MRO Stock Forecast: Oil Company That Gives High Expectations Beyond Storm in the Commodity Market

Sergey Okun  This MRO Stock Forecast article was written by Sergey Okun – Senior Financial Analyst at I Know First, Ph.D. in Economics.

Highlights:

  • Since November 2020, the company’s stock has grown by 162.31%
  • Actively allocates money to investors through buybacks
  • 3-Year Average Share Buyback Ratio is 2.5 that better than 94% of companies in the industry
  • DCF supports over 21% upside for MRO stock  
(Source: wikimedia.org)

Overview

Marathon Oil Corporation is an exploration and production company focused on U.S. territorial resources: the Eagle Ford in Texas, the Bakken in North Dakota, the South Central Oklahoma Oil Province in Oklahoma, and Northern Delaware in New Mexico. The company also has production assets in Equatorial Guinea. The operating activity is divided by geographic location and includes two segments:

  • United States – explores for, produces and markets crude oil and condensate, natural gas liquids and natural gas in the United States
  • International – explores for, produces and markets crude oil and condensate, natural gas liquids and natural gas outside of the United States as well as produces and markets products manufactured from natural gas, such as LNG and methanol, in Equatorial Guinea

The company’s headquarters is located in Houston. Shares of the Company’s common stock are listed on the New York Stock Exchange and trade under the symbol MRO. Traditionally, MRO’s stock depends on the situation in the commodity market. Below is a price dynamic of MRO’s stock with a price dynamic of Brent.

(Source: Yahoo Finance)

The Consequence of the Storm in the Commodity Market

(Source: medium.com)

COVID-19 has had a negative impact on Marathon Oil Corporation through the commodity prices that forced to decrease the volume of sales. In 2020 revenue decreased by 39% with the price factor of 78% and the volume factor of 22 % respectively.

(Figure 1 – Price/Volume Revenue Analysis)

Historically the company paid a quarterly dividend of $0.05 per share, but due to the pandemic the company skipped dividend payments in 2020Q1 and 2020Q2 and decreased dividend to $0.03 per share in 2020Q3 and 2020Q4 respectively. The company has a stock repurchasing program which was established in 2006 and regularly has been updating. The company has repurchased 191 million common shares at a cost of approximately $5.9 billion, excluding transaction fees and commissions. To maximize liquidity in 2020, the company has decided to temporarily suspend repurchasing program and transfer buybacks in the amount of $1.3 billion in the future. The 3-year average share buyback ratio is equal to 2.5 that better than 93.9% of companies in the Oil & Gas industry.

Reacting to the substantial decline in commodity prices and oversupply in the market because of COVID-19, in 2020 the company reduced the capital budget from $2.4 billion to $1.2 billion. The capital budget for 2021 is $1 billion consistent with a transparent capital allocation framework that prioritizes corporate returns and free cash flow generation over production growth. Also, to decrease cost in the pandemic time, Marathon Oil Corporation decided to reduced general and administrative expenses including temporary base salary reductions for CEO and other corporate officers, a reduction in Board of Director compensation, and U.S. employee and contractor workforce reductions. So, CEO and Board compensation reduced by 25% in 2020.

According to the IMF, the global economic growth was estimated as -3.5% in 2020 and should get 5.5% in 2021. Such recovering grade of the world economy will get a positive impact on commodity markets and consequently will boost Marathon Oil Corporation’s revenue through increasing average price realizations and sales volume. For instance, on March 24thBrent’s price is $64.13 that 49% more than the average price in 2020.

DCF Estimates Up to $13 MRO Stock Forecast

The DCF analysis shows that MRO’s target stock price should be around $13. This expected share price makes some 21% upside difference from the price on March 24th. The below forecast is based on average data from previous years, the direction of the company’s policy, and macroeconomic expectations in the main company commodity markets.

Revenue growth for the periods 2021 – 2025 was calculated by taking into account the price trend in the commodity market and expected net sales volume which fit for the company segments and types of goods. I calculated expected MRO average goods price realization for 2021 – 2025 based on average goods price realization in 2020 with taking into account growth rates for Brent and natural gas price forecasts. Also, I assumed that Natural Gas Liquids price will have the same growth rate as Natural Gas. I have adjusted future net sales volume by segments and types of goods depends on expected average goods price realization in 2021 – 2025.

(Figure 2 –  DCF Model of MRO’s Stock)

I have made the following assumptions and estimations for DCF:

  • the risk-free rate and risk premium are equal to 1.91% (expectation on March 20th, 2021) and 5.6%, respectively; WACC and cost of equity are equal to 15.6%  and 21.49%;
  • the coefficient of regression (Beta) was estimated by five years monthly logarithm return and it is equal to 3.50 with the 95% confidence interval ranging from 2.61 to 4.38;
  • the effective tax rate is 12% (the average effective rate between 2018 and 2020);
  • perpetuity growth rate (g) is 3.16% (the average expected value based on ROE and the future dividend payout ratio for 2021 – 2025 years);
  • the quarterly dividend payment is $0.03 per share in 2021, from 2022 the quarterly dividend payment is $0.05 per share;
  • the company will fulfill the stock repurchasing program on $650 million in 2021 and 2022 respectively;
  • to estimate the value of proved reserves I have adjusted information from the company annual report by the current dynamic in the commodity market and using the current WACC;
  • value of unproved reserves is equal to 10% of the value of proved reserves to take into account that share of unproved reserves is equal to 31% in the total amount of the company reserves.

COVID-19 had a structural impact on the market risk profile between financial assets, which can have a positive or negative effect on WACC. Currently, the beta coefficient for MRO is 3.50 and the pandemic has had a tremendous impact on it:

(Figure 3 –  The Dynamic of Beta with the Frame of 5 Years)

The high beta value means that an investor asks for more return from investments in MRO that has a reflection on the cost of equity and WACC. It is reasonable to expect that in the future when the story with COVID-19 will be over, the coefficient of regression will decrease that will drop WACC, and will have a positive effect on the company value. I have made a sensitivity analysis of MRO stock based on WACC and g. Values of WACC 12.29% and 18.84% that correspond with values of Beta 2.61 and 4.38 respectively (consistent with 95% of the confidence interval).

(Figure 4 – Sensitivity Analysis of Marathon Oil Corporation’s Share)

 DCF vs Technical Analysis – What’s the Current Trend?

(Source: Yahoo Finance)

As we can see in the chart, currently MRO’s stock price is on the uptrend and it is higher than all three moving averages (the green line is MA-50; the yellow line is MA-100 and the red line is MA-200). Currently, we can notice some grade of price correction. However, there is not a signal now that after correction tendency will change from an uptrend to a downtrend.

Conclusion

I take a buy-side on MRO stock because the stock holds a positive DCF forecast resulting in a $12.64 target price, i.e., around 21% upside potential in the coming years. Marathon Oil Corporation is one of the best companies in the Oil & Gas Industry by allocating money to investors through buybacks. Also, the company has a strong dividend payment history and continues to pay dividends despite the pandemic time and dropped prices on the commodity markets in 2020. Price growth on the commodity markets after the drop in 2020 is the main factor of increasing expected revenue and a driver of MRO’s stock price.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the MRO stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

Past Success With MRO Stock Forecast

I Know First has been bullish on the MRO stock forecast in the past. On February 17th, 2021 the I Know First algorithm issued a forecast for MRO stock price and recommended MRO as one of the best consumer stocks to buy. The AI-driven MRO stock prediction was successful on a 1-month time horizon resulting in more than 20.00%.

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Please note-for trading decisions use the most recent forecast.