Marathon Oil (MRO) vs. Marathon Petroleum (MPC): Which Energy Stock Has the Potential for Great Momentum in September

In this article, I evaluated two energy stocks, Marathon Oil Corporation (MRO) and Marathon Petroleum Corporation (MPC), to determine which has the potential for solid momentum the following month. We believe MPC is the better investment for reasons explained throughout this piece.

Robust demand for oil and gas combined with tight supplies amid several output cuts are recently causing oil prices to climb. According to the International Energy Agency’s (IEA) latest monthly Oil Market Report (OMR), global oil demand is scaling record highs, driven by solid summer travel, increased oil use in power generation, and soaring petrochemical activity in China.

World oil demand is expected to expand by 2.2 million barrels per day (mb/d) year-over-year to 102.2 mb/d in 2023, with China accounting for more than 70% of growth.

However, per IEA, global oil supply slumped by 910 kb/d to 100.9 mb/d last month. In July, a significant reduction in Saudi oil production saw output from the OPEC+ drop 1.2 mb/d to 50.7 mb/d. Further, the almost 1 mb/d voluntary crude output cut, which was also implemented in July and August, will be extended into September, the state-owned Saudi Press Agency (SPA) stated.

“In effect, the Kingdom’s production for the month of September 2023 will be approximately 9 million barrels per day,” SPA said, citing a source from the Saudi Ministry of Energy.

At the same time, Russia announced plans to slash oil exports by 300,000 barrels per day in September.

Robust oil demand and production cuts prompted analysts to update their price forecasts. Goldman Sachs projects record demand in oil markets and tight supplies to push crude prices higher in the near term.

Goldman’s head of oil research, Daan Struyven, said, “We expect pretty sizable deficits in the second half with deficits of almost 2 million barrels per day in the third quarter as demand reaches an all-time high.” He added that the investment bank forecasts Brent crude to rise to $86 per barrel by year-end.

Further, the Wall Street Bank expects crude prices to surge to $93 per barrel in the second quarter of next year as supply deficits continue.

The Energy Information Administration (EIA) also projects Brent crude oil prices to average $86 in the second half of this year, an increase of about $7 from the previous forecast.

The prevailing market conditions should help energy stocks MRO and MPC gain robust momentum in the near term.

MPC is a clear winner in six-month price performance, with 15.9% returns compared to MRO’s 3.9% gain. MPC has gained 17.5% over the past nine months, while MRO plunged 12.3%. Also, MRO’s 23.1% year-to-date gains are significantly higher than MRO’s decline of 3.4%.

Here are the reasons why we think MPC could perform better in the near term:

Latest Developments

On March 30, MRO, through its affiliated company Marathon E.G. Holding Limited, announced it had signed a Heads of Agreement (HOA) with the Republic of Equatorial Guinea (E.G.) and Noble Energy E.G. Ltd, a Chevron company, to progress the following phases (Phases II and III) in the development of the Equatorial Guinea Regional Gas Mega Hub (GMH).

“This announcement builds on our successful partnership of more than 20 years with the E.G. Government, further leveraging and extending the life of E.G.’s world-class gas monetization infrastructure, including the critical E.G. LNG facility, into the next decade,” said Lee Tillman, MRO’s Chairman, President, and CEO.

On March 8, MPC announced the acquisition of a 49.9% interest in LF Bioenergy, an emerging producer of renewable natural gas (RNG) in the United States, from Cresta Fund Management for $50 million. LF Bioenergy has been focused on developing a portfolio of dairy farm-based, low-carbon intensity RNG projects.

This acquisition demonstrates MPC’s commitment to lower carbon investments. Further, this platform would create the opportunity for integration and advance the company’s goal to lower the carbon intensity of its operations and product offerings.

Recent Financial Results

MRO’s revenues and other income decreased 34.3% year-over-year to $1.51 billion in the second quarter that ended June 30, 2023. Its income from operations declined 64.9% from the year-ago value to $454 million. In addition, the company’s adjusted net income and adjusted net income per share were $295 million and $0.47, down 68.4% and 63.6% year-over-year, respectively.

