We tend to like businesses that generate a huge amount of Free Cash Flow. Triple digit FCF can be impressive, but in Marathon Oil Corporation’s (NYSE:MRO) case there is $2.2 billion in FCF in 2021 alone. The main contributor to the advancing of free cash flows ("FCF") has been the rise in prices of oil and natural gas.
The company has the potential to capitalize on the rising fuel demand in the U.S.
Additionally, the company has shown commitment to return profits to equity investors. There has been a sustained dividend payment in combination with continued share repurchases. We do love stocks such as this!
However, all of these capital returns to shareholders comes at a price. The price, in this case, is production growth.
Seeking Alpha author Laura Starks had a section in her article on Marathon Oil that outlined the firm’s competitors. We are going to use this as a point of reference. Let us place that part of the article below for easy reference.
Marathon Oil Corporation is headquartered in Houston, Texas.
In the Eagle Ford, some of Marathon Oil’s competitors include BP (BP), Chesapeake (CHK), ConocoPhillips (COP), EOG Resources (EOG), SilverBow Resources (SBOW), and Exxon Mobil (XOM).
In the Williston/Bakken region, Marathon Oil’s competitors include Chord Energy (CHRD), private Continental Resources, ConocoPhillips, Devon (DVN), EOG Resources, Hess (HES), and Exxon Mobil.
The company also has many competitors in Oklahoma’s SCOOP/STACK formations and the Permian.
The company’s largest competitor in Equatorial Guinea is Exxon Mobil.
Exxon Mobil is a competitor to Marathon Oil in all of the regions that the company has operations in. At first glance, Exxon appears to be the superior stock. It has a current market cap of $446.68 billion and a dividend yield of 3.36%. In comparison, Marathon Oil has a market cap of $17.17 billion right now and a dividend yield of 1.33%. So Exxon with the much larger market cap represents an established company that can be viewed as a safer investment in the eyes of investors. But interestingly, both these companies are classified as large-cap. It does look like you can’t go wrong investing in either one of these two stocks. However, Marathon Oil is closer to the mid-cap value and there is a big potential for growth in the coming years. There are misconceptions about market caps and only a thorough review of a company’s fundamentals can give investors important information on the value of a company. Shares can be over-or undervalued by the market.
Brand wise, Marathon Oil can be considered obscure in any equation with Exxon Mobil. The brand value of Exxon Mobil is estimated to be approximately $11.2 billion in 2022. On the other hand, Statista does not even list Marathon Oil’s brand value for us to do a fair appraisal. Let’s put some perspective to Exxon’s brand value. Statista ranks Apple (AAPL) number with its brand worth of about $355 billion. So even though Exxon’s worth pales in comparison, we feel it can easily be ranked in the top 50 of the world’s most valuable brands.
Exxon boasts over 63,000 employees as of 2020- a figure that has been on the decline over the last couple of years. In comparison, MRO has just over 1500 employees. Again there is decline in this number in recent years. A large employee base can pose management issues across the globe. Legal and human rights issues tend to dominate headlines and there can be real costs associated with these things.
Exxon has its R&D and diverse operations going for it. In addition, one can’t dismiss the growing financial performance and the fact that it has 37 oil refineries in 21 countries. With these high investments, the company is well positioned to capitalize on the increasing demand for LPG and the rising prices of fuels everywhere on the planet.
Big oil companies can have their ugly side with fraud and bribery cases reported.
Oil spills and environmental hazards are additional weaknesses. Government regulations have to be tackled as well in what is already an industry with relatively high levels of competition.
Both Marathon Oil and BP Plc have a healthy portfolio of assets. However, Marathon Oil may have the edge here with its assets in various stages in their lifecycle: base, growth, or exploration. For BP, our SWOT analysis reveals a production decline and the fact that the company is reaching maturity. But BP wins on its strong brand name and its huge geographical reach. Additionally, BP is one of the largest players in the energy sector and is considered a top firm in the market.
Marathon Oil may not have the scale and the quality of operations, but BP is more exposed to the cost of environmental hazards. What Marathon Oil has going for it is its focus. BP, on the other hand, may look at investing in alternate business as an opportunity. It sure has the ability to expand the export market.
There is a question that arises whether in a B2B business, how important a part does brand play? Buyers will be looking for the cheapest, best option after all. Moreover, Marathon Oil also has a brand. It is not like it is unbranded.
Still, Marathon Oil has limited scale particularly in comparison to big names such as BP. One of the issues with Marathon Oil is its concentration of operations in the United States, specifically in the Gulf of Mexico. There are declining oil/gas reserves in this part of the world. This is a big risk for the company and brings down its valuation going forward.
