MRO is up 11% in the last month – is it still a bargain?

It’s always been interesting to me, up to a point, to note how practically all of the talking heads on popular media seem to focus almost exclusively on growth-driven investing strategies. Not that it’s surprising – after all, they’re generally trying to play to the broadest possible market, which means they need to emphasize strategies that the greatest number of people are going to be interested in. The truth is that basic growth investing is a lot easier to talk about; after all, the shortest distance between two points is a straight line, and growth investing deals with a relatively simple, straight-line concept: will the stock be worth more down the road than it is today? More detailed questions get brushed aside in favor of data that favors a reasonable analysis that answers that question.

I’m not saying that growth investing is flawed, or that it doesn’t factor other important elements, like fundamental analysis or price action into it. The problem, however that I have with it is that the basic concept – buy the stock at a lower price than it will be sometime down the road – doesn’t encourage average investors to drill down into much more detail. That’s one of the reasons over the years that I’ve come to favor value-driven strategies; it’s not just about whether I think the stock could be worth more at some point in the future, but also about whether the stock is actually trading at a discount, right now, to where my analysis says the stock should be. That question requires a more detailed look not only at the fundamentals of a stock’s business, but also at how that business translates into a useful market price for investors like you and me. It requires a thoughtful consideration of where the stock’s price is today and what are the forces that have put the stock at that level.

The energy sector, and stocks in the oil industry in particular is one of the most volatile areas in the market. For evidence, you really don’t need to look any further than the price of oil itself; since topping out at around $66.50 per barrel in April of this year, West Texas Intermediate crude dropped to a low around $51, or about -22.7%. From that point, however the price has rebounded back to about $60 as of this writing. The volatility in crude has in turn wreaked havoc on stocks in that industry, especially on companies like Marathon Oil Corp (MRO) whose focus is on the exploration & production of crude oil, natural gas, and other energy resources. Free cash flow levels for these kinds of companies surge the most when oil prices are rising, which means that the commodity’s volatility for most of the past year has put a lot of pressure on the entire industry’s cash flows. That’s why it probably isn’t all that surprising that MRO’s stock price, despite having increased by a little over 11% in the last month, remains not too far from its 52-week lows right now; in fact, the stock is down almost -29% since hitting its highest point this year at almost $19 per share. With generally healthy fundamentals, and an interesting valuation, that means this is a stock that could still offer plenty of opportunity in the long term.

Fundamental and Value Profile

Marathon Oil Corporation is an exploration and production (E&P) company. The Company operates through two segments: United States E&P and International E&P. The United States E&P segment explores for, produces and markets crude oil and condensate, natural gas liquids (NGLs) and natural gas in the United States. The International E&P segment explores for, produces and markets crude oil and condensate, NGLs and natural gas outside of the United States, and produces and markets products manufactured from natural gas, such as liquefied natural gas (LNG) and methanol, in Equatorial Guinea (E.G.). MRO’s current market cap is about $10.8 billion.

Earnings and Sales Growth: Over the last twelve months, earnings declined by -41.6%, while sales were negative by about -19% – a reflection of the drop in oil prices over the last year. In the last quarter, earnings declined almost -39% while revenues dropped by about -6.14%. MRO operates with a healthy, but narrowing margin profile; Net Income versus Revenues over the past year was 15.5%, and decreased in the last quarter to 13.21%.

Free Cash Flow: MRO’s free cash flow over the last twelve month is generally healthy, at a little more than $367 million. That translates to a Free Cash Flow Yield of 3.45%.

Debt to Equity: MRO has a debt/equity ratio of .40. This is a conservative number that speaks to management’s ability to use debt more effectively than a lot of competitors in the industry. In the last quarter, MRO’s balance sheet reported more than $1.16 billion in cash and liquid assets with about $4.9 billion in long-term debt. Given their healthy operating margin and increasing cash flows even amidst significant price pressures, along with generally good liquidity, effective debt management should continue to be a strength.

Dividend: MRO pays a dividend of $.20 per share, which translates to an annual yield of about 1.51% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MRO is $15.26, and which translates to a Price/Book ratio of .88 at the stock’s current price. The stock’s historical average Price/Book ratio is .87, which means the stock is fairly valued. The real story, however is that the stock is also currently trading almost 78% below its historical Price/Cash Flow average, which provides a long-term target price at about $24 per share. That’s a price level the stock hasn’t seen since October of 2018, and which makes the stock very interesting indeed.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s downward trend over the past year; it also informs the Fibonacci retracement lines shown on the right side of the chart. The stock has been showing some encouraging strength since the beginning of October, rebounding off of a trend low point at around $11 to its current price at about $13.50 per share. Immediate resistance is expected to be seen between $15 and $16, where the 38.2% Fibonacci retracement line; but if the stock can maintain its bullish momentum and break above that level, it could have attractive momentum to drive to about $18 per share a little below where the 61.8% Fibonacci retracement line rests. If the stock picks up bearish momentum and breaks below its current support at $13, the stock could drop to as low as $11 based on the stock’s 52-week lows.

Near-term Keys: MRO is a stock with a solid fundamental profile, and an interesting value proposition. It isn’t a given the stock is going to continue to rebound, of course, which means that if you are going to make a value-based bet on the stock, you do need to be prepared for the stock to remain volatile in the short-term, and plan to hold for the long-term. If the stock does show signs of maintaining its current momentum, there could be a good opportunity to buy the stock or work with call options for a short-term trade with an eye on $16 as an exit target. A drop below $13, on the other hand would be an interesting signal to consider shorting the stock or to buy put options with an eye on $11 for a bearish trading target.


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