Marathon Oil Corporation (MRO) in Houston, Tex., is an independent exploration and production company in the United States and Equatorial Guinea. The company explores for, produces, and markets crude oil and condensate, natural gas liquids, and natural gas and its products. In comparison, Apache Corporation (APA), which is also headquartered in Houston, explores for and produces oil and gas. The company operates through its subsidiaries: Apache Corporation and APA Corporation Suriname.

As the countries phase out pandemic-driven restrictions, demand for crude oil is rising quickly, causing oil prices to climb to multi-year highs. OPEC+ countries recently agreed to increase oil production and supply by 2 million bpd or 0.4 million bpd per month from August through December 2021. The cartel aims to phase out production cuts entirely by around September 2022. Thus, MRO and APA should benefit from the industry tailwinds.

MRO has gained 33% over the past six months, while APA has returned 4% over the period. Also, MRO’s 77.2% gains year-to-date compare with APA’s 26.2% returns. MRO is the clear winner with 105.9% gains versus APA’s 15.3% in terms of past year’s performance.

But which stock is a better buy now? Let’s find out.

Latest Developments

On May 4, APA agreed with Egypt’s Ministry of Petroleum and Mineral Resources and the Egyptian General Petroleum Corporation to modernize its petroleum sector. This should facilitate higher investments by Apache Egypt, resulting in more production, while also delivering cost efficiencies by introducing new technology.

On July 28, MRO declared a $0.5% dividend, payable on September 10, 2021.

Recent Financial Results

MRO’s revenues increased 320.2% year-over-year to $1.14 billion in its  fiscal second quarter, ended June 30. Its operating income grew 114.9% from its year-ago value to $105 million, while its net income improved 102.1% year-over-year to $16 million. The company’s EPS improved 102.1% year-over-year to $0.02.

APA’s total revenues increased 133.5% year-over-year to $1.76 billion in its  fiscal second quarter, ended June 30. Its net income attributable to common stock improved 181.9% year-over-year to $316 million. The company’s EPS increased 180.4% year-over-year to $0.82.

Past and Expected Financial Performance

MRO’s revenue has grown at a 0.8% CAGR over the past five years. Analysts expect MRO’s revenue to increase 54.5% in the current quarter and 45.4% in the current year. The company’s EPS is expected to grow 185.7% in the current quarter and 164.7% in the current year.

In comparison,  APA’s revenues have grown  at a 3.6% CAGR over the past five years. Analysts expect the company’s revenue to increase 64.6% in the current year. The company’s EPS is expected to grow 506.2% in the current quarter and 355.6% in the current year.

Profitability

APA is more profitable, with a levered FCF margin and EBITDA margin of 49.78% and 53.36%, respectively, compared to MRO’s 35.46% and 49.41%.

Furthermore, APA’s 215.11% ROE compares with MRO’s negative 4.97%. And APA’s net 11.78% income margin is higher than MRO’s negative 13.44%.

Thus, APA is more profitable.

Valuation

In terms of forward P/E GAAP, MRO is currently trading at 15.28x, which is 65.1% higher than APA, which is currently trading at 5.33x. Also, MRO’s 4.13 forward EV/EBITDA ratio is 8.5% higher than APA’s 3.78.

Thus, APA is the affordable stock here.

POWR Ratings

APA has an overall A rating, which equates to Strong Buy in our proprietary POWR Ratings system. MRO, in contrast,  has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

APA has a grade of B for Value, while MRO has a grade of C for Value. APA’s forward non-GAAP P/E ratio of 5.59 is 44.8% lower than the industry average of 10.13, in sync with its grade. In contrast, MRO’s forward non-GAAP P/E multiple of 11.23 is 10.8% higher than the industry average, consistent with its grade.

APA has an A grade for Quality, owing to its higher-than-industry average profit margins. APA’s 49.78% levered free cash flow margin is 311.6% higher than the 12.09% industry average. MRO, on the other hand, has a B grade for Quality. This is justified because MRO’s 35.46% levered FCF margin is 193.2% higher than the industry average.

Of the 92 stocks in the Energy – Oil & Gas industry, APA is ranked #3 while MRO is ranked #24.

Beyond what we’ve stated above, we have also rated both the stocks for Stability, Momentum, Sentiment, and Growth. Click here to view APA ratings. Also, get all MRO ratings here.

The Winner

The oil-producing companies benefited significantly in the first half of 2021, with production cuts amid  rising demand. Furthermore,  the companies are expected to continue  benefiting from  growing demand, given OPEC’s plan to phase out the production cuts gradually. While both APA and MRO should benefit from this backdrop, its higher profit margins and growth prospects make APA the better buy here.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Energy – Oil & Gas industry here.

MRO shares rose $0.01 (+0.08%) in after-hours trading Tuesday. Year-to-date, MRO has gained 86.39%, versus a 19.18% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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