After several failed attempts, Marathon Oil (NYSE:MRO) finally pushed through $6 per share on June 4. It’s an interesting development because the volume seems to be vanishing right as oil seems to be coming back.
That would appear to be a catalyst for Marathon, but traders seem to agree with the analysts. And that means that the sprint is not likely to become a marathon.
The Price of Oil Is Helping Marathon
Crude oil has made nearly a 200% rally from its April 22 low around $13 per barrel. Shares of MRO stock are up over 30% in that same time. It’s not clear yet if the fundamental supply/demand imbalance has really improved, but the market is forward thinking. And the market clearly believes that demand will improve.
The good news for Marathon is that management stated its cash flow breakeven oil price for the second half of the year would put oil somewhere in the low $30 range. The bad news is that a price in the $30 range will not be high enough to encourage the company to resume drilling operations. The market still has a lot of supply to work through.
Where Are Oil Prices Headed?
If I knew the answer to that, I would probably be doing something else for a career. The economy is reopening, but it’s hard to gauge the impact. Right now, it seems to me that the appearance of normalcy is passing as normal. But things are not normal.
How do I know this? A few days ago, I was checking in on a friend who works in the banking industry. He texted me that he filled up his car in March and just refilled it the last weekend of May. Many professionals continue to work from home and that will continue to suppress demand.
But even if there is more demand for gasoline as people begin to commute again, what about air travel? The airlines are saying they are ready to fly, but international routes will probably be closed for some time. And many business travelers may find that their companies have realized they can handle those trips more efficiently on a digital basis.
The same can be said of cruise lines. Fleets won’t even begin to sail until August. And when they do, many cruise lines are already saying they will be operating with fewer ships based on current demand.
The Analysts Seem to Be Right
The consensus price target for Marathon is $10.85. But this takes into account analyst price targets that have not been updated since last year. More recent price targets suggest that the stock is right where it should be. And my colleague, Muslim Farooque, did a nice job of explaining the current situation involving analysts’ opinions.
Mean estimates for the stock price are at the $7 mark, but the difference between the high and low estimates is more than three times its current share price.
And using the same valuation calculation as Farooque, I came up with a price target of just over $6. That was based on a price-earnings ratio of 18.5, net income of $260 million, and 790.3 outstanding shares.
Check Back on MRO Stock in a Few Months
The old adage of investing is “sell in May and go away.” That may be the case with Marathon. The trading volume has dwindled. Unless investors anticipate the price of oil rising to $50 or $60 a barrel, there would appear to be little reason to pay attention to MRO stock in the near term.
By Labor Day, we’ll have a better sense of what’s happening with the virus, with the election, and maybe even the return of fans to live sports. Each and all of those things can be catalysts for oil prices and Marathon stock. But in the absence of big news and a dividend that’s been suspended, you’re not missing anything by not participating in this marathon.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
