Marathon Oil (NYSE:MRO) reported its earnings last week for Q3 and made it very clear that it expects to continue to produce free cash flow (FCF). Marathon Oil stock should be able to rise over the next year as it becomes clear that the company will remain profitable.
As I wrote in August, I believe that Marathon Oil stock is poised to turn around quite significantly. For example, I wrote that it could be worth $13.84 over the next year. A big reason for this is its expected FCF generation, despite the slump in oil.
For example, Marathon Oil produced $180 million in FCF during Q3, even after spending $173 million in capital expenditures (capex). That implies that if it wanted to lower capex spending, its FCF, and hence cash balances, would rise accordingly.
This was after FCF was negative last quarter by $43 million. So, in effect, it reflects a $213 million FCF turnaround from last quarter.
Moreover, the FCF was so strong that Marathon Oil restored its dividend. The payment has not yet been made. The 3 cents per share quarterly dividend is scheduled to go ex-dividend on Nov. 17 (which means you need to own it before that date in order to receive the payment).
FCF and Marathon Oil Stock
Since the dividend pay date is Dec. 10, FCF will easily cover the cost. For example, the dividend will only cost $23.70 million (i.e., 790 million shares outstanding multiplied by 3 cents per share), which will easily be lower than Q4 FCF.
Moreover, the company says that its FCF breakeven is below a scenario if oil stays below $35 per barrel (bbl) on average using West Texas Intermediate (WTI) benchmarks.
In addition, the company has committed to using 70% of that FCF to invest in oil and gas projects on top of its normal maintenance capex spending. Remember cash flow from operations deducts capex to arrive at FCF. Therefore, a large portion of the company’s cash flow is going to be used for future growth.
This also implies that 30% will go to investors – either via dividends and/or buybacks. It also implies that as FCF grows, the dividend per share could continue to grow. Remember they cut the dividend from 5 cents to 3 cents.
The Outlook for Marathon Oil
I believe that oil prices should turn around once the market believes that the Covid-19 pandemic will get under control. Today’s announcement from Pfizer (NYSE:PFE) that their Covid-19 vaccine has passed Phase 3 trials with 90% efficacy has led to a rethinking.
By mid-next year their vaccine, along with others, will become widespread and should act as a catalyst for higher economic activity in many sectors.
Therefore, I suspect that oil will start to rise over the next several months as the market anticipates the future where travel, activity, lock-down restrictions, and related repressed sectors start to lift up.
This also coincides with the market’s normal six to nine-month discounting of future prices.
Therefore, I suspect that Marathon Oil stock will continue to move higher up to the $13.88 target that I mentioned in my last article.
Wall Street analysts are generally positive on the stock right now. For example, Tipranks.com reports that 12 sell-side analysts who have written about MRO stock in the last three months have a higher target. Their average price target is $5.33 per share. However, I suspect that as the company continues to produce higher FCF during Q4, many analysts will raise their price targets.
And don’t forget that Marathon Oil stock sports a 2.35% dividend yield (i.e. 12 cents dividend by the price on Nov 9 of $5.09). Over time the dividend is likely to rise, especially since it is more than affordable by the company, as I have shown above.
On the date of publication, Mark R. Hake holds a long position in Marathon Oil stock.
Mark Hake runs the Total Yield Value Guide which you can review here.
