Marathon Oil Could Hit $50 By 2014

| About: Marathon Oil (MRO)

By James Allen

Marathon Oil (NYSE:MRO) is an intriguing earning opportunity with growth potential for investors interested in the exploration and production (E&P) industry. Marathon is still recovering after the drop in earnings from creating the spinoff Marathon Petroleum (NYSE:MPC). Marathon Oil should be viewed as an organization still in transition regarding its poor earnings and revenues of late. The low stock price and diversified, yet aggressive, portfolio presents a substantial opportunity for investors in comparison to its competitors in the industry like BP (NYSE:BP), Hess (NYSE:HES) and Chesapeake (NYSE:CHK). The focus on oil and gas both in North America and internationally makes this an attractive investment at a discount.

Marathon Oil has been trading around $25. This is on the lower end of its 52-week range from $19 to $54 before the spinoff. The current stock price is under both the 50-day and 200-day moving averages of $27.90 and $30, respectively. The beta is around 1.3, and the low stock price below its averages indicates that now is a good time to invest in shares. The market cap is around $17.55 billion, while the enterprise value is over $21 billion. This indicates that the stock is slightly undervalued at its current rate. With multiple promising ventures on the horizon, this is an optimal time to invest in Marathon Oil as it may be the lowest price we see all year. The price-to-earnings ratio is improving into next year, but it's still above the industry average. The growth rate for next year is almost double the industry average, while net margin is above the average. The current ratio is below one; however, operating margin is above 30% while the gross margin and institutional ownership are both above 55%. Both the net margin and operating margin have increased through the last three quarters. Despite the marginal numbers in its financials, there are clear indicators that Marathon Oil is more valuable than its current stock price.

One appealing attribute about Marathon is the aggressive yet balanced approach it is taking as an E&P. This Houston-based E&P is more appealing because it is focused on international growth while increasing its domestic assets as well. This approach will be extremely beneficial for Marathon once it has completed the transition from a fully integrated energy company and after gas and oil rise back to normal pricing throughout the year. Marathon is focused on growing efficiently and quickly in the natural gas market as well as the liquid-based markets. The only downside of its operation is easily reversible by means of its diversified approach. The potential for growth outweighs the recent struggles in Marathon's financials. It's important to remember that most of the industry has had decreased earnings due to the low natural gas and oil prices in 2012.

These prices will normalize by mid-summer and fall and will continue to rise into their normal cyclical pattern throughout the years. The reason for the discounted prices in 2012 is due to the advancements in shale technology that are also driving the trend for integrated energy companies to increase their focus on E&P. The other factor hampering Marathon's recent earnings are exorbitant international taxes. In the last quarter, Marathon paid over 60% in income taxes due to its presence in Norway and Libya. The upside here is that Marathon can offset this expense with ventures in other markets, or simply divest its interests from these regions as needed. Increasing its focus on domestic opportunities is one way to offset the international tax problem it's currently enduring.

Marathon currently operates in the United States, Canada, Norway, the U.K., West Africa, Iraq, Indonesia, Libya, Poland, and Libya to name a few countries. Its international assets accounted for over 77% of its total earnings last quarter. Both the United States and Norway each accounted for 34% of boe production. The goal for growth in the United States for 2012 is 25%, up from 12% in 2011. It should be noted that Marathon has one of the lowest production costs per barrel in the industry while also having one of the highest liquid-to-gas asset ratios in the industry as well. Adhering to these two trends in the future will ensure substantial earnings as Marathon completes its transition phase. The larger its portfolio grows, the more discretion Marathon can use in order to avoid losses in troublesome regions while capitalizing on the most promising and profitable markets at the moment.

Marathon increased its expectations from its Bakken shale operations in late March. It expects to average 38,000 barrels of oil per day by the end of 2016. It also expects to increase overall production by at least 5% compounded annually into 2016. The most promising venture on its docket is the recent purchase of Paloma Partners for $750 million. This private energy firm owns 17,000 acres of oil fields that produce approximately 7,000 barrels of oil each day. The land is estimated to have a total of 10 billion barrels of oil and gas reserves. Right now, this is the most promising outlook for the possible long-term prosperity of Marathon's operations. Marathon Oil has also recently put in a joint bid with a 40% stake for oil and gas exploration rights in Cyprus. There have recently been substantial offshore discoveries in Cyprus and a decision on the winning bid should be made by the end of 2012.

The aggressive nature of its operations and evolving diversified portfolio will create more opportunities for Marathon Oil to discover the most profitable ventures among its assets. Growth in the United States, along with naturally increasing prices in both oil and gas, will create substantial earnings in the future for Marathon Oil. The more expansive its portfolio becomes, the easier it will be for Marathon to avoid the reduction in earnings it has experienced so far in 2012. With all the positives working for it, I think Marathon will trade close to $50 in the next 12- to 18-month time frame.

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

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