below $6 per share, they’ve nearly doubled in a matter of months.
Yet, while Marathon remains far below its 52-week-high $14.70 a share, further share price upside may be a long-shot. Everything hinges on future oil price moves. As of late, anticipated reduced supply and improved demand have helped led to energy prices trending higher as of late. But, there’s no guarantee that prices will retrace prior levels.
As our InvestorPlace contributor Louis Navellier recently wrote, oil demand may never recover to pre-pandemic levels. Between the potential declines in business travel, and “working-from-home” becoming more acceptable, you could argue today’s oil price levels will become “the new normal.”
And that doesn’t bode well for MRO stock. The company has already cut expenses to the bone, in an attempt to reset its breakeven point. Doing as much as it can, the rest remains highly dependent on outside forces.
Taking these factors into account, it’s hard to see shares moving substantially higher from here. Barring continued gains in oil, MRO could tread water. Or perhaps, fall back toward its 52-week low of $3.02.
Lower is Possible
Shares have moved higher, in tandem with other oil stocks. Yet, there’s good reason shares could see a pullback. Especially when assessing the company’s relative weakness. That’s the view of Morgan Stanley’s Devin McDermott, who in May downgraded shares from the equivalent of hold to sell.
His rationale? The analyst sees the company facing greater challenges than its peers. Firstly, its per-barrel breakeven price is higher than average. Secondly, the company’s balance sheet is more leveraged compared to similar names. With these factors in mind, McDermott sees the stock’s current valuation as “unwarranted.”
Granted, his negative outlook doesn’t mean shares are going to tumble back to past lows, as McDermott’s price target is $5 per share. But still, it does show shares could pull back from their current prices. Add in recent downgrades to its credit rating, and there’s plenty to be concerned with in the near-term.
So, does that make MRO stock a sell? I wouldn’t go that far. Yes, I don’t see much share price upside from here. But, given there’s still a chance oil continues to rally higher, shares could continue to climb. In other words, it’s too risky to short this name right now.
Does that make it a buy? I’m saying that, either. With the potential for shares to tread water (or even head lower) through the rest of 2020, the stock’s risk/return proposition is not in your favor.
Consider MRO Stock a ‘Hold’ for Now
As I wrote previously, this oil exploration stock remains a high-risk, high-return opportunity. Yet, the easy money’s already been made. Further upside is too dependent on outside factors (oil prices continuing to climb).
In other words, if you believe oil continues bouncing back, MRO stock may be worth the risk. Otherwise, skip out on this name for now, as much of the upside has already been priced into shares.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
