Marathon Oil (NYSE:MRO) closed out 2019 at $13.52 a share. Thanks to the novel coronavirus and a short price war with oil, MRO stock dropped to a 52-week low of $3.02 on April Fools’ Day.
If you’re a long-time shareholder, that was no joke.
Did You Buy MRO Stock on the Dip?
If you were courageous enough to buy on the dip, you’ve gotten some of your profits back. Not all of them mind you. MRO still has a year to date total return of -58.6% through July 7. It’s got a long way to go to get back to double digits.
It attempted to do so at the beginning of June. MRO rose 58% in the first six days of trading, hitting a high of $8.48 on June 8.
My InvestorPlace colleague, Mark Hake, jumped on this spike in price, suggesting it would continue to rise in value as higher oil prices and economic growth took hold. This change of heart was an about-face for Hake, who previously wrote that the oil company’s dividend cut would hurt its share price.
Everything seemed to be working in Marathon’s favor and yet it still managed to fall in price.
This begs the question: Should you buy on Marathon’s second dip? Here are a couple of quick thoughts.
Marathon Remains a Relative Value
My colleague rightly pointed out in his June article about the company that it remains on solid financial footing.
“It is a very profitable company and will likely have plenty of free cash flow. I believe this will help sustain the company until its operations are back up to full speed,” Hake wrote June 8.
In the trailing 12 months through the end of March, Marathon had a free cash flow of $380 million. That’s slightly lower than its FCF in 2018 ($480 million) but higher than both 2019 ($200 million) and 2017 ($160 million).
Now, as Hake has suggested, it’s possible Marathon’s Q2 2020 results won’t be very good, which will reduce its TTM FCF. However, that should return to historical levels in the third quarter.
I couldn’t tell you what’s going to happen in either quarter, but what I do know is that Marathon’s current FCF yield is 8.6%, if you base it on a market capitalization of $4.4 billion, and 4.2%, based on an enterprise value of $9.1 billion.
I like to use enterprise value in my calculation because it reflects the company’s debt situation. A 4.2% FCF yield is still quite good. By comparison, Exxon Mobil (NYSE:XOM) has an FCF yield of 1.1% based on TTM FCF of $2.55 billion and an enterprise value of $231.1 billion.
As I write this, Marathon Oil stock is trading around $5.67. Based on an improving free cash flow situation, it’s hard not to consider Marathon a relatively good value play at this point.
Analysts Have Grown Cautious
Of the 28 analysts covering Marathon Oil stock, only six have a positive rating (buy or overweight) on the company, down from 10, three months ago. Interestingly, over the same period, most of the analysts calling it a hold, have remained on the sidelines.
As for its 12-month target price, the average is $6.87, providing a current upside of 22%, but overall, the mean recommendation has gone from overweight three months ago, to hold today.
When looking at oil prices in 2020, the glass right now is half full. In early January, a barrel of West Texas Intermediate (WTI) was trading above $60. By late April, it was in the low teens. Today, slightly over $40, it looks as though a lower price for a barrel of oil isn’t in the cards.
Unless, of course, the nation goes on a full lockdown to stem the tide of the Covid-19 resurgence. But given the White House is hell-bent on getting back to regular economic activity, I guess we’ll just have to do as they say and put up with ongoing deaths from the virus.
The Bottom Line
In late May, I said aggressive investors might have a play in Marathon stock. I don’t think anything’s changed to alter my view.
So, if you’re up for a speculative bet on the stock’s second dip in 2020, I’d say go for it. However, if this money is from your retirement account, I’d steer clear. There is still some risk in investing in oil at the moment.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