Marathon Oil has a strong reputation for health and safety, environmental stewardship and corporate citizenship (Marathon Oil Annual Report 2021, Pg: 8). Additionally, it is known for its high performance team and gets brownie points for honesty and integrity.
It must be kept in mind that MRO is a diverse upstream business that includes oil and gas exploration and production. Then there is natural gas liquefaction, degasification operations and methanol production operations. This ability to focus its business operations and still remain diversified is a huge plus point.
There is a strong focus on North American liquid hydrocarbon growth by developing liquids rich shale. Even so, BP could see opportunities in government and environment regulations in this highly competitive industry. This is because smaller companies tend to be negatively impacted by these sort of regulations.
When comparing Marathon Oil to BP, the edge goes to the latter when it comes to capitalizing on the increasing natural gas market and expanding its export market. But stuff like more oil well discoveries and alternate business investment has the chance to really prop Marathon Oil’s stock price up more than BP, in our opinion. Also, these large-cap oil and gas stocks may be faced with increasing cost of operations.
In this competitor lineup, here is another Fortune 500 company that has a strong brand name and established market position. What is more, this is the largest upstream company of the lot. The firm has approximately 9900 employees worldwide. Once again, high labor costs may be a downside.
You can’t go wrong with a company that has returned probably over $15 billion to shareholders in 2022. Both Marathon Oil and ConocoPhillips have positives in the form of increasing fuel/oil prices, an ever expanding natural gas market and the prospects of more oil well discoveries. The increasing demand for gas and refined products means that again Marathon Oil has that big potential to scale up.
Just like with BP and Exxon Mobil, the cost of environmental hazards and declining oil reserves and production are weaknesses in the case of ConocoPhillips. Then there are the government regulations, but ConocoPhillips will be more negatively impacted by pollution guidelines, we believe. The company has a history of pollution accusations.
One more weakness we would like to add is that nowadays hybrid cars are using less fuel. This is a problem for both MRO and COP going forward.
Chesapeake Energy finds itself among the 100 best companies to work for over many years. It does have a competitive edge much like Marathon Oil in that it has strong natural gas resources in the US. Its top line growth is driven by robust upstream and midstream operations. Chesapeake boasts of being the most active driller in the US, a feat that may have recently been supplanted by Exxon Mobil according to reports.
Just like Marathon Oil, Chesapeake’s operations are confined to the US and this is a weakness at times. The other big problem with Chesapeake stock is its high debt. For this reason alone, we give MRO the upper hand as it has a strong balance sheet.
When it comes to the opportunities and threats discussion, there are similar factors (as mentioned in previous competitor discussions) that can drive or put pressure on growth. With a better cash position, Marathon Oil may be the firm that can take advantage of these opportunities and navigate the threats.
Some of EOG Resources, Inc’s strengths include a wide geographic presence, a market leadership position and talent management.
When you compare with the oil and gas industry as a whole, there is a declining market share observed for EOG Resources in terms of revenue numbers. The reducing R&D expenditure specifically in customer oriented services is another weakness for EOG. When looking at a key profitability metric, ROE, it tells a similar story for both EOG Resources and Marathon Oil. However, the net income figure comparison makes EOG a clear winner.
Marathon Oil does have much better operating and net margins, though. We see the operating and net margins recorded by EOG Resources as a minor concern and it can be an issue for the firm’s finances in the future.
Higher inflation is something that we haven’t mentioned prior to this. This will reduce consumption of offerings at both firms. Additionally, there will tend to be some instability in the market and less access to credit.
The US-China trade war appears to have caused a China operations divestiture by EOG. Marathon Oil will have to watch for global developments such as this and invest prudently in its overseas ventures.
SilverBow Resources Inc isn’t faring that well in terms of FCF numbers, while Marathon Oil is raking in the FCF. Surprisingly, the FCF yield for SBOW comes in at 8.17% for 2021 which is only slightly below the 9.99% FCF yield value we computed for MRO. Nonetheless, by this very important fundamental indicator we can deem Marathon Oil the winner.
Moreover, MRO has its dividend yield at 1.29% and SilverBow seems to have never paid a dividend in its entire trading history. All is not bad for SBOW which as a growth-oriented company is trading at a P/E ratio of 1.89. In comparison, MRO has a rather expensive valuation when you take into account its P/E of 5.36.
In this competitor analysis, Marathon Oil can be considered to be far ahead because of its stronger brand name and its larger-scale operation as signified by its number of employees and revenue stats. SilverBow is only a competitor to Marathon Oil in the Eagle Ford and it has only 62 employees.
On the technical front, Marathon Oil has outperformed SilverBow Resources. Any timeframe chart you look at, Marathon Oil has done much better than SilverBow. If you look at the 5 year, 6 month and 1 month charts, SilverBow’s stock price has lost value. Marathon Oil, on the other hand, has seen its stock price consistently rise.
