BUSINESS
Marathon Oil Corporation operates as an independent exploration and production company in the United States and internationally. The company engages in the exploration, production, and marketing of crude oil and condensate, natural gas liquids, and natural gas; and the production and marketing of products manufactured from natural gas, such as liquefied natural gas and methanol. It also owns and operates 32 central gathering and treating facilities; and the Sugarloaf gathering system, a 42-mile natural gas pipeline through Karnes and Atascosa Counties. The company was formerly known as USX Corporation and changed its name to Marathon Oil Corporation in December 2001. Marathon Oil Corporation was founded in 1887 and is headquartered in Houston, Texas.
INVESTMENT RATING
Reflecting future returns on capital that are forecasted to be above the cost of capital, MRO is expected to continue to be an important Value Builder.
Marathon Oil has a current Value Trend Rating of B (Positive).
This rating combines inconsistent signals from two proprietary PTR measures of a stock’s attractiveness. Marathon Oil has a very high Appreciation Score of 93 but a neutral Power Rating of 43, and the Positive Value Trend Rating results.
Marathon Oil’s stock is selling well below targeted value. The current stock price of $23.65 compares to targeted value 12 months forward of $105.
Marathon Oil’s very high appreciation potential results in an appreciation score of 93 (only 7% of the universe has greater appreciation potential.)
Marathon Oil has a Power Rating of 43. (This neutral Power Rating indicates that MRO’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: earnings estimate behavior for MRO has been slightly negative recently; the Crude Petroleum & Natural Gas comparison group is in a slightly weakened position currently; and recent price action has been neutral.
INVESTMENT PROFILE
MRO’s financial strength is below average. Financial strength rating is 36.
Relative to the S&P 500 Composite, Marathon Oil Corp has moderate Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that MRO is higher risk. Low financial leverage is a positive for MRO. Relative weaknesses include: low historical profitability, low financial strength, high stock price volatility, and high earnings variability. MRO’s valuation is low: moderate dividend yield, low P/E ratio, and low price/book ratio. MRO has unusually low market capitalization.
CURRENT SIGNALS
Marathon Oil’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; and rising leverage.
Marathon Oil’s current technical position is mixed. The stock price is in a 3.0 month down move. The stock has declined 17.9% from its prior high. The 200 day moving average is in an uptrend. The stock price is below its 200 day moving average. The 200 day moving average has just turned up.
ALERTS
Recent meaningful negative changes in fundamentals have impacted Marathon Oil Corp (NYSE: MRO): the stock’s power rating fell below 50, significant quarterly sales deceleration occurred, and the consensus estimate for December, 2024 decreased significantly.
In light of this new information we are reviewing our current Overall Rating of B. This review will be completed in the next several days.
For its fourth fiscal quarter (ending December 31), Marathon Oil Corp (NYSE: MRO) has reported E.P.S. of $0.68 compared to $0.82 a year ago. E.P.S. were $2.56 for the latest four quarters through December 31 versus $5.27 for the same period a year ago.
On 2/21/24, Marathon Oil Corp (NYSE: MRO) stock enjoyed a large increase of 2.1%, closing at $23.65. Moreover, trading volume in this advance was above average at 125% of normal. The stock has performed in line with the market over the last nine months and has risen 4.4% during the last week.
CASH FLOW
In 2022, Marathon Oil experienced a very significant reduction in cash of -$246 million (-42%). Sources of cash were much lower than uses. Cash generated from 2022 EBITDA totaled +$5,184 million. Non-operating sources contributed +$628 million (+12% of EBITDA). Cash taxes consumed -$136 million (-3% of EBITDA). Re-investment in the business amounted to -$4,779 million (-92% of EBITDA). On a net basis, debt investors furnished +$1,758 million (+34% of EBITDA) while equity investors received -$2,901 million (-56% of EBITDA).
Marathon Oil’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Marathon Oil Peer Group. (Since 2020 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, Marathon Oil was in the top quartile. Currently, Marathon Oil is substantially above median at +12% of EBITDA (+$628 million).
Marathon Oil’s Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Marathon Oil Peer Group. (Since 2019 Cash Taxes, %EBITDA has experienced a minor decline.) In most years, Marathon Oil was in the lower quartile and top quartile. Currently, Marathon Oil is above median at -3% of EBITDA (-$136 million).
Marathon Oil’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Marathon Oil Peer Group. In most years, Marathon Oil was in the second quartile and top quartile. Currently, Marathon Oil is substantially below median at -92% of EBITDA (-$4,779 million).
Marathon Oil’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Marathon Oil Peer Group. In most years, Marathon Oil was in the third quartile and top quartile. Currently, Marathon Oil is upper quartile at +34% of EBITDA (+$1,758 million).
Marathon Oil’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Marathon Oil Peer Group. (Since 2020 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Marathon Oil was in the lower quartile and top quartile. Currently, Marathon Oil is substantially below median at -56% of EBITDA (-$2,901 million).
Marathon Oil’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Marathon Oil Peer Group. (Since 2019 Change in Cash, %EBITDA has experienced a very sharp recovery.) In most years, Marathon Oil was in the top quartile and lower quartile. Currently, Marathon Oil is slightly above median at -5% of EBITDA (-$246 million).
Marathon Oil’s Cash, %Revenue has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Marathon Oil Peer Group. (Since 2020 Cash, %Revenue has accelerated sharply.) In most years, Marathon Oil was in the second quartile and lower quartile. Currently, Marathon Oil is lower quartile at +4%.
