While the price of oil has been rising past $40 a barrel this month, Marathon Oil’s (NYSE:MRO) MRO stock tried rallying, but failed.
West Texas Intermediate (WTI) oil, the primary U.S. oil grade, has risen 30% in less than one month. July futures were at $32.81 per barrel on May 27. They were at $41.39 on June 23.
But MRO stock has made a round trip. It traded at $6.01 a month ago. Only a surge overnight had it at $6.50 on June 23.
Despite boosting by some analysts convinced its cash flow will get it through, the stock recently had its rating cut to “sell” by Goldman Sachs (NYSE:GS).
The New Conventional Wisdom
The new conventional wisdom is that oil is doomed. Transportation, which is the primary oil market, collapsed with the COVID-19 lockdowns. The decision by Saudi Arabia to launch a price war for market share decimated the sector. At one point, futures contracts sold in negative territory. Traders were being paid to take oil.
Stock in companies that make gasoline engines, from Ford Motor (NYSE:F) to Cummins (NYSE:CMI), are going nowhere. Electric car specialist Tesla (NASDAQ:TSLA) has breached $1,000 per share. It has more market cap than the rest of the sector combined.
This was an inevitable event. The fall of oil has gone from necessary, to possible, to obvious thanks to the virus shock, the price war, and the drop in renewable energy prices. New solar panels now produce electricity for just 6 cents per kilowatt hour. The Department of Energy sees it being cut in half again.
The new conventional wisdom tells oil companies to pump cheap fields in West Texas now, and write off more expensive reserves. Marathon gets 90% of its oil from the U.S., and is thus subject to these realities.
The Bull Case
The short-term is different from the long-term for MRO stock.
There has been a bull run on Marathon stock during the last month. On June 1 it was trading as low as $5.38 a share. A week later it closed at $8.40.
This was sparked by the success of OPEC+ in shutting down supply, and the hope that economic growth would return. As the economy seemed to recover and Marathon adapted to low prices, our Mark Hake became bullish again.
A dividend cut in February meant Marathon seemed cash rich. The May 7 quarterly report, covering the March quarter, showed only a small loss. Net cash flow from operations rose from $515 million in 2019 to $701 million.
But this has been a false dawn. A week after Hake’s article, Josh Enomoto was bearish, calling Marathon’s future “unsustainable.” Ian Bezek suggested investors “wait until next year” to buy the stock. He saw that half of Marathon’s current production is hedged at $30/barrel. This limits its ability to take advantage of June’s rising prices.
This play between short-term optimism and long-term pessimism is Marathon’s new normal. The average one-year price target for the stock at Tipranks is $6.36 per share, close to its current price. Only one in 17 analysts is bullish, while four are bearish.
The Bottom Line on MRO Stock
The new conventional wisdom has transformed the environment for all oil stocks, including Marathon.
I wrote a month ago that you must be ready to sell MRO stock at any moment. The June action has proven this to be true.
Oil is now a sector you trade. It’s not something you invest in. Marathon’s decision to stop its dividend after last year’s losses conserves cash but eliminates any reason for investors to hold it.
Marathon is, and will remain, a speculation. It’s a stock that short-term traders can make some money on, or lose on, as the industry adapts to its coming sunset. But investors, people with a five-year time horizon, should watch this sunset from the sidelines with a cooling beverage.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
