Marathon Slumps With Oil Prices Despite Solid Second Quarter
It was generally a rough day for energy stocks.
Marathon (MRO) shares plunged after the firm reported its second-quarter results, albeit on a rough day for energy stocks in general. Oil prices dropped more than 2% as the market digested weaker-than-expected U.S. gasoline demand data and the OPEC decision to slightly increase output in August. That sparked a sector wide selloff, but Marathon was still one of the weakest performers on the day. That’s surprising to us, as there were no major disappointments. The firm’s financial results were slightly ahead of consensus estimates, and management left its prior production and capital expenditure projections in place, in contrast to several peers that are struggling with higher-than-expected inflation and nudging up their budgets as a result.
Nevertheless, we think inflation will continue to be a headache for exploration and production companies, including Marathon. The industry is a heavy consumer of steel, fuel, and labor, and prices for all three have been soaring. While management has yet to outline its 2023 plans in detail, we are now assuming further well cost inflation, based on the logic that supplier contracts will be rolled over at market prices (as several E&Ps have suggested). Incorporating this pricing pressure, along with the rest of Marathon’s second-quarter results, reduces our fair value to $18 per share from $19.
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