Marathon Oil Earnings: Q4 2021 Results Analysis (NYSE: MRO)

Stock Market


Marathon Oil Corporation Gas Station and Trademark

Wolterk / iStock Editorial via Getty Images

Part I – Introduction

Texas-based energy explorer Marathon Oil Corp. (NYSE: MRO) released its fourth-quarter and full-year 2021 results on February 16, 2022.

1 – 4Q21 and full-year 2021 Results snapshot

The company reported a fourth-quarter 2021 adjusted net profit per share of $ 0.77, which easily beat analysts’ expectations compared to a loss of $ 0.12 per share a year ago.

Marathon Oil’s results were inflated by more robust liquid realizations and better-than-expected domestic production of 304K Boepd. Marathon Oil reported revenues of $ 1,800 million, well above the year-ago revenues of $ 830 million, beating expectations.

Finally, the company uses the excess free cash flow to reward its shareholders with an increase in the dividend and buybacks. MRO indicated that it has executed $ 1 billion of share repurchases since October (with $ 1.7 billion remaining under the current approved program) and announced a dividend hike to a quarterly distribution of $ 0.07 per share from $ 0.06 per share in the preceding quarter.

Previous presentation

MRO Presentation: US assets location (Marathon Oil)

2 – Stock Performance

A quick one-year comparison with a few E&P (primarily domestic) shows that DVN, MRO, and MUR have significantly outperformed the group with an increase of 114% on a one-year basis for MRO.

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Data by YCharts

3 – Investment Thesis

The investment thesis continues to be the same. Marathon Oil is an attractive E&P company and a significant US E&P player. As indicated in my previous article, holding a long-term MRO position is a great idea, especially with oil above $ 90 a barrel, geopolitical turmoil, and a growing dividend of $ 0.07 per share or a yield of 1.3% (that I consider too low compared to the 7.5% for Devon Energy).

However, despite an actual bullish environment, we can not escape the oil market’s high volatility and cyclicity. Oil is subject to unpredictable swings, as we recently experienced with the Omicron variant selloff or the overnight jump happening when Putin decided to move into Ukraine territory and help separatists in the Donbas region in Eastern Ukraine.

High oil prices can significantly affect the world economy and severely affect demand.

Thus, I recommend trading LIFO about 30-35% of your position to take advantage of the sector’s volatility while keeping a core long-term position.

CEO Lee Tillman said in the conference call:

I can best describe 2021 as a year of comprehensive delivery against our framework for success, highlighted by financial results that are not only superior to our E&P peers, but more importantly, superior to any other sector of the S&P 500. And we are carrying that momentum forward into 2022, fully expecting another year of outstanding delivery.

Marathon Oil – Financial Table 4Q21 – The Raw Numbers

Marathon Oil 4Q20 1Q21 2Q21 3Q21 4Q21
Revenues from contracts in $ million 822 1,117 1,254 1,438 1,732
Revenues and others in $ Million 830 1,071 1,143 1,453 1,800
Net Income in $ Million -338 97 16 184 649
EBITDA $ Million 148 720 794 868 937
EPS diluted in $ / share -0.43 0.12 0.02 0.23 0.84
Operating cash flow in $ Million 418 622 655 816 1,146
CapEx to $ Million 253 209 274 289 274
Free cash Flow in $ Million 165 413 381 527 872
Total cash $ Billion 742 1,125 970 485 580
Long-Term debt in $ Billion 5,404 5,405 4,908 4,013 4,014
Dividend per share in $ 0.03 0.03 0.04 0.06 0.07
Shares outstanding (diluted) in Million 792 789 789 789 779
Oil Production 4Q20 1Q21 2Q21 3Q21 4Q21
Oil Equivalent Production in K Boe / d 352 345 348 345 353
US Onshore Crude oil price ($ / b) 39.71 55.38 64.73 69.40 77.03

Sources: Marathon oil release

Part II – Analysis: Revenues, Earnings Details, Free Cash Flow, Debt, And Oil and Gas Production

1 – Total Revenues were $ 1,800 million in 4Q21

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MRO: Chart Quarterly Revenues history (Fun Trading)

The fourth quarter’s revenues were $ 1,800 million, up significantly from the same quarter a year ago and up 23.9% sequentially.

Total costs in the fourth quarter were $ 1.1 billion, $ 19 million lower than the 4Q20. Marathon Oil declared an operating cash flow of $ 1.1 billion for the fourth quarter, up significantly from $ 428 million a year ago.

