How Marathon Oil Is Responding to Low Energy Prices
Marathon’s relative valuation
In the previous part of this series, we compared Marathon Oil’s (MRO) EV/EBITDA multiple against its own historical levels. In this part, we’ll look at the company’s valuation in comparison to its peers.
Marathon’s forward EV/EBITDA
Marathon’s forward EV/EBITDA multiple of ~7.9x is lower than that of its peers. For example, Diamondback Energy (FANG) is currently trading at a forward EV/EBITDA multiple of 14.1x. Concho Resources (CXO) is trading at a multiple of ~9.6x. Hess (HES) is trading at a slightly lower EV/EBITDA multiple of ~9x. So, MRO appears to be undervalued compared to its peers. Together, these companies make up ~3% of the Vanguard Energy ETF (VDE). They make up ~10% of the iShares U.S. Oil & Gas Exploration & Production ETF (IEO).
Why is MRO trading at a discount?
As we saw in the previous parts, MRO’s EBITDA has fallen considerably this year, and so have its cash flows. Its net debt levels are also higher compared to last year. Also, as we saw in part three, the company is heavily levered to oil prices. If the current oil price recovery doesn’t sustain, the company’s cash flows might be in trouble, and MRO might have to resort to raising more debt or share sales, or even cut its dividend altogether to conserve cash. So, MRO’s lower forward EV/EBITDA multiple compared to its peers implies a valuation discount due to higher risk.
Marathon’s returns and dividends
In terms of returns, Marathon offers one of the better returns when its profitability is scaled by its shareholder equity. This calculation is called ROE (return on equity). MRO’s ROE stands at about -11%. Among the company’s peers, CXO has the highest ROE at ~1.1%. FANG has the lowest ROE at -30%.
In terms of more direct returns to shareholders, MRO offers the highest dividend yield at 2.0% among the peer group we have been discussing in this series.
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