Marathon Oil Corporation: I Like This Company Very Much

Investment Rundown

Marathon Oil Corporation (NYSE:MRO) has grown significantly over the last several years and now boasts a market cap of over $16 billion. The company's share price is very much tied to the price of both oil and natural gas. Since MRO operates as an explorer of and producer of crude oil and natural gas liquids more favorable commodity prices will yield stronger earnings for the company. It's a commodity company plain and simple.

What I think sets MRO apart right now is the impressive amount of shareholder value they are trying to pass on. In the last quarter alone MRO returned $434 million in total to shareholders. This was an increase of 10% from the returns in the first quarter to 2023. I think this underscores very well what you are getting right now with MRO, a company that is aiming to maximize shareholder returns as it capitalizes on improving commodity prices. The share price has come down some from the highs of around $33 and presents in my opinion a very strong investment opportunity right now. I will be rating MRO a buy.

Company Segments

MRO is primarily engaged in the production of oil, natural gas liquids, and natural gas within the United States and the African nation of Equatorial Guinea. In a significant move, the company acquired Ensign Natural Resources, a privately held company with a focus on natural gas operations. The deal resulted in MRO taking on a larger amount of debt to fund the deal, which right now is at $5.7 billion. The debt maturities are far out though so MRO is staying true to its focus on returning a significant amount of capital to shareholders through buybacks and dividends.

MRO's primary operations within the United States are concentrated in the Bakken region of North Dakota and the Eagle Ford region in South Texas. Additionally, the company has smaller-scale operations in the New Mexico section of the Permian Basin and Oklahoma. This diversified geographic presence allows Marathon Oil to tap into various energy resources across the country. Looking at the guidance for the year, MRO sees improvements in the production levels in the US, with results expected to reach at or above the annual guidance provided. This I think is quite bullish as it tells me MRO is seeing the market as very positive right now and that higher earnings are possible. It's important to note as well that oil prices have appreciated quite a lot in value recently and if they remain above $90 I would expect even stronger shareholder returns in Q1 and Q2 FY2024.

Earnings Highlights

The results from the last quarter I think are very strong. MRO has proven itself very capable of growing the top and bottom lines efficiently. The adjusted FCF for example was up by 70% sequentially. We have gone over before that MRO is a business that aims to maximize shareholder returns. Right now the company has an annualized distribution yield of 11% which is incredibly appealing to get a piece of, enough that a buy rating is suitable I think.

Risks

While this may not necessarily be categorized as a risk, I would express hope for MRO that they place a higher priority on bolstering their current cash position. As it currently stands, their cash reserves fall short of the $200 million mark, which can be attributed, in part, to the significant $3 billion acquisition of Eagle Ford assets from Ensign Natural Resources. Considering that the company has generated upwards of $2 billion in levered free cash flows over the past year, it appears prudent to rebuild this cash cushion. Doing so would not only provide a safeguard for times when oil prices might face suppression and margins are lower but would also serve the interests of investors, as it could potentially facilitate the distribution of dividends.

It should be said that MRO is quite exposed to the price of oil and natural gas. As we have seen oil prices rally in the last few months and reach above $90, so has the share price for MRO. A drop in oil prices will likely result in a drop in the share price for MRO. If this is a volatility level that some investors aren't comfortable with then perhaps MRO isn't the right choice.

Looking at the assets though, despite the Eagle Ford's significant size and productivity, its reserves are comparatively smaller, with a greater inclination towards natural gas. There exists a possibility that MRO may not fully actualize the expected synergies stemming from its acquisition of Ensign or may have paid a premium for this acquisition.

Industry Comparison

Comparing MRO to a similar-sized business like EQT Corporation (EQT) which also operates as a natural gas provider and has some reserves of crude oil, I think MRO looks like the better deal on the surface. Looking solely at the p/e of the two businesses MRO trades at a far lower one, under 11 right now, whilst EQT is nearing 20.

As for the shares outstanding of EQT, they have been steadily climbing over the last few years, mitigating any significant form of shareholder value there, unfortunately. I think this is a trend likely to continue. The immediate shareholder value is found with MRO as they have a solid dividend, but as we have gone over buy back a large portion of shares as well. Both companies may be subject to price volatility but MRO offers a far better opportunity for long-term investment appreciation right now.

Final Words

MRO has been expanding its operations with various acquisitions over the years. The primary risk around the company seems to be the high debt levels, but paying down any current liabilities seems to easily be covered by the FCF of the business. The share price has come down over the last 12 months and with more and more capital being distributed to shareholders I think MRO displays a long-term investment opportunity right now, which brings me to rate it a buy.