Marathon Oil’s (NYSE:MRO) low oil production costs — combined with the likely rebound of oil prices and the oil price hedges the company has carried out — make MRO stock attractive at its current levels.
Marathon reportedly has very low oil production costs. With a $2.2 billion capital budget and its current dividend of 20 cents per share, the company estimated that it would break even from a cash flow perspective at an oil price of $47 per barrel.
That was before the novel coronavirus crisis began. In the wake of the crisis, the company slashed its capital budget to $1.3 billion or less. And given the extremely low oil prices, I expect Marathon to slash its dividend by at least 50%.
After cutting those expenses, Marathon will be able to break even with oil at $40 per barrel. Fortunately, Marathon was able to hedge 100,000 barrels per day of its second-quarter oil production.
Under the deal, it will receive an average of $30.73 per barrel for 60,000 barrels per day and an average of at least $32.89 per barrel for 40,000 barrels per day. In the fourth quarter of 2019, the company produced an average of 196,000 barrels of oil per day. But given Marathon’s low production costs and its hedging, its Q2 losses should be manageable.
The picture improves further in Q2 and Q3. It has hedged 80,000 barrels per day at an average minimum price of $55 per barrel for both quarters.
Oil Prices Look Set to Climb
Around the world, some shutdowns have started to ease. In Europe, Austria, Denmark, Norway and the Czech Republic are among the nations planning to ease their lockdowns during the week of April 20. The governor of Texas has said that he would issue an executive order this week, establishing parameters to ease the state’s closures.
President Donald Trump is indicating that his administration will recommend easing closures in the beginning of May. And the crisis already showing some signs of waning. So, many American states will probably allow some businesses to reopen at that time.
Further, the restrictions set by many European countries are set to expire in early May. When those deadlines arrive, a significant number of nations are likely to ease their restrictions.
Cumulatively, the lifting of closures in the United States and Europe will cause demand for oil to meaningfully rise. Together with the supply cuts to which OPEC and other major oil-producing nations recently agreed, the demand increase will likely cause oil prices to reach at least $35 by mid-May.
As a consequence, Marathon Oil will not have to worry about issuing new shares of stock or going bankrupt, and MRO stock is likely to climb significantly.
The Bottom Line on MRO Stock
Given Marathon Oil’s low production cost and the high chances of oil prices rising over the coming weeks and months, the company is fairly well-positioned. Moreover, its current ratio, which compares short-term debt to assets, is 1.22, indicating that it will remain solvent in the short term, Finally, the company’s hedges should also help it emerge unscathed from the coronavirus crisis.
In light of all these points, I recommend buying MRO stock at this point.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any shares of the aforementioned companies.