- Marathon Oil and Gas (MRO) looks attractive at a growing dividend yield (1.08%) and share buyback play.
- Marathon has been raising its quarterly dividends by 0.01 each quarter and will likely keep on doing so.
- Based on its huge and growing free cash flow (FCF), Marathon can afford its large $3 billion share buyback program.
Marathon Oil and Gas (NYSE:MRO) is an attractive oil and gas play with a 1.08% dividend yield. MRO stock also has a forward P/E below 10x. In addition, most of its production comes from the Eagle Ford Basin in Texas and the Bakken area in North Dakota and Montana.
Value investors like the stock due to its low price-to-earnings (P/E) ratio, growing dividend, and huge free cash flow (FCF). It also has a huge $3.0 billion buyback program, and rising quarterly dividend payments.
|MRO||Marathon Oil and Gas||$24.40|
Marathon’s Powerfull Free Cash Flow
Analysts estimate that its forward P/E now stands at 8.96x, according to a survey of earnings by Refinitiv. They forecast earnings will grow by 88.5% this year, along with significant FCF growth.
Its FCF in Q4 was $898 million. That works out to an annualized rate of almost $3.6 billion. That is more than its buyback program of $3.1 billion and also the cost of its dividends of about $205 million.
This can all be seen in the company’s cash flow statement from its Feb. 16 earnings release. The $3.6 billion run rate FCF is significantly higher than the $2.239 billion in FCF that the company produced last year.
Moreover, the $898 million in FCF this past quarter was based on revenue of $1.8 billion. This gives it a huge 50% FCF margin. This is an extremely high FCF margin.
Additionally, there is good reason to believe revenue and FCF will be substantially higher in Q1 and 2022. For example, Marathon Oil produced 353,000 bbl oil equivalent per share in Q4. With 91 days on average each quarter, that works out to 32.123 million barrels in Q4. Since revenue was $1.8 billion, the average price per bbl was $56.03/bbl.
That is well below the $100 and higher that Marathon is likely receiving on average in Q1. This is why the FCF going forward its likely to be substantially higher.
Marathon’s Ample Dividends and Buybacks
Right now Marathon spends about $216 million on its dividend payments, based on 28 cents per share and 773 million shares outstanding. This is significantly lower than its $3.6 billion in FCF.
Moreover, Marathon has a large share buyback program. It has cut the share count by 8% in over four months. Marathon said that it bought back $772 million of its shares during Q4. That works out to an annualized rate of $3.088 billion.
So, combined with its $216 million in dividends, the total shareholder returns cost $3.3 billion. This is still below the $3.6 run rate in FCF it is making now.
Even more interesting, Marathon Oil says that it expects to return a minimum of 40% of FCF to its shareholders. However, that is based on an average of $60 per bbl/oil. Since Q4 ended the average price of oil has been much higher – well over $100/bbl.
Moreover, it is possible that the company will be producing more barrels at this higher price. That will also increase the FCF and hence the dollar amount of buybacks it will do during 2022.
What To Do
Investors in MRO stock can expect that its buybacks and dividends could vary greatly along with its free cash flow. However, for the time being, it looks like MRO stock has an attractive dividend and buyback policy.
With its 1.08% dividend yield, likely to rise along with higher dividends, and a generous buyback policy, MRO stock looks like a bargain oil and gas play.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.