PROFITABILITY
Marathon Oil’s return on equity has improved very significantly since 2013. The current level of 15.0% is 1.82X the low for the period and is -52.7% from the high.
The key to the story for MRO is a very strong positive trend in pretax operating return significantly augmented by a very strong positive trend in non-operating factors.
The productivity of Marathon Oil’s assets rose over the full period 2013-2023: asset turnover has exhibited a volatile overall uptrend that accelerated very sharply after the 2020 level.
Marathon Oil’s pretax margin enjoyed a volatile overall uptrend over the period 2013-2023.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
Marathon Oil’s return on equity is at the upper quartile (15.0%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is at the upper quartile (10.8%) reflecting asset turnover that is at median (0.32X) and upper quartile pretax margin (33.5%).
Tax “keep” rate (income tax management) is at median (77.8%) resulting in after tax return on assets that is at the upper quartile.
Financial leverage (leverage) is at the lower quartile (1.77X).
GROWTH RATES
There are no significant differences between Marathon Oil’s longer term growth and growth in recent years.
Marathon Oil’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.
Annual revenue growth has been -5.5% per year.
Total asset growth has been -7.4% per year. (More recently it has been 8.5%.)
Annual E.P.S. growth has been 4.5% per year.
Equity growth has been -7.0% per year. (More recently it has been 6.1%.)
Marathon Oil’s consensus growth rate forecast (average of Wall Street analysts) is 12.4% — substantially above the average of the historical growth measures.
Relative to the Marathon Oil Peer Group, Marathon Oil’s historical growth measures are generally lower quartile. E.P.S. growth (4.5%) has been at the lower quartile. Total asset growth (-7.4%) has been lower quartile. Revenue growth (-5.5%) has been lower quartile. Equity growth (-7.0%) has been lower quartile.
In total contrast, consensus growth forecast (12.4%) is at the upper quartile.
PRICE HISTORY
Over the full time period, Marathon Oil’s stock price performance has been variable and significantly below market. Between April, 2013 and February, 2024, Marathon Oil’s stock price fell -28%; relative to the market, this was a -77% loss. Significant price moves during the period: 1) October, 2020 – May, 2022: +694%; 2) September, 2018 – March, 2020: -86%; 3) February, 2016 – November, 2016: +120%; and 4) August, 2014 – February, 2016: -80%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -15.4% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through January, 2024 of -15.4% is substantially below median relative to Marathon Oil Corp Peer Group.
Current 5-year total return performance of 9.2% is slightly below median relative to the S&P 500 Composite.
Through January, 2024, with slightly below median current 5-year total return of 9.2% relative to S&P 500 Composite, Marathon Oil’s total return performance is at median relative to Marathon Oil Corp Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, MRO’s overall valuation is quite low. The highest factor, the ratio of enterprise value/revenue, is below median. Ratio of enterprise value/assets is near the lower quartile. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Price/equity ratio is lower quartile. The lowest factor, the price/earnings ratio, is lower quartile.
Relative to Marathon Oil Peer Group, MRO’s overall valuation is normal. The highest factor, the price/equity ratio, is above median. Ratio of enterprise value/revenue is at the upper quartile. Ratio of enterprise value/assets is above median. Price/earnings ratio is below median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is below median.
Marathon Oil has a minor value gap compared to the median. For MRO to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 3.05X to 2.85X. If MRO’s ratio of enterprise value/revenue were to fall to 2.85X, its stock price would be lower by $-2 to $21.
For MRO to achieve upper quartile valuation relative to the Marathon Oil Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 3.05X to 3.07X. If MRO’s ratio of enterprise value/revenue were to rise to 3.07X, its stock price would increase by $0 from the current level of $24.
VALUE TARGETS
Reflecting future returns on capital that are forecasted to be above the cost of capital, MRO is expected to continue to be an important Value Builder.
Marathon Oil’s current Price Target of $103 represents a +334% change from the current price of $23.65.
This very high appreciation potential results in an appreciation score of 93 (only 7% of the universe has greater appreciation potential.)
With this high Appreciation Score of 93, the neutral Power Rating of 43 results in an Value Trend Rating of B.
Marathon Oil’s current Price Target is $103 (+57% from the 2022 Target of $65 and +334% from the 02/21/24 price of $23.65). This dramatic rise in the Target is the result of a +38% increase in the equity base and a +14% increase in the price/equity multiple. The forecasted increase in growth has a very large positive impact on the price/equity multiple and the forecasted decline in cost of equity has a very large positive impact as well. Partially offsetting these Drivers, the forecasted decline in return on equity has a very large negative impact.
PTR’s return on equity forecast is 14.1% — below our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2014 and 2022. The current forecast is significantly above the 2017 low of 4%.
PTR’s growth forecast is 22.0% — substantially above our recent forecasts. Forecasted growth erratic between 2022 and 2022. The current forecast is significantly above the 2022 low of 11%.
PTR’s cost of equity forecast is 8.8% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2014 and 2022. The current forecast is well above the 2016 low of 2.8%.
At Marathon Oil’s current price of $23.65, investors are placing a negative value of $-5 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 11.0% per year, and a return on equity of 19.4% versus a cost of equity of 10.7%.
PTR’s 2024 Price Target of $103 is based on these forecasts and reflects an estimated value of existing assets of $19 and a value of future investments of $83.
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