With oil prices reaching a plateau, the oil and gas industry found some much-needed breath. Whether the trend is to turn upward or resume the downtrend is hard to predict. So far, oil prices have been on a downtrend since early 2011, and today stand very close to the $100 line. Although the oil and industry is hit in its totality, some sectors are more exposed than others. For example, midstream companies are less exposed than those involved in exploration and production. At least, that is what intuition tells but the market always offers some exceptions to the rule. Let us look at Marathon Oil (MRO), and try to find out why Ray Dalio (Trades, Portfolio) continues to buy the stock.
Flying Low but Strong
Marathon Oil is a pure-play upstream exploration and production company, focused on profitable resource acquisition and development with important international exposure. Footprint that continues to be increased, as exemplified by last month’s production agreement with Africa Oil. The company is expected to acquire roughly 50% ownership in Ethiopia's Rift Basin, following a $15.0 million investment to explore the Rift Basin.
For fiscal year 2013, Marathon Oil reported net income of $1.753 billion, or $2.47 per diluted share, compared to $1.582 billion, or $2.23 per diluted share, in 2012. Most importantly, the firm achieved 194% of proved reserves replacement. That was the result of discoveries at Mirawa-1 on Company-operated Harir Block in the Kurdistan Region of Iraq and Diaman-1B on non-operated Diaba License in Gabon, and increasing acreage at South Central Oklahoma Oil Province and Eagle Ford shale.
The strong performance was, however, curbed by lower prices. In that line, Lee M. Tillman, Marathon Oil's president and CEO said that “strong fourth quarter operating results were offset by decreased price realizations, particularly in the U.S. and Canada.” Nonetheless, management projects a growth in resource play production in excess of 30%, and total company production growth of 4% for 2014. And a total of $5.9 billion, destined for capital investment, is already being disbursed.
Keeping the Drill Turning
For 2014, Marathon Oil saw three main objectives: Accelerate rig activity in Eagle Ford, Bakken and Oklahoma Woodford; open data room for marketing of North Sea businesses; and complete second phase of $1 billion share repurchase associated with close of Angola Block 31 divestment. According to Tillman, the three-spear plan is already underway and important advancements have been achieved during the first quarter of 2014. Confirmed by the strong performance delivered in the first quarter of 2014, in contrast with major integrated oil and gas companies.
The upside to a long-term investment on Marathon Oil is a strong inventory of development projects, acquisition of sizeable acreage in the burgeoning Eagle Ford shale, divestiture of non-core underperforming assets, and continued quarterly dividend increments. Most important, the company has had successful exploration attempts in the Gulf of Mexico, Kurdistan, Africa and Indonesia. Such catalysts have granted the firm a stronger performance than many oil giants like Exxon Mobil (XOM) and Chevron (CVX).
Currently trading at 15.9 times its trailing earnings, Marathon Oil’s stock carries a 43% discount to the industry average. Additionally, the company’s operating margin and return on capital is one of the highest in the industry. Indicators supported by a declining debt and stable cash flow. Given the strong performance and growth catalysts there is no surprise behind the decision of Joel Greenblatt (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio) and Renaissance Technologies acquired new position. Most important, Pioneer Investments (Trades, Portfolio) is already collecting rewards by selling part of its initial investment thanks to the stock’s strong market performance.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.