It has been a little while since I wrote about Marathon Oil (MRO). However, it was just the recipient of some blockbuster news. It seems now is a good time to again update the story on these cheap energy shares.
- Anadarko Petroleum (APC) just announced it may have found one of the largest fields yet discovered in the Gulf of Mexico. This huge discovery could hold between 500mm to 1B barrels of oil. Marathon has a stake of 10% in the field which equates to 50mm to 100mm barrels of potential new reserves.
- Citi analyst Robert Morris believes this could eventually add 75 cents to a $1.50 annually to Marathon's EPS.
In addition to this huge potential find, Marathon has other positives going for it.
- It has some prime acreage in the Bakken and Eagle Ford. Over 95% of its new wells this year will happen in the United States which provides greater geopolitical stability to its overall production base.
- Oppenheimer also raised its price target one month ago to $45 from $40 and reiterated its "Outperform" rating on the stock.
4 additional reasons MRO is undervalued at $34:
- The company sells at less than 11x 2014's projected earnings and this does not take into effect any contribution from the new Gulf of Mexico find which probably will not be online for several years in any case. If you put the same multiple on the Citi's estimate what this new field to contribute to Marathon's earnings over time (.75 to $1.50 a share) you get another $8.25 to $16.50 of market value per share.
- The stock is even cheaper on an operating cash flow (OCF) basis where it trades at approximately 6x current OCF.
- The 19 analysts that cover the stock have a median price target of $40 a share. I would look for at least a couple analysts to raise their price targets on the back of this major discovery.
- The stock is selling near the bottom of its five year valuation range based on P/CF and P/B.
Disclosure: I am long MRO.