- Marathon Oil (MRO) stock has surged in the last few quarters. However, with the recent upside in oil price, there seems to be a further rally impending.
- Low break-even assets will translate into robust free cash flows with WTI oil trading well above $100 per barrel.
- A strong balance sheet and a robust liquidity buffer provide headroom for higher dividends and aggressive share repurchase.
The escalation in geopolitical tensions has significantly altered the investment themes for 2022. In turn, stocks in the defense, energy and precious metal sector have been trending higher. More specifically, with the conflict persisting, the price of oil is trading above $100 per barrel. And in sync with this upside is Marathon Oil (NYSE:MRO) stock, which has surged by nearly 54% the past three months.
With that in mind, I believe that MRO stock is positioned for further upside in the coming quarters. The company is fundamentally strong with quality assets, and even if oil trades around $100 per barrel, Marathon Oil is positioned to deliver robust cash flows. And here’s why.
Marathon Oil’s Strong Fourth Quarter
On Feb. 16, Marathon reported results for the fourth quarter of fiscal year 2021. In it, the company guided for a capital expenditure of $1.2 billion and free cash flows in excess of $3 billion. This was under the assumption that WTI oil traded at $80 per barrel.
Almost a week after the results, the Russian Invasion of Ukraine escalated and WTI oil currently trades at $107.50 per barrel. Assuming an optimistic scenario where the average realized oil price remains well above $100 per barrel, Marathon Oil might be positioned to deliver free cash flow in excess of $5 billion for 2022. The current company valuation of $18.64 billion, therefore, looks attractive.
It’s also worth mentioning here that MRO stock has an annualized dividend of 22 cents. It’s likely that dividends will increase in 2022. Additionally, since October 2021, Marathon has undertaken $1 billion in share repurchase.
Overall, investors are positioned to benefit from the tailwinds of higher oil prices. Moreover, dividends and aggressive share repurchases are likely to ensure that MRO stock trends higher. In fact, to put things into perspective, Marathon returned 70% of operating cash flows in Q4 2021 to shareholders. So, with all of this coupled together, MRO stock stands to benefit.
Marathon Oil’s Solid Balance Sheet
Let’s assume a scenario where oil is back to around $80 to $90 per barrel. This is a possibility when the geopolitical risk premium for oil declines. Even in this scenario, I would remain bullish on Marathon Oil for three reasons.
First, Marathon Oil reported reserves of 1,106 million barrels of oil equivalent (mmboe) as of December 2021. Proved reserves increased by 14% year-over-year (YOY). The company, therefore, has a multi-year production and cash flow visibility. And for 2022, Marathon Oil has guided for enterprise free cash flow break-even of below $35 per barrel.
Next, low break-even asset is another key reason to be bullish on MRO stock. Even at $80 to $90 per barrel oil, the company is positioned to deliver robust free cash flows.
As of December 2021, Marathon reported $580 million in cash and equivalents. Additionally, the company reported an “undrawn revolving credit facility” of $3.1 billion. This implies a total liquidity buffer of $3.7 billion. So with higher oil prices, Marathon has ample financial flexibility to pursue aggressive exploration expenditure. Thus, I would not be surprised if the capital expenditure for 2021 is revised on the upside.
Lastly, from a financial perspective, Marathon also has a solid balance sheet with net-debt to EBITDA of less than one. This might not be the best time to pursue acquisitions. However, the company has the financial flexibility for organic and inorganic growth.
Importantly, with a strong balance sheet and robust free cash flows, the focus is on expanding returns to shareholders. And if you’re possibly looking to invest in MRO stock, that’s what you want to hear.
Is MRO Stock A Buy?
Over the past 12 months, MRO stock has surged by 134%. However, this should not deter investors from fresh exposure to the stock.
It’s also worth noting that MRO stock still trades at a forward price-earning ratio (P/E) of almost 9. That’s an attractive measure for investors looking for stocks to buy.
For oil and gas companies, though, EV/EBITDA is a better valuation metric. Currently, MRO stock trades at an EV/EBITDA valuation of 6.6. The energy sector in the United States trades at an EV/EBITDA of 7.5. So clearly, MRO stock is still undervalued on a relative basis.
Collectively, Marathon has high-quality assets in the United States, and that implies low geopolitical risk for the company. And considering the excellent balance sheet and the energy sector tailwinds, MRO stock is an attractive pick for the portfolio.
On the date of publication, Faisal Humayun 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.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sectors.