If you had to pick any one sector that best represented the destruction caused by the novel coronavirus, it would have to be the energy market. Specifically, independent oil firms specializing in exploration and production like Marathon Oil (NYSE:MRO) suffered steep declines because let’s face it – no one wanted their products anymore. You’d have to be forgiven if you thought MRO stock was going to plummet toward zero.
Adding fuel to the bearish argument was unprecedented trading dynamics that shocked the world. Primarily, the price of crude in the U.S. market went briefly below zero, a first in history. Theoretically, this meant that traders would rather pay money not to take delivery. Of course, this negatively unique circumstance didn’t last long. However, it caused a huge credibility headwind for MRO stock.
Nevertheless, contrarians eventually bid up Marathon and other oil companies, from the majors like Exxon Mobil (NYSE:XOM) to left-for-dead firms such as Chesapeake Energy (NYSE:CHK). Later on, a surprisingly positive May jobs report helped build the recovery case for the energy market.
Still, it’s fair to ask if the recent momentum in MRO stock is a dead cat bounce. After all, this isn’t the type of market where you want to be caught off guard.
To be completely transparent, I have a very skeptical perspective on the oil industry. Mainly, I don’t see how demand could rise back up to normal capacities within this year. While the jobs report suggests that the worst is behind us, weekly unemployment benefits claims continue to number in the millions. This is a clear indicator that much of the economic pain is filtering out to white-collar occupations.
MRO Stock Is Possibly Facing an Unsustainable Future
For most investors to get excited about oil again, they’ve got to see real demand driving up prices. Though I appreciate the Federal Reserve adopting an accommodative – as in inflationary – monetary policy, we need more than “magic” tricks. In my view, you can only coax investors toward riskier assets before the charade collapses.
And that’s my biggest problem with MRO stock. Until I see strong evidence to the contrary, it appears that shares are only jumping because they were badly oversold. But to move the needle beyond where MRO is now, the fundamentals need to justify the premium.
Frankly, I don’t see that happening. Even in the pre-pandemic years, demand for oil products have been steadily eroding.
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For instance, total revenue at gasoline stations across the U.S. peaked at $554.6 billion in 2012. Since then, gasoline retail sales have charted a series of lower highs. Worryingly, in 2015 and 2016 when retail sales slipped due to the energy market deflation, Marathon Oil’s operating margin went deeply negative.
It wasn’t until 2018 and 2019, when gasoline sales rebounded off last decade’s lows that Marathon started stabilizing. But with the coronavirus putting a hard stop on demand, the pandemic leaves MRO stock in an extremely difficult situation.
At best, U.S. retail gasoline sales will hit just under $470 billion in 2020. This accounts for the devastation in March and April, and my estimate for May demand losses. Further, this tally assumes that capacity will return to 100% in June onward.
Obviously, that’s not going to happen. Realistically, I anticipate gasoline sales to come in well under $300 billion, based on broader transportation sector dynamics. If so, I don’t see how this new normal would be sustainable for MRO stock given its recent history.
International Pressures Remain a Concern
One of the earlier headwinds that I didn’t mention above was the oil price war between Saudi Arabia and Russia. Although we’re supposedly energy independent, that didn’t stop these oil-exporting giants from hurting American oil producers. If that price war continued, it’s possible that we would have seen many more bankruptcies in the independent oil markets.
However, if the global economy doesn’t improve, we could see geopolitical conflicts rise up again. Part of the reason why the Saudis and Russians sustained their dispute was that neither side has any love for the U.S. energy industry. For them, our oil sector represents competition.
But with deflated sentiment for oil everywhere, I can’t imagine that oil exporters – many of which have non-diversified economies – will just sit back and do nothing. In this market, you must take whatever you can get. Therefore, I don’t think we’re done seeing ridiculously low oil prices.
For once, that will put a smile on drivers’ faces. But it’s an awful predicament if you have a heavy position in MRO stock.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
