2020 has not been a good year to have oil and gas stocks in your portfolio. The one-two punch of the novel coronavirus pandemic and a spring oil price war has littered the industry with bankruptcies. Marathon Oil (NYSE:MRO) isn’t at that stage yet — and its situation is slightly less dire than it was in March — but MRO stock is still struggling. Its Friday close of $4.12 is an improvement over the $3.12 it bottomed out at on April 1, but it’s still down 70% from January highs.
On Oct. 1, Marathon announced it was reinstating its dividend and presented a plan to reduce debt. That news was enough to cause MRO stock to pop 4.3% on Friday. Regardless of that rare bit of positive news for investors, now is not the time to bet that any oil and gas company is set to begin a meaningful recovery.
Marathon Oil Announces Reinstatement of Dividend, Debt Reduction Plan
Last week, Marathon announced it was reinstating its base quarterly dividend of 3 cents per share. In addition, the company unveiled a debt reduction plan. With WTI (West Texas Intermediate) crude oil prices of between $40/barrel (bbl) and $45/bbl, MRO will allocate at least 20% of its cash flow from operations to “balance sheet enhancement and return of capital to shareholders.” If WTI prices rise to over $45/bbl, then the allocation will also rise to 30% or more of cash flow.
That sounds good, especially if you already hold Marathon Oil shares. With the stock currently down nearly 70% since the start of the year and 82% from two years ago, you could use some good news. However, delivery on the plan is tied to the price of oil — and that’s where things get dicey.
Betting on the Price of Oil
In 2019, oil demand hit an all-time high. Even then, the industry was aware that peak oil demand was coming. Environmental pressures that favored energy efficiency and the rise of electric cars made that inevitable. The best guess was around 2040 — plenty of time for investors in oil stocks to enjoy big gains until the bottom began to fall out of the market.
The pandemic upended those calculations. With factories shut down and cars off the road, demand for oil plummeted in the early stages of the pandemic. That, combined with the oil price war between Russia and Saudi Arabia, set the stage for plummeting oil prices. By April, WTI prices had dropped below $12/bbl. It was no coincidence that on April 1, MRO stock dropped to an all-time low.
Here’s the problem for anyone considering investing in MRO at this point. There is a very real possibility that the pandemic has altered behavior permanently. Many workers may continue to work from home. With gasoline accounting for nearly half of all oil demand, a reduction in commuting will have a huge impact. So will the crippled airline industry. Add in a renewed focus on reducing global warming, and it’s entirely possible we may never see the level of demand for oil that was recorded in 2019.
At this point, the price for WTI is just touching on $40/bbl, the lowest level at which Marathon starts working on that balance sheet enhancement. With demand for oil up in the air, there are no guarantees prices will return to anywhere near the levels they were at during peak demand.
Bottom Line on MRO Stock
In early June, MRO stock saw a big spike. Over the course of two sessions, Marathon shares jumped by 35%. That jump was based primarily on a U.S. Labor Department report of a record increase in new jobs. Record job growth suggests business is ramping back up, which means an increased demand for oil.
That report turned out to be false hope for MRO investors. Shares in the company gave back that gain over the course of the next week. Since then, it’s been a slow slide. After the June 8 close at $8.43, MRO has slumped 51%.
Reinstating its dividend is good news for investors. So is tackling debt. However, neither of these measures address the fundamental problem for Marathon and other oil companies: weak demand for oil that may never recover to pre-pandemic levels.
If you want more insight on whether now is the time to grab bargain-priced Marathon Oil stock, check out what the investment analysts are doing. The Wall Street Journal is tracking 30 analysts for their recommendation on MRO. The stock has a consensus hold rating with a median $6.25 price target. There is potential upside, tempered by concern. Some suggest existing shareholders dump their MRO stock, but few are suggesting now is the time to add it to your portfolio, either.
Marathon Oil retains its Portfolio Grader ‘F’ rating. Regardless of the company’s recent pro-investor moves, I wouldn’t suggest that now is the time to gamble on MRO stock. Not with the demand (and price) of oil such a big question mark.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
