Marathon Oil: Wait For A Pullback To $20

May.16.12 | About: Marathon Oil (MRO)

Marathon Oil (NYSE:MRO) has a couple of benefits over its competitors. For one thing, it has the lowest production expenses in the industry. For another thing, it has an excellent balance between its US and international exploration and production.

Financial stats

I would not recommend buying Marathon Oil. There are a number of reasons for this. You might be tempted to buy, as the company's stock price is currently around $24 whereas the 52 week high is $54. This might seem like a perfect time to buy. It's not. For one thing, the price to sales ratio is 1.26. This is significantly higher than its major competitors, Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM). These companies have ratios of .86 and .87 respectively. Despite these strong numbers, the firm only had a net income of $417 million, or $.67 per share for the first quarter of 2011. This is significantly lower than the $996 million it made in 2011, and also the $.88 per share analysts were predicting for this quarter.

Of course, much of this loss was expected. The main factor was the recent spin-off between Marathon Oil and Marathon Petroleum (NYSE:MPC). Marathon Petroleum is devoted to oil refining, allowing Marathon Oil to focus on exploration and production. Therefore, it took a significant part of the parent company's profits. However, the main reason for the lower than anticipated profit margins were the high international tax rates, according to Fadel Gheit of Oppenheimer. The company actually had an income tax rate of 66% of the quarter.

This is because the majority of the production was in Libya and Gheit, nations known for their high tax rates. The analysts were factoring in the spin-off, but they were not counting on these tax rates. There is no reason to expect this to change in the future. One thing to like about this company is that the dividends it issued for the first quarter of 2012 were $.68, or 2.60% of the stock price. The dividend was issued despite the earnings falling 24% from what they were in 2011.

The dividends issued are significantly lower than most of its competitors. For instance, BP (NYSE:BP), Total (NYSE:TOT) and ConocoPhillips (NYSE:COP) all offered dividends that were 4.9% or more of their total stock price. One of the reasons is that the company is involved in buying Paloma Partners, and it is expanding its territory. While some of the other companies are sitting on their heels, Marathon Oil is pushing the envelope by expanding its reach. This could be one of the reasons for the lower dividend rate.

Another thing to like about the firm is the good profit margins. They are a very reasonable 15.97%. The revenue is $14.83 billion. It does have $655 million in cash on hand, as well as $4.76 billion in debt. However, the main reason I would not recommend Marathon Oil is that the price is already reflecting the company's value. While the firm's balance sheet is quite good, the stock price is already valued correctly. This is evidenced by the fact that the market capitalization for Marathon Oil is 19.03 billion, and the enterprise value is only $22.75 billion.

As you can see, there is not a lot of room for improvement with these two numbers. This cancels out the high profit margins and reasonable debt levels.

Projects

The company recently agreed to buy the private energy company, Paloma Partners, for $750 million in cash. Paloma is based out of Houston. This firm owns roughly 17,000 acres of oil fields, and it produces roughly 7,000 barrels of oil daily. The deal is expected to close in the 3rd quarter of 2012. The agreement is designed to give the company a chance for better oil and gas drilling. This is because Paloma owns land that is estimated to have 10 billion barrels of reserves of oil and gas. This should be a great deal for increasing long term profit margins for the company, although the results might not be felt for some time.

Spin-off

As you can see, the company is focusing on boosting its production in the US. This is not only evidenced by the acquisition of Paloma, but also the spin off with Marathon Petroleum. This company is devoted to the refining side of the business, which enables the bigger Marathon Oil firm to focus more specifically on the exploring and production side. Marathon Oil's focus on these two areas is something that a lot of companies in the industry are doing, and it is following the trend. This should make the company a bit more efficient in its operations, although temporarily it obviously has hurt the stock price.

In the news

Marathon is continuing to suffer from the effects of the Gulf of Mexico oil spill in 2011. One of the reasons is recently released photographs of marine animals that were suffering from the spill. This proves that the spill has produced more damage than people originally knew. To try and stem the tide, the company has come up with better systems for stopping the oil flow from damaged deep water wells. These units are able to be flown anywhere globally if needed. However, it remains to be seen how big a hit the company will take from these photos.

Conclusion

There are a lot of things to like about Marathon Oil. For instance, it has a good balance between its US and international production holdings. That is one of its strong suits, and something rarely seen in the oil industry. It also has the lowest cost per barrel of production among any of its competitors. Therefore, it manages the expenses very well.

Overall, the firm is in good shape financially, and the future outlook is positive. It has a good reserve base, project pipeline and a strong balance sheet. It is showing decent revenue growth and great profit margins. The net income might continue to suffer from the high tax rates in the company's main countries of operation. The increased US production could help alleviate some of this. However, the main reason I do not recommend this stock is that the price is already valued correctly. There is not a lot of room for growth in the future, unless the acquisition of Paloma gives the company a larger than expected boost. I recommend buying on a pullback to around $20. This is a low risk, low reward stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.