Independent exploration and production company Marathon Oil Corporation (MRO - Get Rating) finds itself confronted with a series of challenges that have raised concerns about its long-term outlook. In this article, I will explore the challenges and discuss why investors should exercise caution and wait for a favorable entry point in this stock.

Coming to the oil industry, despite indications of tightening supplies, oil prices experienced a weekly decline last Friday as concerns about interest rate hikes dampened market sentiments.

However, the latest U.S. inventory report revealed a surprising drop of 3.8 million barrels in crude stocks. Additionally, the market is expected to further tighten as Saudi Arabia plans to reduce production by one million barrels per day in July, in line with an OPEC+ agreement to restrict supplies until 2024.

MRO has declined 7.2% over the past month to close the last trading session at $21.95. It has also tumbled 18.9% year-to-date and 20% over the past six months.

Furthermore, the stock is currently trading below its 50-day and 200-day moving averages of $23.33 and $26.03, indicating a downtrend.

Here’s what could shape MRO’s performance in the near term:

Equatorial Guinea Gas Hub Development

On March 30, MRO and its affiliated company signed an agreement with the Republic of Equatorial Guinea and Noble Energy to advance the development of the Equatorial Guinea Regional Gas Mega Hub (GMH).

This milestone builds upon their successful partnership and aims to leverage and extend the life of Equatorial Guinea’s gas monetization infrastructure.

The agreement encompasses Phases II and III of the GMH, which will involve processing gas from the Alba Unit and the Aseng Field. MRO expects significant improvements in earnings and cash flow through increased exposure to global LNG pricing.

Deteriorating Financials

During the first quarter that ended March 31, 2023, MRO’s revenues and other income decreased 4.2% year-over-year to $1.68 billion. Its income from operations declined 19.1% from the year-ago value to $605 million.

Moreover, the company’s adjusted net income and net income per share declined 43.9% and 34.3% year-over-year, respectively, to $420 million and $0.67.

Healthy Profitability

MRO’s trailing-12-month gross profit margin of 80.38% is 70.9% higher than the industry average of 47.05%. Its trailing-12-month EBIT and EBITDA margins of 43.87% and 69.88% are higher than the industry averages of 25.54% and 39.12%.

Additionally, its trailing-12-month ROCE, ROTC, and ROTA of 23.95%, 12.30%, and 13.62% are higher than the industry averages of 23.95%, 12.30%, and 13.6%, respectively.

Mixed Valuations

In terms of forward non-GAAP P/E, MRO is currently trading at 8.18x, which is 6% lower than the 8.18x industry average.

However, its forward P/S multiple of 2.00 is 66.2% higher than the industry average of 1.20x. Its trailing-12-month forward non-GAAP PEG multiple of 4.91x is 188.3% higher than the industry average of 1.70x.

Unfavorable Analyst Estimates

Analysts expect MRO’s revenue for the fiscal second quarter ending June 2023 to amount to $1.65 billion, indicating a decrease of 28.5% from the previous-year quarter. The company’s EPS for the same quarter is expected to decline 57.4% year-over-year to $0.56.

Moreover, its revenue is expected to fall 15.7% year-over-year to $6.78 billion in the current fiscal year ending December 2023. Its EPS estimate of $2.68 for the same year indicates a 40.1% decline compared to the prior year.

POWR Ratings Reflect Uncertainty

MRO has a rating of C, translating to a Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has a C grade for Value, in sync with its mixed valuation multiples.

Its D grade in Stability is justified by its 60-month beta of 2.39. However, the stock has a B grade for Quality, consistent with its healthy profit margins.

MRO is ranked #69 among 92 stocks in the D-rated Energy – Oil & Gas industry.

Click here to access MRO’s Quality, Growth, Momentum, and Sentiment grades.

Bottom Line

Amidst recessionary concerns and supply cuts, the oil industry can be quite volatile. With deteriorating financials, MRO faces challenges that have impacted its price performance.

While the company shows healthy profitability and is pursuing strategic opportunities, its grim financials, mixed valuations, high beta, and unfavorable analyst estimates all contribute to a cloudy outlook.

Hence, I think investors could consider waiting for a more favorable entry point in this stock.

Stocks to Consider Instead of Marathon Oil Corporation (MRO)

Unfortunately, the odds of MRO outperforming in the weeks and months ahead are significantly compromised. However, many good stocks in the Energy- Oil and Gas industry have impressive POWR Ratings. So, consider these three A-rated (Strong Buy) and B-rated (Buy) stocks instead:

Cheniere Energy Inc. (LNG - Get Rating)

Weatherford International PLC (WFRD - Get Rating)

Centennial Resource Development, Inc. (CDEV - Get Rating).

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MRO shares were trading at $22.21 per share on Monday morning, up $0.26 (+1.18%). Year-to-date, MRO has declined -17.29%, versus a 14.29% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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