Running a Marathon requires a lot of energy

Energy sits at the front of everyone’s mind these days.

In the last two-quarters global demand and supply chain kinks pushed oil and gas prices to the moon. 

Russia’s invasion of Ukraine didn’t help the situation, raising the stakes further and both Brent and WTI. Both traded and stayed above $100 per barrel in recent weeks.

That’s filled the coffers of quite a few energy-rich countries.

And just as many oil and gas drillers.

The third most searched oil and gas company amongst financial pros, Marathon Oil (MRO) presents an interesting investment opportunity.

With shares up more than 66% year-to-date, it’s natural to question whether there’s any value left.

After pulling this company out of our search data, our research came up with some interesting facts you need to consider.

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Marathon Oil’s Business

Marathon is an independent E&P or exploration and production business focused on American energy needs and resources.

Additionally, the company boasts a world-class integrated natural gas business, located in West Africa, to boot.

Located in the so-called basins, you can find the majority of the firm’s US assets in Eagle Ford, Texas, Bakken in North Dakota, the Stack and Scoop basins in Oklahoma, and the Permian basin in New Mexico, with production split roughly 50/50 between oil, gas and gas liquids. 

The business can trace its roots back to 1887 but it has been a pure-play E&P business since 2011 when it spun out its refining interests.

Financials 

Top line revenue picked up in 2021 as the company moved to operate at near full capacity post covid. 

At the same time, gross margins have improved reaching +40.60%, compared to 2019’s figure of +26.60%, and the negative gross margin of-11.90% posted in 2020 during the pandemic.

Prior to 2021, the 5-year average revenue growth was -10.92%.

In 2021, that same 5-year average jumped to +6.8%.

How?

+81% growth in 2021 with the most recent quarter at +$110!

You can thank higher oil prices for that one.

That helped boost overall gross and operating margins substantially. Plus, a cost-cutting hangover from Covid left SG&A at extraordinarily low levels.

Long term debt at the company has also been falling and stood at $3.978 billion as of the end of Q4 2021, below the operating cash flow for the most recent year. 

In, its Q4 and full-year earnings, presentation Marathon’s management highlighted:

• Free Cash Flow or FCF generation of almost $2.20 billion
• Accelerating reduction of gross debt (down by -$1.40 billion) 
• $1.0 billion worth of stock buybacks.

Valuation 

Digging into the Marathon’s valuation, we get a mixed bag.

The price to earnings ratio (P/E) sits higher than the sector median for non-GAAP and GAAP, but looking forward, both non-GAAP and GAAP come in below the energy sector average.

Additionally, Marathon’s price to forward cash flow at 3.9x is stupidly cheap. Effectively they can pay for all the outstanding shares in less than four years.

The only knock on the company is the price to sales ratio at 3.52x times. That’s a bit rich and more indicative of a growth company.

Considering oil prices are already elevated, it’s tough to see sales pushing much higher.

Profitability 

Going back to our earlier point about the low administrative and sales costs, Marathon generates $617.90 thousand in revenue per employee versus $71.60 thousand for its median sector peer. That’s so high it might be questionable.

All the margins dominate the sector average, highlighting Marathon as the best of breed.

Our opinion 8/10

We love management’s focus on capital efficiency and shareholder returns, via share buybacks. 

With incredible margins that beat its peers, Marathon generates enormous amounts of cash and carries little debt, leaving it the flexibility to invest in additional assets.

While the company largely focuses on onshore US oil and gas production, its gas operations in Equatorial Guinea provide it with a base to exploit the rapidly changing energy consumption picture in Europe.

And given the situation with Russia, this could mean big business.

Even after a sharp pullback European natural gas prices are up by +228% over the last year.

The risks here are simply that energy prices drop as central banks pull back on easy money policy. Otherwise, we love this company for a medium-term outlook.