Marathon Oil - A Long-Term Oil And Gas Winner

| About: Marathon Oil (MRO)

For many investors, Marathon Oil (NYSE:MRO) might not be a familiar name in the energy sector. The company is a global oil and gas player with a $20 billion market cap, and it has a stake in Canada's Athabasca Oil Sands Project. However, Marathon Oil has not exactly been rewarding investors lately as the stock is down more than 2% since the start of the year, up almost 11% over the past year, down more than 47% over the past five years, and up 132% over the past five years as of early September. On the other hand, during the first week of September a new 90-day call volume record was established when a total of 5,953 put and 7,012 call contracts were traded for a 0.85 put/call ratio. So, is there reason to get more bullish about Marathon Oil?

Background on Marathon Oil

Marathon Oil is one of the oldest players in the oil business, tracing its origins back to 1887 when it was founded as The Ohio Oil Company, only to be acquired by John D. Rockefeller's Standard Oil trust two years later. When Standard Oil was broken up, Marathon Oil became an independent oil player again until 1982, when United States Steel (NYSE:X) bought the company. In the early 2000s, United States Steel spun off its steel business as United States Steel and the remaining oil and gas assets became Marathon Oil.

Today, Marathon Oil is an independent international energy company engaged in exploration and production, oil sands mining, and integrated gas operations in the United States, Angola, Canada, Equatorial Guinea, Indonesia, Iraqi Kurdistan Region, Libya, Norway, Poland, and the United Kingdom. It's also worth noting that Marathon Oil owns a 20% outside-operated interest in the Athabasca Oil Sands Project in Alberta, Canada.

Otherwise, Marathon Oil has a market cap of around $20 billion, putting it roughly in between Phillips 66 (NYSE:PSX) and Pioneer Natural Resources (NYSE:PXD) on a list of integrated oil and gas stocks.

What Does Marathon Oil Offer for Investors?

There are good reasons to like Marathon Oil and expect a better performance in the future. For starters, and unlike other high-flying oil or gas players like Chesapeake Energy (NYSE:CHK), Marathon Oil's management is well regarded for being conservative when it comes to spending -- meaning it hasn't gone out and borrowed heavily, as total debt stood at $5.25 billion at the end of the last quarter. Moreover, in Marathon Oil's latest quarterly earnings report, its chairman, president and CEO pointed out that the current lower price environment where costs have not declined at a comparable rate means a more disciplined level of domestic spending and activity is required.

That also means less drilling, as Marathon Oil has reduced its rig count in its North Dakota Bakken and Oklahoma Anadarko Woodford plays for the remainder of this year and perhaps into the next year. Marathon Oil is also in a position to fully execute its Texas Eagle Ford growth plans with fewer rigs thanks to increased drilling efficiencies.

But Marathon Oil will still be increasing overall upstream production by 5% (excluding Libya) this year and maintaining a 5% to 7% growth rate (on a compound annual basis) for the years 2010 through 2016. Marathon Oil is also projecting that upstream production next year will be 6% to 8% higher (excluding Libya and Alaska) than this year.

On the other hand, investors should be aware that while Marathon Oil reported just a 2.1% year-over-year fall in revenue to $3.78 billion last quarter, it also reported a 60.5% drop in net income from $996 million to $393 million. And that's while net income also fell 58.1% (Q1), 22.2% (Q4) and 41.8% (Q3) for the previous three quarters -- missing Wall Street estimates. Wall Street expectations have also been moving downward as far as results for the current third quarter are concerned.

On the brighter side of things, it's also worth noting that Marathon Oil is getting more involved in the potentially rich oil and gas fields of sub-Saharan Africa, with the announcement of a new production sharing contract with the Government of Equatorial Guinea, and a return to Gabon where exploration drilling is expected to begin in the first quarter of 2013. That means Marathon Oil will be bringing far more oil and/or gas into production, and it does not appear that the company's current share price is a reflection of these future increases just yet.

Given today's near-zero interest rate environment, its worth noting that Marathon Oil does have a forward dividend of $0.68 for a dividend yield of around 2.5%. And while that may not be as spectacular as some of the yields coming from oil and gas pipeline master limited partnerships, it still not something that should be completely ignored by income hungry investors.

The Final Word on Marathon Oil

With much of the world either sliding back into recession (e.g., Europe and possibly the U.S.) or entering what could be a long phase of slower economic growth (e.g., China, emerging markets, and possibly the U.S. if it escapes recession), many investors are probably shying away from investing in oil and gas stocks right now. After all, slow or no economic growth in much of the world will also mean less energy will be needed.

On the other hand, the current soft patch that much of the world finds itself in will not last forever. Likewise, investors should remember that the price of oil hit $145 a barrel in the summer of 2008 but then ended the year at the $30 a barrel level, and it's now trading at around $100 a barrel -- meaning things can change rather quickly. Hence, investors with a long-term time horizon who want to avoid unnecessary risks might consider more conservatively managed oil and gas stocks like Marathon Oil, which can still produce solid returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any 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.

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