2 – Free cash flow was $ 872 million in 4Q21

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MRO: Chart Free cash flow history (Fun Trading)

Note: The generic free cash flow is cash from operating activities minus CapEx. However, the company indicated $ 898 million of free cash flow in 4Q21, which is not exactly what I have calculated.

Trailing twelve-month free cash flow was $ 2,193 million, with a record 4Q21 free cash flow of $ 872 million.

This quarter, the quarterly dividend has been raised again to $ 0.07 per share, which means an annual cash expense of $ 218 million, easily covered by free cash flow.

In addition, the company executed $ 1 billion of share repurchases since October, reducing the share count by 8%.

In the conference call, CEO Lee Tillman said:

Our cash flow-driven return of capital framework uniquely prioritizes our shareholders as the first call on cash flow generation, not the drill bit. And our recent actions underscore both our commitment to prioritizing our shareholders and the power of our portfolio in a constructive price environment. The outcomes speak for themselves.

3 – Production of Oil equivalent was 353K Boepd in 4Q21

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MRO: Chart Quarterly Production history (Fun Trading)

3.1 – US segment

US production was 304K Boepd, representing 86.1% of the total output of 353K Boepd. Total production increased 8.6% from the same quarter a year ago.

Oil production averaged 172K Bopd (57%) with US unit production costs of $ 4.90 per Boe for the fourth quarter.

The segment reported an income of $ 553 million compared to a loss of $ 33 million in the year-ago period due to more substantial price realizations.

Table

MRO: Presentation per basin (Marathon oil Presentation)

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MRO: Chart US production history (Fun Trading)

Marathon Oil produces from four basins and other locations in the US. As we can see, the Bakken segment did very well in QoQ.

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MRO: Chart Production US 3Q versus 4Q (Fun Trading)

3.2 – The Equatorial Guinea segment

The segment reported earnings of $ 106 million compared to $ 29 million in the year-ago period due to improvement in liquids prices. Production was 49K Boepd net.

Presentation

MRO: Equatorial Guinea Presentation 4Q21 (MRO Presentation)

3.3 – Oil and gas prices

Marathon Oil’s average realized liquids prices (crude oil and condensate) of $ 77.03 per barrel were particularly above the year-earlier level of $ 39.71.

Natural gas liquids average price realizations rocketed 114.7% to $ 34.99 a barrel.

Also, average realized natural gas prices were up 126.8% year over year to $ 5.24 per thousand cubic feet.

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MRO: Chart oil and gas prices history (Fun Trading)

4 – Net Debt was $ 4.01 billion in 4Q21

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MRO: Chart Cash versus Debt history (Fun Trading)

As of December 31, 2021, Marathon had cash and cash equivalents worth $ 580 million and long-term debt of 4.014 billion. The debt-to-capitalization ratio of the company was 27.1%.

5 – Guidance 2022

Marathon Oil’s 2022 CapEx is expected to be $ 1.2 billion, up modestly (16%) from the $ 1 billion it spent in 2021. The company continues to target shareholder returns over production growth.

The company is targeting production in the range of 340K Boepd to 350K Boepd – virtually unchanged from last year.

Finally, Marathon Oil expects oil volumes in the band of 168K-176K Bopd. Note: Assuming $ 60 WTI, Marathon Oil expects to return a minimum of 40% of its cash flow from operations.

In the conference call, CEO Lee Tillman said:

Our $ 1.2 billion 2022 capital program is fully consistent with our disciplined capital allocation framework that prioritizes sustainable free cash flow generation over production growth. We expect to deliver over $ 3 billion of free cash flow at a reinvestment rate of less than 30%, assuming $ 80 WTI and $ 4 Henry Hub, prices at a discount to the current forward curve. These financial outcomes are sustainable for years to come and are underpinned over a decade of high return, high competent inventory.

Technical Analysis (Short Term) and Commentary

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MRO: TA chart (Fun Trading)

Note: The graph is adjusted for the dividend.

MRO forms an ascending wedge pattern with resistance at $ 22.7 and support at $ 20.

The trading strategy is to sell about 30-35% of your position between $ 22.4 and $ 22.85. If oil prices turn even more bullish after an invasion of Ukraine by Russia, above $ 100 per barrel, MRO could cross the resistance and retest $ 23- $ 25.

Conversely, if oil prices drop lower, potentially below $ 85, MRO will drop below $ 18.50.

I recommend buying MRO at or between $ 20.30 and $ 19.70.

Frequent wild swings characterize the oil sector, and I believe we will have plenty of that in the next 12 months. Hence, it is critical to trade a significant part of your MRO position using the LIFO strategy and keep a core long position for higher ground.

Warning: The TA chart must be updated frequently to be relevant. It’s what I’m doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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