They say that business is a marathon, not a sprint. And Marathon Oil (NYSE:MRO) investors sure hope that’s the case because the company looks gassed right now. The company has reported steadily worsening earnings, and MRO stock is following that trajectory on down; shares have fallen from a 52-week high of $14.70 to less than $7 today.
Marathon isn’t out of the race just yet. In fact, management is making sound decisions now to get the company back on track. Unfortunately for investors, the fruits of these maneuvers likely won’t be seen for at least another year.
While the benefits will come in the future, shareholders are facing difficulties today. The company suspended its dividend and share buyback programs to save capital. And it has slashed spending across the board to keep its financial position tenable. So what’s it all mean for Marathon’s stock in coming months? Here’s where things stand with Marathon today.
Downbeat Earnings and MRO Stock
Marathon’s latest earnings report did little to cheer investors. The company’s adjusted earnings swung sharply into negative territory, with the company losing 16 cents per share for Q1. That’s way off from a 31 cent profit for the same period last year.
While the company reported rising production, that was counteracted by double-digit prices decreases for oil, natural gas, and natural gas liquids. On oil, for example, the company realized less than $45 per barrel of oil that it sold during the quarter.
In 2019, however, the company brought in $56 per barrel of oil that it produced. That’s a steep drop, and it’s not over yet. Spot oil is a tick under $40 now, and Marathon doesn’t have a strong hedging program in place to offset the weak market prices.
Negatives Will Persist into 2021
Some oil companies are better positioned than others to turn things around quickly. Unfortunately, Marathon is not one of the ones in the driver’s seat. It has two primary concerns at this point.
First, the company has a weak hedge book. As of the last quarterly report, Marathon has roughly half its oil production hedged for Q2 with a minimum floor price of $30.33/barrel. This provides some insulation in the event that oil prices plunge back to $20 again, but locking in half your production at a floor of $30 is pretty modest protection.
Now to be fair to Marathon, its underwhelming hedging position is less of a liability than it was a few months ago. We’re at $40 oil after all, not $20, so things could be worse. Still, you’d rather be one of the producers that locked in a lot of their output above $50.
Second, Marathon is set to see falling production going forward. Remember that they still invested significantly in growth last year. This led to 17% growth in the company’s oil production year-over-year. Despite that, it still delivered a large operating loss thanks to falling energy prices.
Now, they’ll seemingly be stuck with both low energy prices and a production profile that is rapidly trailing off as the company sharply curtails new drilling investments. This means that, absent a big recovery in oil prices, Marathon’s earnings will likely to be weak for at least the next year.
MRO Stock Verdict
Marathon has a decent enough balance sheet and retains an investment-grade credit rating. That’s impressive given the scope of the destruction across the energy industry in recent years. And you have to applaud management for making the hard moves.
They suspended the dividend and buyback, cut investments sharply, and even lowered executive pay to make it through this crisis. So, Marathon is taking the right steps to stay viable while waiting for the next bull market in energy.
While Marathon is making good decisions now, however, it still has some major roadblocks. The combination of lackluster energy hedges and sliding oil production may put Marathon’s earnings into a downward slide for the foreseeable future.
There’s an investment case here. This isn’t some failing near-bankrupt exploration and production company here; Marathon is a reputable firm that has a decent future.
It’s hard to make a case for the stock in the near-term, though. It’s unlikely that Marathon will deliver meaningful profits until at least 2021 if not 2022, and the same goes for a respectable dividend. With that in mind, there’s no rush to buy into Marathon just yet.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.