Despite Recent Rally, Marathon Stock Remains a Buy

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[Editor’s note: “Despite Recent Rally, Marathon (MRO) Stock Remains a Buy” was previously published on April 7. It is updated regularly to reflect the most relevant information.]

Despite Recent Rally, Marathon Stock Remains a Buy

Source: IgorGolovniov /

Despite an epic plunge in oil prices, Marathon Oil (NYSE:MRO) stock has performed well in recent weeks. Shares have doubled since hitting 52-week lows in late March. Why have investors bid up shares?

The United States Oil ETF (NYSEARCA:USO) trades near all-time lows. But, energy stocks have bounced back, in anticipation that the current demand-supply gap will shrink in the coming months.

But as the novel coronavirus continues to impact oil demand, is this possible? Even assuming we get “back to normal” in the next few months, it may be a while before oil returns to its high water mark. And with Marathon’s breakeven point at prices above $40 per barrel, it could be years before the oil exploration company returns to profitability.

Yet, Marathon may still be a buy. Even after shares have bounced back from their lows. Let’s dive in, and see why the ship hasn’t sailed for this contrarian energy play.

MRO Stock: Predicting the Unpredictable

Given its dependence on oil prices, you can put Marathon stock in the “predicting the unpredictable” category. An end to “shelter-in-place” orders could mean oil demand bounces back again. On the other hand, a weakened global economy may mean energy prices remain depressed for an extended period.

In short, tough times for the oil exploration company. Marathon is in a better place financially than potentially bankrupt Chesapeake Energy (NYSE:CHK). But, while Marathon probably won’t be totally wiped out, don’t expect additional short-term gains, unless the pandemic comes to an end sooner than anticipated.

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Even then, it could be awhile before the company can resume share buybacks or big exploration projects or find other ways to move the needle. So why should investors buy Marathon’s stock now?

I can think of one reason: potential for big gains if and win oil bounces back. Marathon continues to trade far below where it was just a few months back. Earlier this year, shares were changing hands at prices well north of $10 per share.

Granted, don’t expect shares to double again in the next few months. Yet, with its potential gains outweighing its possible losses, Marathon’s stock continues to be a great contrarian buy at today’s prices.

An Asymmetric Wager on Oil Price Rebound

We may not know if or when oil prices will rebound. But that doesn’t mean we should write off Marathon Oil stock as an investment idea entirely. In light of its risk/return ratio, it may be worthwhile considering a position in the shares.

Think of MRO as an asymmetric wager. In other words, the stock’s potential gains outweigh its possible losses.

So how much could the shares rise? As InvestorPlace’s Larry Ramer wrote on April 15, Marathon has taken steps to reduce their breakeven point from $47 per barrel to $40 per barrel. They have slashed their capital budget, and have entered hedging transactions to manage losses. Ramer’s reduced breakeven point also assumes a dividend cut.

Let’s say oil rebounds to prices above Marathon’s break-even point. That would enable it to generate positive free cash flow and resume buying back its shares. Given that the amount left in the company’s buyback plan ($1.4 billion) represents a large chunk of its current market capitalization ($4.8 billion), buybacks could move the needle in a big way.

Marathon’s stock may not climb back to prices seen in prior years. But if oil prices rise slightly, the shares could continue to rally back towards double-digits.

How much could the shares drop? Income investors may bail out if the company winds up cutting its dividend. This could drive down shares closer to their recent lows. However, many of these investors may have already cashed out during March’s sell-off. Those owning the stock today are likely in it for the oil price rebound play.

In short, unless crude oil prices tumble further, the shares should stay at their current price range. Considering the stock’s ability to jump 100% or more, the shares could provide an asymmetric opportunity for contrarian investors.

Marathon Could Be Worth the Risk

Marathon is not a slam-dunk opportunity even as the shares remain far below their prior price levels. However, if the pandemic fades and oil demand bounces back, the exploration company’s stock could generate massive gains as its free cash flow goes from negative to positive.

The company next announces results May 6. Changes in guidance and outlook could mean volatility in this stock. If you want to play it safe, it may be worthwhile to wait until after earnings to enter a position.

Nevertheless, Marathon Oil remains a high-risk, high-return opportunity. Consider shares a buy.

Thomas Niel, a contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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