When I last wrote about Marathon Oil (NYSE:MRO), I was concerned about the direction of crude oil prices. Marathon executives were saying the company’s break-even price for oil was around $35 per barrel. At the time (early June), crude oil was right around $35 and MRO stock was trading around $6.
Fast forward two months. Crude is over $40 per barrel and the stock is still trading around $6 per barrel. This is a straightforward case of something has to give. And in this case, I think that means a higher price for MRO stock.
Free Cash Flow Is King
On the company’s last earnings call, chief executive officer Lee Tillman said the company would have positive free cash flow (FCF) if crude prices were around $35 per barrel. With every subsequent $1 increase in the price of crude, the company could expect $55 million in annual FCF generation.
When pressed by analysts, who cited forecasts for a crude price of around $45 per barrel in 2021, Tillman did not retreat. He said that indeed, Marathon could be seeing FCF growth in the vicinity of $500 million or higher. It also had to be encouraging to investors that Marathon said the priorities for the additional cash would be to pay off debt and to compensate shareholders.
The Fundamentals Matter
At times like these, it’s best to simply put your trust into companies that have the resources to grind through whatever is next. Marathon’s total liquidity was over $3.5 billion at the end of the quarter. The company’s credit was still investment grade at all the major credit rating agencies.
I’ve written about a number of bankruptcy stocks during this pandemic, Marathon is not a bankruptcy risk. Are oil stocks great options right now? Probably not, and Marathon has suspended its dividend, which is a primary reason for investors to consider the stock.
However, if the company does indeed continue to grow its FCF, then it’s likely that a dividend will be one of the priorities for 2021.
Spit-balling a Price for MRO Stock Is a Fool’s Errand
Mark Hake referenced a Barron’s article that talked about the three stages of the oil price recovery: the legal reopening of the economy, an absence of fear, and then more jobs and economic activity. The problem is that this isn’t a linear process. The economy is in a phase I’ve described as being open, but not really being open.
Live sports are being played, but without fans traveling to games. Businesses are open, but many workers are still working remotely. Airlines are still cutting back on routes. Cruise ships are anchored until at least November.
The takeaway is that things can change quickly for oil prices. The problem is that they could change rapidly in either direction. Oil companies are fighting a demand problem that has no easy solution. It’s obvious that there is sufficient vehicle traffic to support current crude prices. However, there’s a lingering concern that the novel coronavirus may breakout again, causing case numbers to increase just as the holidays are coming.
At the same time, if there were to be a vaccine that was safe (and at this point even relatively effective), oil prices could rise very quickly. And that’s why you have to invest in MRO stock for what it is, not for what you think it will be.
And right now, Marathon is looking like more than just a good contrarian bet. If you believe the economy will open up, then MRO stock appears to be one of the best stocks to take advantage of that growth.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.