Exxon Mobil (NYSE:XOM) got dumped from the Dow Jones Industrial Average on Aug. 24. While it definitely says something about Chevron (NYSE:CVX), it also says a lot about Marathon Oil (NYSE:MRO) and MRO stock.
If you own Exxon Mobil, and you’re honest with yourself, I don’t think there’s any question your oil company isn’t nearly as impressive as it once was. I also think it’s fair to say the powers that be at S&P Dow Jones Indices were correct to move XOM out of the Dow.
In today’s day and age, there’s no need for two oil companies in an index of 30. And Chevron is the better of the two.
“Goldman’s Neil Mehta added that Chevron is a better fit than Exxon due to three reasons: greater free cash flow generation, stronger balance sheet, and better operational and earnings execution. The firm has a buy rating on Chevron and a sell rating on Exxon,” reported CNBC’s Pippa Stevens on Aug. 25.
I couldn’t agree more.
In mid-March, I suggested investors shouldn’t touch Exxon Mobil stock with a 10-foot pole because it has way too much debt and participates in a dying industry. It might take a decade or three for fossil fuels to fade to black, but they will go away.
What Does This Have to Do with MRO Stock?
Well, if Chevron is the best of a bad bunch, and Exxon Mobil, despite all of its warts, is the second-best bet among exploration and production companies, Marathon investors ought to be wondering if it has a place in an industry with diminishing returns.
The last time I wrote about MRO stock was in early July. At the time, I recommended speculative investors might want to take advantage of the stock’s second dip, which has seen it fall from over $8 in early June to a range between $5.50 and $6 ever since.
Most of my InvestorPlace colleagues see MRO as a good value play at the moment. Mark Hake suggests the company’s free cash flow should push its stock above $13. In other words, the risk to reward appears to be in the investor’s favor at the moment.
I’m a sucker for free cash flow, so he’s got my attention, but I still don’t think there’s enough meat on the bone for retirement investors to bite. After all, consumer confidence in August fell to its lowest level in six years.
“Consumer confidence has now taken two steps back after one giant step forward in June,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Initial hopes for a faster return to a pre-pandemic normal have faded.”
While oil prices have made enormous strides since April lows, I think it’s fair to say that consumer confidence levels suggest a $43 barrel of West Texas Intermediate might be the best producers can hope for in the near term.
Through the first six months of 2020, Marathon had negative free cash flow of $236 million, down from positive free cash flow of $50 million in the same period a year earlier. For all of 2019, it had positive free cash flow of $200 million on $4.99 billion in revenue for a 4% FCF margin.
In its second-quarter 2020 press release, chief executive officer Lee Tillman suggested that it should be able to generate positive FCF in the second half of the year based on a low $30s barrel of oil as the FCF breakeven point.
“We believe the Company is successfully positioned to generate free cash flow at commodity prices well below the current forward curve, while protecting operational momentum into 2021,” Tillman stated.
“Though premature to provide a specific business plan, our differentiated capital efficiency is illustrated by a 2021 benchmark maintenance scenario that we believe could deliver total Company oil production in-line with 4Q20 at a free cash flow breakeven of approximately $35/bbl.”
So, with a barrel currently trading around $43, it appears that it actually could deliver positive free cash flow for all of 2020, although it won’t be anywhere near 2019 levels.
However, should consumer confidence continue to erode as Americans are evicted from their homes — estimates put the number of evictions between 19 and 23 million — you can be sure all of Marathon’s best estimates will fall by the wayside.
The Bottom Line
Kicking Exxon Mobil out of the Dow is a sign of the times. While I do not doubt that MRO stock will see double digits at some point, I can’t recommend its stock for regular investors saving for their retirement.
However, if you can afford to lose your entire investment, current prices remain the lowest (except for early April) they’ve been in 18 years. That’s got to count for something.
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. On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.