Marathon Oil (NYSE:MRO) has been on the move lately. Since late October, MRO stock has gone from $4.14 to 6.79, with the market capitalization rising to $5.4 billion. It’s true that the shares are still well off their high for the year of $13.79. But it really does look like MRO is on much better footing and that 2021 will be a year of growth.
Of course, the biggest problem for the company has been the Covid-19 pandemic, which has depressed global economic growth. As seen with many other companies like Exxon Mobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B) and BP (NYSE:BP), the impact has been wide-spread across the oil industry – regardless of the scale of the company.
But even before the Covid-19 pandemic, there were major headwinds. OPEC was unable to be cohesive. Then there was oversupply of oil, especially from the shale operators in the U.S.
Yet despite all this, the prospects the oil industry are showing signs of improvement. But a major key will be the roll out of the vaccines from companies like Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA).
In other words, the bull case for MRO does look reasonable.
The Latest Earnings
For the past four quarters, MRO has reported net losses. But as for the latest report, there were some notable positive signs. For example, the company announced that it generated positive free cash flow of $180 million. This compares to negative free cash flow $43 million in the prior quarter.
Next, the company has been able to reduce its break-even point, which is about $35 per barrel on average for West Texas Intermediate (WTI). This is certainly good news since oil prices have remained above this level since June.
The balance sheet is also looking much better. There is now $4.1 billion in liquidity and $1.1 billion in cash. And the debt is rated at investment grade from the three primary rating agencies. Actually, in the quarter, the company was able to reduce the gross debt by $100 million.
But all this does not mean that MRO is cutting costs too much either. The company is still focused on investing in the long-term. As an indication of this, about 70% of the free cash flows will be for capital projects.
On the earnings call, CEO Lee Tillman said: “At Marathon Oil, we have a long-standing working definition for what capital discipline looks like. It is allocating capital with the right priorities in mind to improve corporate returns and to generate sustainable free cash flow across a wide range of commodity prices. It’s taking investor-friendly actions with that free cash flow, prioritizing debt reduction, and return of cash to shareholders.”
Bottom Line on MRO Stock
Even with the good news, MRO stock will still likely be volatile. Let’s face it, next couple months could see lower economic activity because of the Covid-19 pandemic. Although, if Congress is able to pass a stimulus bill, this should help alleviate some of the pain.
It’s also important to note that – during the third quarter – the company reinstated its dividend payout. It is at 3 cents per share per quarter now. This is definitely a significant move, which shows that management has considerable confidence in the company’s business.
And as things get better, it would not be a surprise to see further increases in the dividend. There will also likely be share buybacks.
Something else: The oil industry seems poised for consolidation. The mega operators are looking for snagging assets at lower valuations. In other words, MRO stock would make an attractive buyout candidate.
But then again, when it comes to this company, there does not need to be a transaction. On its own, MRO stock looks like a good bet right now to capitalize on the return of the oil industry.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.