At first glance, Chord Energy looks rather promising and it probably is. It has a higher dividend yield than Marathon Oil and the stock price has been on quite a ride over the past five years, going up almost 384%. Also, it has made Forbes’s recent list of the ten cheapest stocks.
Nonetheless, risks remain and the key one is the low earnings growth. The EPS numbers over the years have not been looking good. EPS is up 57% per year for Marathon Oil over the past three years, though. This EPS growth is higher than the 30% average annual increase in the share price over the same period.
There is some concern that Chord Energy may not be able to sustain its dividend payout, something that Marathon oil has been doing well without flinching. MRO has repeatedly been touted for its strong fundamentals.
Furthermore, Chord is a mid-cap stock and brings with it some inherent risk.
Devon Energy Corporation is known for its good returns to shareholders over the years. After all, its dividend yield is an impressive 7.92%. But just like in the case of Chesapeake energy that we discussed a few sections earlier, high debt could make Devon Energy a risky investment. Devon Energy had $6.45 billion of debt, at September 2022, which is about the same as the prior year. The cash position is at $1.17 billion, and so its net debt stands at $5.29 billion.
Digging deeper, we can see that Devon has a low net debt to EBITDA ratio of just 0.51. What is more, it has boosted its EBIT by 85%, making future debt repayments rather relaxed.
We would like to put in a word of caution here about Devon’s dividend payments. Devon has a supplemental payment that depends on the company’s performance. Consequently, the fluctuation in oil and gas prices will impact these payments. In comparison, Marathon Oil has more consistent dividend payments.
The thing is Marathon Oil is very investor-friendly at the moment. Investors have been pushing U.S. shale companies to hold spending flat and boost oil and gas production at single-digit percentage levels to deliver higher returns. But in the case of companies like Devon, the higher labor costs, materials and equipment expenditures are increasing spending.
There have been some concerns with Hess Corporation’s profitability over the years. Currently, Hess appears to be doing alright with its profitability metrics as measured by Seeking Alpha. But Marathon Oil is doing much better with its figures.
We also feel that having read both annual reports, Marathon Oil seems to be using newer methods of manufacturing as compared to Hess. Additionally, the limited international presence is a weakness in the case of both companies. But it could be argued that this helps in focusing the business.
The reason we feel Marathon Oil has room to grow is because Hess Corporation is much larger with a market cap of just over $40 billion. What is more, Hess Corporation has been termed an expensive stock.
The room for growth and potential of Marathon Oil are big pluses. There are plenty of areas of improvement for Marathon Oil to expand its business. The oil firm's obvious opportunities lie in geographic expansion and product improvements. Since Marathon Oil can greatly scale up its product offerings, there is a good chance that these moves will increase its future valuation. Additionally, its operations can be strengthened by inking some strategic agreements. For instance, contracts given to smaller companies for development and storage among other things.
The future development prospects look bright in this sphere and we would like to see some more large-scale investments initiated by the firm.
The demand for natural gas in the US is only going to go up and this means that topline growth will be ensured for years to come. Exploration is another avenue that Marathon Oil can look to tap and the prospects appear exciting.
Given all the positives going for the company, it must be stated here there are those facts that can negatively affect its business. One is the intense competition in all sectors of the oil and gas industry. Due to this being the number one factor, we decided to prepare this report.
The second big risk that props up is the potential fluctuation in liquid hydrocarbon or natural gas prices. Then there is the likelihood of Middle east refinery capacity increasing which relates to the competition factor mentioned at the start. Crude oil prices are expected to fall this year, but if this does not materialize then it could be a risk.
Another risk for Marathon Oil is possible disruption in the exploration and production operations. Additionally, conducting operations outside the US can pose risks.
One more risk we wish to point out is the partnership arrangements that Marathon Oil has. Risks are shared with partners across those operations.
Marathon Oil generated over $2.2 billion of free cash flow in 2021 (we repeat), with $900 million produced in the fourth quarter. In the fourth quarter, over 70% of cash flow from operations were returned to shareholders. Since October 2021, there have been share buybacks to the tune of $1 billion (Marathon Oil Annual Report, Pg: 1).
Productions has been sacrificed, but not the technology behind it. Total company gas capture was improved to 98.8%, after all.
There is a lot that investors have to love about Marathon Oil. The significant free cash flow generation and market leading return of capital to equity investors stand out. Wall Street will like the fact that the company is committed to strengthening its balance sheet by gross debt reduction (Marathon Oil Annual Report 2021, Pg: 8). We are recommending to buy this stock based on this peer evaluation.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.