Marathon Oil Earnings: Shareholder-Friendly Cash Returns Continue, but Dividend Mix Remains Low

Key Morningstar Metrics for Marathon Oil

• Fair Value Estimate: $24.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of Marathon Oil’s Earnings

Marathon Oil MRO underperformed our expectations for revenue, earnings, and cash in its fourth-quarter results. Total production of 400,000 barrels of oil equivalent per day, or 400 mboe/d, similarly fell below our expectations and dipped 5% sequentially, though production costs fell a bit below our model. Further, lower hydrocarbon volumes were primarily due to lower production than we expected from the Eagle Ford basin.

Guidance also came in a bit softer than we were hoping. Oil production between 185,000-195,000 barrels of oil per day, or mb/d, and total production of 385-405 mboe/d both fell below our model. Furthermore, capital spending of $2 billion at the midpoint is a good deal north of what we penciled in. Consequently, we’ve lowered our fair value estimate to $24 from $25.

Marathon continues highlighting that it compares favorably relative to other stocks in major market indexes on a free-cash-flow-to-market-cap basis (greater than 12%), but we think this metric is deceiving, as exploration and production companies tend to be flush with cash during peak market cycles. Investors shouldn’t extrapolate high oil prices and assume these yields will last forever. Indeed, the outsize free cash flow from last year’s results continues to step down, declining 13% sequentially or 18% year on year.

Nonetheless, Marathon’s reinvestment rate remains low and well below that of its peers. Furthermore, cash has favored the shareholder over the bondholder, since management has returned $1.7 billion in cash relative to the $500 million used to pay down debt. We strongly appreciate management’s commitment to returning capital to shareholders, but we would much rather it do so in the form of dividends than repurchases, as we think the stock trades in line with our fair value. At present, roughly 15% of capital returned comes from dividends.