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Be Ready to Sell Speculative Marathon Oil Stock at Any Moment

The novel coronavirus has made Marathon Oil (NYSE:MRO) stock seem like a movie star forced to take up a regular job.

For now, MRO stock isn’t living the high life. Shares that traded a year ago at $14.50 opened May 27 at a little over $6. Rather than talk about the losses, analysts are quick to tell shareholders they were getting $3.50 at the end of March.

Marathon’s comeback from those lows has been impressive, and speculators may make some money. This is a company with $5 billion in revenue that, just last year, brought almost $480 million to the net income line.

Marathon Oil still had $81 million in free cash flow for the March quarter.

MRO Stock Is Bad and Getting Worse

But during that quarter Marathon also lost $46 million, 16 cents per adjusted share. After the quarter was announced it suspended its dividend. Then, it laid off 200 employees.

The June quarter is guaranteed to be worse than the March one. In its March report, management said it used “fixed price swaps and two-way collars,” along with fixed-price sales agreements, to get a price of $30.33 for its production. Hard to see it making any money at that price.

Why, then, are investors buying the stock? The answer is cash. Marathon had $3.8 billion of it at the end of March, $800 million in long green and an undrawn credit facility of $3 billion. Its bonds were still being rated at investment grade, with no maturities until November 2022.

Investors are seeing across the valley to the other side. The hope is that OPEC production cuts and the collapse of other shale producers will result in higher prices and profits. Futures contracts for December 2022 delivery currently show a price of about $41 per barrel for West Texas Intermediate oil, the main American grade.

Professional analysts are unconvinced. This month Moody’s turned negative on Marathon’s bond rating, putting it on the road to “junk” status. Morgan Stanley analyst Devin McDermott has slapped an “underweight” rating on the stock, with a price target of $5.

Should You Buy the Refiner?

When crude prices are down, refiners and marketers can become a safer place for oil investors.

Marathon split from its refining division in 2011. That now trades as Marathon Petroleum (NYSE:MPC). MPC agreed to its own massive break-up last year, under pressure from Elliot Management and its allies.

Since then its shares are down 42%, almost as bad as Marathon Oil’s 48% loss. The refiner lost $9 billion in the first quarter, cut spending by $1.4 billion and has failed to sell its Speedway or Marathon gas stations. I think the stations are the best part of the whole company.

But analysts haven’t given up. Marathon Oil has 16 analysts. Most say just hold it, with an average price target of $5.40, below where it opened May 27. The 13 analysts following Marathon Petroleum are more optimistic, with most saying buy. They have a price target of $50, a 40% gain from its May 27 price.

The Bottom Line

The current optimism over oil stocks is based on an assumption that demand is coming back and production cuts will rebalance the market.

During May, the assumption seemed a good one. Oil prices have come back strong in May, to nearly $33 per barrel for WTI crude. Gasoline prices have also risen, back over $1 per gallon in the wholesale market.

OPEC has thrown everything it has at getting those prices up. But renewable energy costs keep declining. Once that demand is destroyed it doesn’t come back.

If you’re buying oil or oil stocks like Marathon today, treat it as a speculation. Keep an eye on it. Be ready to get out at any time.

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