Marathon Earnings: Still Delivering on Capital Returns Despite Lower Oil Prices

Marathon Oil Stock at a Glance

• Fair Value Estimate: $27.00
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None

Marathon Oil Earnings Update

Marathon Oil’s MRO second-quarter results were ahead of FactSet consensus estimates, and the firm still expects to meet its previous full-year production target of 395 thousand barrels of oil equivalent per day. Firmwide output in the second quarter came in at 399 mboe/d (1% higher sequentially), and management believes third-quarter volumes will meet or exceed the annual target as well.

Full-year capital expenditures are also on track, with no revision. We do expect service pricing to soften in the back half of the year, but this is more likely to affect 2024 spending, and we already incorporate a 5% reduction in well costs starting next year.

The company focused on the continued success of its capital returns program. The gusher of free cash the firm enjoyed last year has moderated with declining commodity prices, but the firm is still only spending about half of its operating cash, leaving a surplus of about $500 million—80% of which was funneled back to shareholders.

We appreciate that Marathon aims to return a fixed portion of its operating cash, rather than its free cash, as this puts shareholder distributions ahead of drilling capital in the allocation queue. However, in general, we would prefer to see more cash and fewer buybacks in the mix, as firms are typically more flush with cash during upcycle environments when their stocks also tend to be elevated. In Marathon’s case, shares currently trade slightly below our fair value estimate, making repurchases accretive, but habitual buybacks are often not the best strategy in a highly cyclical industry.

We intend to incorporate these results shortly, but for now, our narrow moat and $27 per share fair value estimate are unchanged.