2014 was an outstanding year for Marathon Oil (MRO, Financial). The company finished fiscal 2014 by posting a solid improvement in its key financials. However, the second half of the fiscal year was a bit shaky due to the soft oil pricing market that affected the whole industry, and Marathon Oil is no exception. But the management is confident of upbeat performance in 2015 and is engaged in capital budgeting for 2015. On the other hand as the consensus is estimating oil prices will fall further, Marathon Oil is also preparing itself to respond to this further downtrend in oil pricing.
What next?
Since the prospects of the oil market are more towards the downtrend, Marathon Oil is focusing on achieving flexibility which will be a key aspect of sustaining profitability in volatile oil pricing. However, it might not be an easy task for Marathon Oil as the company is not as clairvoyant as it was in December. Despite this, Marathon’s prime focus will rely on some key aspects such as selective investments, returns, strong balance sheet which it thinks will surely position it for the price recovery. It is also taking some good cash flow management initiatives that will also improve its margins. It has already reduced the exploration spending by half also moderating its activities in the U.S.
In order to deliver high returns in the current pricing environment, Marathon has pinpointed three core U.S. resource plays where it is seeing good return opportunities. To capture this, Marathon is investing meaningfully in these core areas. In addition, to improve its margins, it has taken measures that can control some of the key metrics that can surely help it to improve its margins. Under this, the company is focusing on capital efficiency, expense management and operational reliability.
Positives to consider
Moving on, there are some positive points that can also support Marathon’s growth initiatives. In the broad range of a pricing scenario, Marathon clearly benefits from a deeper multi-year inventory. In addition, Marathon is also reducing its development activities also commensurate capital expenditure across all of its three resource plays. The company can make such kind of adjustments easily at nominal costs due to the flexibility that it is having with its commercial agreements.
Further under this, Marathon has already reduced its rig counts in the recently reported quarter while it is further planning to reduce 14 rigs by the end of fiscal 2015. This will give Marathon an additional flexibility. Moreover, Marathon is also working hard to improve its operational efficiencies with a laser focus on reducing the service costs. With better operational efficiencies Marathon is seeing additional saving opportunities which will further drive its margins.
Marathon is also focusing on gaining market share by attracting investors in the future. With a relentless focus on driving operational efficiencies and cost savings across its three key basins, it is seeing opportunities to add value to shareholders.
Conclusion
With a trailing P/E of 6.25, the stock looks dirt cheap, and it is seeing awesome earnings growth with a forward P/E of 87.06. However, the oil prices are expected to decline in the future so the company can't be a good long-term holding. Its earnings for the next five years are declining with -9.50% as compared to the industry average of 11.45%. Thus, Marathon Oil is a good pick now, but investors seeking long-term gains should watch investment in this stock from the sideline.
