Up 80% YTD, is Marathon Oil Still a Buy?

Texas-based oil and natural gas explorer Marathon Oil Corporation (MRO) has outperformed the oil industry by registering 230.6% gains over the past year. The slump in crude oil prices down into negative territory last April failed to make a long-lasting impact on MRO’s momentum. Rebounding industrial activity and production cuts have allowed it to gain 164.3% over the past six months, and 80% year-to-date.

However, the growing desire by most major economies to reduce their carbon footprints is driving the adoption of clean energy in lieu of crude oil and natural gas. This slow-motion revolution will likely render MRO’s industry redundant over the long term.

Here’s what could influence MRO’s performance in 2021:

Rising Oil Prices

Several production cuts have been implemented by OPEC and OPEC+ since an  aggressive Russia-Saudi production  war in February 2020 and COVID-19-driven oil  price slump. The cartel aims to stick to its production cuts until April despite the rising oil prices as demand recovers from COVID-19’s ill effects. However, Saudi Arabia has announced voluntary reductions in supply in early March as OEPC+ countries including  Russia and Kazakhstan increased their oil supply to counter lost production from the United States’ shale industry.

Also, , freezing temperatures in Texas over the past month and drone attacks on Saudi Arabia’s oil facilities have led to a further uptick in oil prices because  production took a severe hit. Against this backdrop, Barclays has increased its WTI crude oil price estimate by $6 to $58/ barrel, and Brent crude oil prices by $7 to $62/ barrel for 2021.

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Global Shift Towards Clean Energy

The clean energy industry has been in the limelight since 2020 as rising concerns regarding climate change and pollution levels have dominated the energy space. Many countries, including the United States, have announced  plans to  reduce carbon emissions over the next couple of decades.

President Biden has taken several steps since taking office in tandem with his plans for the U.S. to achieve carbon neutrality by 2050. These steps include  rejoining the Paris Accord and rescinding the Keystone Pipeline permit. He has also re-established the President’s council of advisors on science and technology, which aims to promote clean energy. The United States wants  to achieve carbon neutrality in the power sector by 2035, and zero carbon emission goal by 2060.

These developments are raising questions regarding the non-renewable energy industry because  green energy is gearing up to supplant it in the long run.

Trading at Sky-High Valuations

In terms of forward non-GAAP p/e, MRO is currently trading at 103.37x, 728.2% higher than the industry average  12.48x. MRO’s forward non-GAAP PEG ratio of 15.90 is 563.3% higher than the industry average of 2.40.

Moreover, the company’s forward ev/ebit and price/sales of 50.53x and 2.38x, respectively, are significantly higher than the respective industry averages.

Consensus Ratings and Price Target Indicate Potential Downside

Of 23 Wall Street analysts that rated MRO, 13 rated it Hold. Also,  analysts expect MRO to hit $10.56 soon, indicating a potential downside of 6%.

Mixed POWR Ratings

MRO has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

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MRO has an F grade  for Stability, D for Growth, and C for Value and Sentiment. The stock has a beta of 3.36, reflecting immense volatility, thereby justifying its Stability grade. Also, despite its sky-high valuation, MRO’s growth history is bleak. The company’s revenues have declined at a rate of 11.4% over the past three years, while its EBITDA declined at a CAGR of 12.6% over the same period. The company’s poor growth attributes are reflected in its Growth grade, while the declining prospects of the oil and natural gas industry and  analysts’ conservative ratings are reflected in the Sentiment grade.

MRO is ranked #64 out of 95 stocks in the D-rated Energy – Oil & Gas industry. In addition to the grades I’ve highlighted here, you can check out additional ratings for Momentum and Quality here.

There are eight stocks in the Energy – Oil & Gas industry with an overall rating of A or B. Click here to view them.

Bottom Line

With governments currently focused on broader macroeconomic recovery, the clean energy industry is currently being overshadowed by the rising demand for crude oil as industrial production ramps up to recapture  pre-pandemic levels. With several macroeconomic factors, including the recent Texas cold snap, driving up oil prices, MRO has gained 35% over the past month. However, as the economy gains traction, the clean energy industry is expected to grow again  and  will gradually reduce the demand for crude oil. Thus, while MRO’s near-term prospects look bright, we think the long-term industry implications and high valuation are concerns.

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MRO shares were trading at $12.22 per share on Wednesday afternoon, up $0.22 (+1.83%). Year-to-date, MRO has gained 83.82%, versus a 4.22% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don’ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More…

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