Contrarian Buy-recommended Marathon Oil (MRO) offers unlevered appreciation potential of 47% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of US$53 a share. Fourth quarter results released on February 2 disclose unlevered cash flow (Ebitda) below our expectations of three months ago. Upstream costs resulted in a low Ebitda margin and downstream reflected a more depressed refining margin.
Executive Vice President Gary Heminger explains on the earnings call that refining profits are likely to recover with rebounding demand for diesel fuel in a growing global economy. At the same time, increased reported reserves in Canadian oil sands supports NPV in an industry context judged by cash flow and reserve life.
Meanwhile, the trend for oil, 63% of the value in Marathon, continues up with futures prices for the next six years at $86 a barrel compared to the 40-week average of $82. Seeing Marathon stock below its 200-day average of $33 a share, we reclassify our previous Buy rating to Contrarian Buy.
Originally published on February 3, 2010.
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