Marathon Oil (MRO, Financial) had moved higher by nearly 30% from the beginning of 2014 until the end of August 2014. The stock moved higher as the company, through a series of asset dispositions, had positioned itself strongly as a US resource play.
However, the steep decline in oil prices turned the sentiments for Marathon Oil and for oil stocks, and Marathon Oil corrected by 19% from a peak of $41.69 to current levels of $33.83.
I believe that this correction is an excellent opportunity to consider long-term exposure to the stock. Investors with a time horizon of 3-5 years can expect strong returns from a stock that is currently trading at a TTM EV/EBITDA valuation of just 3.75.
This article discusses the key factors that will trigger upside for Marathon Oil over the next few years. I must add here that Marathon Oil also offers an attractive dividend yield of 2.6% besides trading at cheap EV/EBITDA valuations.
In the last four years, Marathon Oil has disposed assets worth $6.9 billion and I believe that the company’s asset disposition strategy is likely to work positively when oil prices recover. The company’s last asset disposition was the sale of Norway business for $2.1 billion, which closed on October 15, 2014.
With these strategic dispositions, Marathon Oil has positioned itself as a high quality US resource play and is well positioned to deliver strong production growth in the coming years. The entire objective of the asset disposition was to focus on some key assets in the US, which the company’s believes will generate a higher IRR.
Marathon Oil has been able to back its objective with strong numbers and this is one of the primary factors to remain bullish on the stock. For the third quarter of 2014, Marathon Oil’s average net production from three U.S. resource plays was 192,000 boepd, representing a 43% growth y-o-y and a 13% production growth q-o-q. Marathon Oil is also on track to register 30% production growth in FY14 on a y-o-y basis. Clearly, the company is making a strong impact in terms of production with high-quality U.S. assets.
The company’s E&P production (% of total production) from U.S. resources has increased from 39% in 3Q13 to 52% in 3Q14 and I believe that the production percentage from U.S. resources will continue to increase. The reason being that out of the $5.9 billion in planned capital expenditure for 2014, $3.6 billion will be allocated to Eagle Ford, Bakken and Oklahoma Resource Basin.
In the third quarter of 2014, there is already an additional rig allocated to Bakken while two rigs are slated to be allocated to Oklahoma by the end of 2014. The important point to note is that the company’s investment momentum is sustaining even amid lower oil prices.
I must mention here that the company’s 3Q14 revenue declined by 5% to $2,971 million as compared to $3,127 million in 3Q13. During the same period, the company’s EBITDA also declined by 9.4% to $1,354 million as compared to $1,494 million in 3Q13.
However, it is important to note that the average price realization from North America in 3Q14 was $80.89 for liquid hydrocarbons and $89.65 for crude oil and condensate in 3Q14 as compared to $90.49 and $101.05 respectively in 3Q13. Therefore, Marathon Oil’s production growth has covered for the decline in oil prices significantly.
While it is important that oil prices recover, Marathon Oil has strong financial flexibility to continue its aggressive drilling and exploration program at Eagle Ford, Bakken and Oklahoma. With a strong operating cash flow of $4.3 billion for the nine months ended 2014 and a current cash position of $761 million, Marathon Oil has high financial flexibility. The company is scheduled to release its 2015 capital expenditure program outlook in December, and I believe that strong investments will continue into 2015.
In terms of risk, Marathon Oil has working interest in a few assets in Kurdistan and the geo-political tensions can result in significant delay in commencement of operations in these assets. While Kurdistan remains safe, the outlook for the region is uncertain and can negatively impact the company’s growth plans from the rich Kurdistan assets.
Lower oil prices also remains a risk and if oil price stay in the range of $70 to $75 per barrel, there could be a potential slowdown in production in 2015. I do believe that oil prices are likely to trend higher in 2015 and 2016. However, the outlook is uncertain with several counter-acting factors dominant such as geo-political tensions, stronger dollar, demand from emerging Asia, Euro Area recession and competitive lowering of prices by Saudi Arabia.
Even with these risks, Marathon Oil is very attractive at an EV/EBITDA of 3.75 and I believe that the stock will trend meaningfully higher over the next 2-3 years. Investors with a long-term investment horizon can certainly consider Marathon Oil at current levels.
