In an August 2 research note, analyst Pavel Molchanov with Raymond James reported that against a backdrop of increased production and high cash flow in Q2/18, Marathon Oil Corp.'s (MRO:NYSE) earnings per share (EPS) was a miss and the company still has not reinstated a share buyback.
As for overall production, in Q2/18, the first quarter following the sale of its Libya asset, it was 419 thousand barrels of oil equivalent per day (419 Mboe/d), higher than Raymond James' expected 411 Mboe/d and at the upper end of the Marathon's 2018 guidance range of 395–415 Mboe/d, relayed Molchanov.
In terms of U.S. production, it grew 5% in Q2/18 to 298 Mboe/d. The Bakken, up 11% to 82 Mboe/d, saw the greatest jump. SCOOP/STACK production increased 7% to 80 Mboe/d. The Permian was up 7% and the Eagle Ford, 2%. International volumes increased 6% during the quarter. For Q3/18, production is expected to be between 395 and 415 Mboe, a 3% quarter-over-quarter drop.
Molchanov indicated that for the second time, Marathon Oil increased its full year 2018 production, this time to 400–415 MBoe/d. This is despite the sale in July of three assets cumulatively producing about 5 Mboe/d: nonoperated Gunflint and Troika in the Gulf of Mexico and a CO2 Waterflood in West Texas. The company also is divesting of its nonoperated Sarsang and Atrush blocks, its only Kurdistan assets.
Marathon Oil's Q2/18 adjusted EPS was $0.15, below Raymond James' estimate of $0.26 and consensus' forecast of $0.20. Molchanov explained, "Realized liquids pricing drove the miss versus our model, a common enough story this cycle amid the relentless volatility in crude price spreads."
The company's Q2/18 operating cash flow was $638 million ($638M), which "more than covered capital spending," wrote Molchanov. This compares to Q1/1 cash flow of $638M. In 2018,"we project $1.1 billion ($1.1B) of free cash flow, the highest since 2011, before the refining spinoff."
At Q2/18E, Marathon's cash balance was $1.7B, making it "an excellent candidate to reinstate share buyback, last seen in H1/14, and following such peers as Anadarko, Cabot, Devon and Hess. Alas, management is not pulling the trigger yet, but we haven't given up hope!"
About Marathon Oil in general, Molchanov highlighted that it differentiates itself by having a significant presence in all four of the U.S. liquids-rich plays: the Eagle Ford, Bakken, Permian and SCOOP/STACK, the latter being "our favorite part of the story and with the most room to surprise."
Raymond James has a Strong Buy rating and a $25 per share target price on Marathon Oil, whose stock is trading currently at around $20.09 per share. "The stock offers some of the highest leverage among large caps to our forecast for oil prices reaching cyclical highs over the medium term," added Molchanov.
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Disclosures from Raymond James, Marathon Oil Corp., August 2, 2018
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