Marathon Oil (NYSE:MRO) has had a rough two months since its first-quarter earnings announcement on May 6. MRO stock has basically been flat since then when it was at $5.78 per share. On Monday, the stock closed at $5.96.
It’s not as though oil has been doing bad, though. For example, on May 7, the July contract WTI crude price was $24.83, but today it was at $39.19. In other words, the price of oil has risen 58%, but MRO stock has stayed flat.
So something else must be going on. I talked a little bit about this in my article on May 11, “Marathon Oil’s Hedging Strategy is Not Beneficial.” In other words, the company’s hedging strategy is probably limiting its upside.
Hedging Issues for Marathon Oil
For example, the company says that 76,703 barrels of oil of its total quarterly production in Q2 was hedged at $28.99. This is 26% below where the price is today.
In Q1 it produced 340,000 barrels of oil equivalent. So, in other words, 22.5% of its production is at prices below the present market value of oil.
That does not help the company’s eventual cash flow for the quarter. But what bothers me more is that the Q3 production is hedged with three-way collars where the bottom flow is a sold put at $48 per barrel of oil.
In other words, this is a losing bet while oil is at $38. However, only 80,000 barrels of oil have been hedged at this price.
What Analysts Are Saying About MRO Oil
So far analysts are not impressed with Marathon Oil’s prospective earnings. For example, Seeking Alpha has polled 26 analysts that estimate 2020 earning per share will be negative $1.41, and negative 92 cents EPS for 2021.
In addition, Yahoo! Finance has canvassed 25 analysts. They estimate that 2020 EPS will be negative $1.42 and 2021 will show negative 88 cents. Moreover, their Q2 estimate is for a loss of 41 cents per share.
In addition, Goldman Sachs recently issued a report with a “sell” rating on MRO stock. The analyst sees oil moving up in 2021, but he believes investors should be “selective.” His target price is $6 for Marathon Oil.
One bright spot for the company is that it is still making positive free cash flow. In Q1 the company produced net operating cash flow was $701 million, or $550 million before changes in working capital.
However, given that capital expenditure spending was $620 million during the quarter, free cash flow was only $81 million. The company has plans to cut its capex spending. This will increase ongoing free cash flow, once capex spending cuts take effect.
What Should Investors Do With MRO Stock
It’s hard to come up with a reason to buy MRO stock at this point. Investors want to see what the Q2 earnings look like. On the one hand, it is possible that the company could do better than expected. For example, the company said it was cutting its expenses by 20%. In addition, it cut its capex spending by 50%.
Most of its production is in Eagle Ford (Texas) and in the Bakken (North Dakota). So it is not like the company is getting all of its production out of the Permian, which has a better reputation for valuation purposes.
Therefore, I would wait to see what the company’s cash flow and hedging situation looks like going forward. This will come out in the Q2 report that will come out in early August.
Patient investors might find that now is a good time to invest, given the company’s plans to increase its free cash flow. However, I think that most will want to see what the ongoing earnings, free cash flow, hedging, and outlook will be in the next earnings report.
They figure there will be plenty of time to invest. And, don’t forget, Marathon no longer pays a dividend. You don’t get paid to be patient. In effect, MRO stock may not recover until its hedges and its future looks more positive.