Oil prices made a spectacular comeback in May and June, with some grades breaching $40 on July 1. Whether you buy oil stocks like Marathon Oil (NYSE:MRO) depends on whether you think producers can keep the increases going, back to $60 a barrel, or not.
Exxon Mobil (NYSE:XOM) and Saudi Aramco are in the bull camp. The Saudis say “the worst is behind us” while Exxon Mobil is refusing to write down its shale assets.
Royal Dutch Shell (NYSE:RDS.A) is in the bear camp. They just wrote down their oil assets by $22 billion, convinced much of it can’t be lifted profitably.
Marathon is poised between the camps. Shares opened July 1 at $6.14 each. The market cap is $4.8 billion. That’s up 86% over the last three months.
For the year it’s down 55%.
What’s Marathon Today
Marathon has been selling what it calls “non-core” assets for years. It sold its Wyoming assets in 2016. It dumped its North Sea assets in 2019.
What’s left are four big U.S. fields. There’s the “North Delaware,” which is part of the Permian Basin play. There’s the “Eagle Ford,” in south-central Texas. There’s the “Stack/Scoop” in Oklahoma. And there’s the Bakken in North Dakota. There remains one Africa play, off Equatorial Guinea, where it works with partners.
Depending on where prices land, and how cheaply Marathon believes it can operate, assets can be deployed, or removed from, any of these locations. The company said it raised 13% more oil in 2019 while reducing its cost per square foot of pipe deployed by 10%.
Much of Marathon’s production is committed through contracts. In happier times it hedged 80,000 barrels of daily production at $55 a barrel and used three-way collars to hedge more at over $65 a barrel. It means that, over the near term, it’s not subject to low spot prices.
Where MRO Stock is Going
Whether you buy Marathon today depends on where you see the supply-demand balance in 2021 and beyond.
India, for instance, said it will soon be at normal levels of demand. China thinks its demand is fully recovered. This has given oil its best quarter in 30 years. The Saudi oil minister is cackling like a Bond villain about controlling the market for 30 years.
On the other hand, energy consultants in Europe now say oil demand peaked in 2019, as did CO2 emissions. Libya production could soon be back online. Oil majors are now flocking to Namibia, off southern Africa, thinking it could hold more giant pools of oil like Guyana.
U.S. producers, like Marathon, will have to compete directly with foreign oil and the rising tide of renewable energy, which has sent Tesla (NASDAQ:TSLA) stock over $1,000 and knocked Ford Motor (NYSE:F) to $6. Most U.S. oil is burned in cars, while gas goes to homes, offices and manufacturers. The speed of the U.S. recovery, and the ramp-up of solar and wind, will drive U.S. oil demand.
The Bottom Line
Marathon seems well-protected from the initial COVID-19 demand shock. Marathon had revenues of $5.2 billion last year. So long as total demand doesn’t drop over 21%, holding the $4.2 billion level, the company can make money.
But Goldman Sachs (NYSE:GS) recently downgraded Marathon to sell, based on its analysis of the supply-demand balance. It doesn’t see the stock getting much beyond its present level. They claim a “more selective” outlook.
My own view is that, for the planet to survive, companies like Marathon must die. Maybe that’s a political view. Maybe you disagree. If you do, don’t argue. Buy Marathon.
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. Follow him on Twitter at @danablankenhorn or write to him at danablankenhorn@gmail.com. As of this writing he owned no shares in companies mentioned in this story.
