Marathon Oil [stock_market_widget type="inline" template="generic" color="default" assets="MRO" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] shares have risen in 2019, appreciating 25% on the back of the oil price rally. However, Marathon Oil will face a litmus test on May 1 when it releases its fiscal first-quarter results as investors will be expecting a strong financial performance and sunny guidance from the company given the recent improvement in oil prices.
Let’s see what’s expected of Marathon Oil and how its outlook might look.
The Expectations
According to Yahoo Finance estimates, Marathon Oil’s revenue for the first quarter of 2018 is expected to decline nearly 29% year over year. Its earnings are expected to drop by a third from $0.18 per share a year ago to $0.06 a share this time.
But there’s no reason to be disappointed with this massive decline as the lower revenue and earnings will be a result of divestitures that will impact the company’s results. Marathon’s net production in the first quarter of 2018 stood at 426 Mboed, but after adjusting for divestitures, the same now stands at 388 Mboed.
For the first quarter of 2019, Marathon expects production between 380 and 400 Mboed, so its output will remain flat on a year over year basis. Marathon has clarified that its first-quarter output will be impacted by a planned shutdown in Equatorial Guinea, while U.S. production will be impacted by the extreme weather conditions Marathon faced earlier in the quarter.
As far as pricing is concerned, Marathon had reported an average crude oil price of $62.89 per barrel, while Brent crude averaged $66.81 in the first quarter of 2018. The good news is that Brent crude is trading at a higher level this year, while WTI has also picked up the pace. Looking ahead, the price of crude oil could rise further and help Marathon deliver a stronger performance this year given its annual outlook.
The Way Ahead Looks Bright
For 2019, Marathon Oil expects its total oil production, including both U.S. and international, to increase 12% after adjusting for divestitures. This increase in production will be achieved at a development capital budget of $2.4 billion, which is nearly identical to last year’s outlay.
As such, Marathon is focused on increasing its production in a profitable manner this year, which should allow it to expand its cash flow profile because of the improvement in oil prices. The company clarified that over 95% of its development capital budget will be spent in the four U.S. resource shale plays of Eagle Ford, Bakken, Northern Delaware, and Oklahoma.
Because of its efficient production growth, Marathon is projecting cumulative two-year (2019-2020) organic free cash flow to the tune of $750 million at a WTI oil price of $50 per barrel. If WTI oil averages $60 per barrel, Marathon’s organic free cash flow over the same period would shoot up to $2.2 billion.
As such, Marathon Oil looks solidly placed to take advantage of an increase in oil prices and boost its cash flow at the same time. This is why investors should continue holding Marathon Oil shares as they can deliver more upside.
