Marathon Oil Corp. (MRO, Financial) is a prominent player in the exploration and production energy sector that has a distinct focus on maintaining a strong and diversified balance sheet, reducing debt and giving back to shareholders, all while generating industry-leading amounts of free cash flow.
The Houston-based company focuses on the exploration, production and marketing of U.S. crude oil, condensate oil, natural gas and natural gas liquids at the Eagle Ford shale in Texas, the Bakken field in North Dakota, the STACK and SCOOP plays in Oklahoma and the Permian Basin of Texas and New Mexico.
In addition to its U.S. operations, the company also engages in the exploration, production and marketing of oil and gas outside the U.S. Its operations extend to Equatorial Guinea, where it produces and markets products manufactured from natural gas, including liquefied natural gas and methanol.
Source: Third-Quarter 2023 earnings presentation
Through its diversified portfolio, Marathon Oil maintains a calibrated mix of approximately 50% oil and 50% gas/NGL production. Thanks to this wide range approach, the company is able to secure a competitive position as a dynamic player in the energy sector.
According to the 2022 annual report, Marathon Oil over the last several years has served as a major supplier to energy giants such as Marathon Petroleum Co. (MPC, Financial), Valero Marketing and Supply (VLO, Financial), Trafigura Groupe Pte. Ltd and Koch Resources LLC, all of which combined made up nearly half of its commodity sales for the year.
Source: 2022 annual report
Along with these major sales, Marathon Oil generated revenue through various contracts and purchasing agreements with its clients through various operations.
The most recent example of such an agreement was announced on Oct. 16, when the company utilized its position in the LNG market to secure a five-year sales agreement with Glencore Energy UK Ltd., a subsidiary of Glencore PLC (LSE:GLEN, Financial).
Effective as of Jan. 1, the deal involved selling a portion of Marathon Oil's natural gas equity produced from the Alba Field unit in Equatorial Guinea. Notably, Marathon Oil holds a 64% working interest in the field.
The pricing structure will be linked to the Dutch Title Transfer Facility (TTF) index and will provide Marathon Oil with significant exposure to the European LNG market.
Simultaneously, Marathon Oil plans to optimize its operations in Equatorial Guinea in 2024 by redirecting a portion of its Alba Unit natural gas from its methanol facility to the LNG facility. This will allow the company to capitalize on expected arbitrage between LNG and methanol pricing.
This agreement serves as an example of Marathon Oil's active role in expanding it operations and generating further revenues.
Cash flows and framework
Since Marathon Oil owns a very diversified stream of assets, its balance sheet enables it to compete in both domestic and international markets across the various segments and sub-segments of the energy sector. This diversified exposure opens up many potential lanes of operating cash flow to the company. As a result, it has consistently generated higher amounts of annual operating cash flow over the last several years, going from $1.57 billion in 2015 to $5.4 billion in 2022.
Source: macrotrends.net
During the same period, Marathon Oil went from generating negative free cash flows in 2015 to generating nearly $4 billion in 2022.
Source: macrotrends.net
It should also be noted that both operating cash flow and free cash flow saw exponential growth after 2020, likely due to the supply-demand disruptions that were induced by the international response to the pandemic. Particularly during the reopening period, we saw an unleashing of pent-up demand that hit the market all at once while most suppliers were still offline or severely unprepared, which in turn caused supply bottlenecks, leading to higher pricing across the board. This likely led to higher revenue for the companies that were directly involved in commodities and logistics markets, but that goes beyond the scope of this discussion. For deeper context on these pandemic disruptions, I have gone into further detail in my analysis covering Danaos Corp. (DAC).
Regardless, thanks to its robust cash flows, the company has been able to fulfill its debt reduction goals while fueling its growing operations and giving back to its shareholders in the form of higher dividends and share buybacks.
According to the third-quarter 2023 earnings presentation, Marathon Oil has committed to its return on capital framework, which actively involves the returning of at least 40% of the company's operating cash flows to its shareholders while continuing to reduce debt. As a direct result of the company following this framework, the total share count decreased by 26% and quarterly dividends saw a 10% increase, along with a raise in theshare repurchase authorization to $2.5 billion as of Nov. 1.
Source: Third-quarter earnings presentation
If we look even further back, we can see the reduction of total shares really started to accelerate in 2018, where it peaked at 850 million shares and now stands at the lowest amount of shares Marathon Oil has ever had, standing at just over 600 million shares.
Source: macrotrends.net
This aggressive reduction in share count as a result of buybacks stands to act as a source of reverse dilution, which has the effect of bringing more company ownership to each individual share, therefore increasing the tangible value of each share. With more buybacks scheduled for the future, it can be assumed that share valuation will continue to increase.
Financial overview
In terms of annual revenue, Marathon Oil has experienced a 2 to 3 times increase in all segments of its operations between 2020 and 2022, with total revenue rising from $3.10 billion to $7.54 billion.
Source: tradingview.com
Within the same period, there is a similarly exponential increase in Ebitda, going from $1.45 billion in 2020 to $5.32 billion in 2022, thus showing strength as it trends up with overall revenue.
Lastly I will dig into Marathon Oil's debt-to-Ebitda ratio.
For context, this ratio is a measure of a company's leverage, indicating how much debt it has relative to its earnings. A lower ratio suggests lower financial leverage and thus, less risk of facing financial stresses as the company will have no issues in meeting its debt obligations in a timely manner.
With that context in mind, we can see that Marathon Oil's debt-to-Ebitda ratio currently sits at a low reading of 1.19, which is much improved from its 10-year high of 11.87 and better than the industry median of 1.71. The low rati also positions the company better than 60.78% of its peers in the oil and gas industry, thus strengthening the case for it being a healthy company.
Source: GuruFocus
Technical outlook
Source: tradingview.com
Marathon Oil appears to be trading within a four-point 0XABC wave structure, where it currently stands to test the structural breakout level that happens to align with the support/resistance zone of $23.28 to $24.20 as well as the 200-day simple moving average. If this breakout level successfully holds as support, we could see the price action accelerate upward in the final wave of the structure, which completes at the 1.13 Fibonacci Extension at around $46.97.