For the second quarter that ended June 30, 2023, MPC’s Midstream segment income from operations increased 6.7% year-over-year to $1.20 billion. Its Midstream segment adjusted EBITDA rose 5.2% from the year-ago value to $1.53 billion. Also, the company generated $4 billion of net cash provided by operating activities, reflecting sustained commercial improvements.

Past And Expected Financial Performance

MRO’s revenue and EBITDA have grown at 18.5% and 24.2% CAGRs, respectively, over the past three years. In addition, the company’s total assets have increased at a 2.4% CAGR over the same period.

Analysts expect MRO’s revenue and EPS for the fiscal year (ending December 2023) to decrease 19% and 45.5% year-over-year to $6.51 billion and $2.44, respectively. However, the company’s revenue and EPS for the fiscal year 2024 are expected to grow 11.5% and 40.7% from the previous year to $7.26 billion and $3.44, respectively.

Over the past three years, MRO’s revenue and EBITDA have grown at 20.5% and 75.9% CAGRs, respectively. The company’s EBIT has increased at a CAGR of 201.5% over the same time frame, while its tangible book value has grown at a 16.6% CAGR.

For the fiscal year (ending December 2023), MPC’s revenue and EPS are expected to decline 18.1% and 13.7% from the prior year to $147.32 billion and $22.58, respectively. Also, analysts expect the company’s revenue and EPS for the fiscal year 2024 to decrease 7.9% and 35.1% year-over-year to $135.64 billion and $14.65, respectively.

Profitability

MPC’s trailing-12-month revenue is 23.5 times what MRO generates. Moreover, MPC’s trailing-12-month ROE, ROA, and ROTC of 43.04%, 18.44%, and 17.43% are favorably higher than MRO’s 17.97%, 13.03%, and 9.59%, respectively. MPC’s trailing-12-month asset turnover of 1.72x compared to MRO’s 0.35x.

However, MRO’s trailing-12-month gross profit margin and EBITDA margin of 78.06% and 68.13% compared to MPC’s 15.28% and 12.92%, respectively. MRO’s trailing-12-month net income margin of 30.56% is higher than MPC’s 8.09%.

Valuation

In terms of trailing-12-month non-GAAP P/E, MPC is currently trading at 5.53x, 30.3% lower than MRO, which is trading at 7.93x. MPC’s trailing-12-month Price/Sales multiple of 0.41 is lower than MRO’s 2.47. Also, MPC’s trailing-12-month EV/Sales of 0.52x is lower than MRO’s 3.21x.

Thus, MPC is relatively more affordable.

POWR Ratings

MRO has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, MPC has an overall rating of B, which translates to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MRO has a grade of B for Quality, and MPC has an A grade for Quality.

In addition, MRO has a D grade for Value, consistent with its higher-than-industry valuation. The stock’s forward EV/Sales and EV/EBITDA of 3.30x and 4.84x compare to the respective industry averages of 2.16% and 5.81%.

On the contrary, MPC has a grade of C for Value, in sync with its mixed valuation. In terms of forward EV/Sales, the stock is trading at 0.55x, 74.6% lower than the 2.16x industry average. However, its forward Price/Book multiple of 2.24 is 32.7% higher than the industry average of 1.68.

Of the 87 stocks in the Energy - Oil & Gas industry, MRO is ranked #62, while MPC is ranked #9.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Value, and Quality. Click here to view MRO Ratings. Get all MPC ratings here.

The Winner

Despite macroeconomic headwinds, global demand for oil and gas is expected to remain robust this year, with China contributing the most. Growing demand and tight supplies amid crude output cuts should keep driving oil prices, resulting in a continued upswing for the energy industry. Hence, MRO and MPC are well-placed to gain momentum in the near future.

However, MRO’s relatively weak financials and bleak growth prospects make its rival MPC the better investment now.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Energy - Oil & Gas industry here.

What To Do Next?

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MPC shares were unchanged in premarket trading Wednesday. Year-to-date, MPC has gained 25.29%, versus a 18.34% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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