Marathon Oil Corporation (NYSE: MRO) engages in the exploration, production, and marketing of liquid hydrocarbons and natural gas. The company was founded in 1887 and is headquartered in Houston, TX.
The company's stock is trading at approximately $25, as of 28 Mar 2022, and is up by 49% year-to-date (YTD). Over the past year, the stock is up by 130% whilst the S&P 500 is up by 16%, which means the company's stock has performed better than the broader market by approximately 114% over this period.
What do the underlying trends at Marathon Oil Corporation tell us about its potential as a long-term investment? Let’s analyze whether the stock has potential or if it’s one to avoid.
Why are fundamentals important?
‘Fundamentals’ are a set of key metrics which can help you, as an investor, assess the financial health of an organization as well as its growth prospects. They are important because the price of a company's stock is usually tied to them over the long-term. Thus, it makes sense to start by looking at Marathon Oil Corporation's fundamentals when we are considering if it has the makings of a 'buy and hold' investment.
There are a number of fundamental metrics to analyze, but we'll be focusing on the price to earnings ratio (P/E ratio), price to book value (P/BV), price to sales ratio (P/S ratio), earnings per share (EPS) and debt.
What do Marathon Oil Corporation’s fundamentals tell us about the investment opportunity? Let's have a look.
Marathon Oil Corporation's fundamentals
A good place to start is to look at Marathon Oil Corporation's EPS, which will tell us how profitable the company is on a 'per share' basis. This metric is calculated by taking a company's net income (after dividends on preferred stock) and dividing this by the number of outstanding shares.
Marathon Oil Corporation's EPS is 1.2 based on its last reported financials, and year-on-year, this fell by 166%, which doesn't give us much encouragement.
Analyzing a company's price to earnings (P/E) ratio is also helpful because it tells us how cheap or expensive a stock is, or how much of a premium investors are willing to pay for its earnings. It is calculated by taking the price of a stock and dividing this by the EPS. A higher ratio suggests that the stock is expensive in relation to its earnings, and a lower ratio indicates the opposite.
According to figures from its last reported financial statement, MRO has a P/E ratio of 21.7. This is 49% higher than the average P/E ratio across its industry (which is 14.5) and indicates that the stock may be overvalued compared to companies in the same sector at present.
Next, let's look at the P/S ratio, which looks at a company's stock price compared to its sales (revenues). It is calculated as the current price divided by sales for the previous 12 months, and is useful because it helps us understand how much investors are willing to pay for every dollar of a company's revenues. The consensus opinion is that stocks with a lower P/S ratio offer better value, and stocks with a very low P/S ratio are known as 'value stocks'. However, what is considered a 'high' or 'low' P/S Ratio is relative and can vary across different sectors, so the best way to objectively assess this is to compare a company against its industry peers.
Marathon Oil Corporation's P/S ratio is currently 3.7 according to figures from its last reported filings. Compared to the sector-wide average of 2.8, this is 32% higher, indicating that the stock may offer less value compared to other companies in the same sector.
Another key metric to look at is a company's price to book value (P/BV), which tells us how much investors are willing to pay for a company's assets. It is calculated by the company's stock price divided by its net assets (or 'book value', meaning the value of all assets which appear 'in its book').
Marathon Oil Corporation's P/BV is 1.8, based on its most recent financial statements, which is 37% lower than the industry benchmark of 2.9.
Finally, it's always worth looking at a company's debt profile before deciding to invest in order to assess the risk. A high amount of debt can be a problem if a company is not generating enough cash flow to service its debt, and some sectors rely on debt more heavily than others.
Marathon Oil Corporation has total debt of $4.11bn as of 28 Mar 2022, and this has fallen by 26% over the past year. The company also has cash & short-term investments totalling $580m, giving it a 'net debt' of $3.53bn.
Although slightly higher than we'd like to see, Marathon Oil Corporation's current levels of net debt don't worry us as the company generates enough revenue to service its debt, and is not using debt to fund their operations, which is good to see.
Is Marathon Oil Corporation worth a look?
All in all, we’ve noticed some trends at Marathon Oil Corporation that give us confidence in its prospects as a 'buy and hold' investment.
In particular, the stock is up by 49% YTD and up by 130% over the past year. Moreover, compared to companies in the same sector, MRO has a lower P/BV. This gives us confidence that the company is on the right track.
In summary, we think that Marathon Oil Corporation might be doing enough to earn a spot in your portfolio. It is certainly worth adding to your watchlist to keep an eye on.
As with any stock however, there are additional factors to consider before making an investment decision. This analysis is general in nature and based on historical data, and it does not take into account your specific investing objectives or financial circumstances. Additionally, this article does not look at the macro environment where geopolitical headwinds, internal company changes and individual technicalities in the way a company conducts its business can have a significant impact on a company's long term outlook. Please do your own due diligence before deciding to invest.