The prevailing energy sector landscape is marked by geopolitical conflicts and supply cuts by OPEC. With the anticipation of oil prices remaining volatile this year, this article compares the fundamentals of two leading industry players, Marathon Oil Corporation (MRO) and Energy Transfer LP (ET) to determine which stock could be a better portfolio addition.
Experts are indicating a surge in oil prices this year due to heightened geopolitical tensions. Oil trading in the Red Sea has been hampered by continued attacks on ships carried out by Yemen-based Houthi militants. Despite the deployment of a U.S.-led task force to the region, the conflict continues to impact the stability of oil trading in the area.
Cole Smead, president and portfolio manager at Smead Capital Management, emphasizes that despite investor wariness towards the oil market, the underlying demand for oil remains robust, stating, "Demand is not going away."
Meanwhile, Phillip Streible, chief market strategist at Blue Line Futures, believes that the prevailing geopolitical disruptions will likely prompt a natural stabilization of oil prices, paving the way for an upward trend from the current point.
On the other hand, OPEC has actively implemented supply reductions since late 2022 to stabilize the oil market and bolster prices. In the first quarter of 2024, several OPEC+ nations have collectively committed to voluntary cuts in oil production, amounting to 2.2 million barrels per day.
In the face of uncertainties tied to supply constraints and geopolitical tensions, the Energy Information Administration (EIA) foresees an increase in the Brent crude oil spot price. The projection indicates a rise from an average of $78 per barrel in December 2023 to an average of $84 per barrel in the first half of 2024.
Given the favorable industry outlook, both MRO and ET should benefit. However, in terms of price performance, ET appears to have outshined MRO by surging 9.7% over the past six months, compared to MRO’s marginal gain during the same period.
Moreover, over the past three months, ET’s shares surged 3.9% versus MRO’s 3.5% plunge. Additionally, ET’s shares have soared 5.1% over the past month to close the last trading session at $13.98. In contrast, MRO’s shares plummeted 1.5% over the same period to close the last trading session at $24.74.
However, to find out which Energy - Oil & Gas stock is the better pick, let’s dive deeper into their fundamentals.
Recent Developments
On December 11, 2023, MRO paid its shareholders a quarterly dividend of $0.11 per share. The company’s annual dividend of $0.44 translates to a 1.80% yield on the prevailing prices, while its four-year average dividend yield is 1.50%. Its dividend payouts have grown at CAGRs of 72.4% and 15.4% over the past three and five years, respectively.
Conversely, on November 3, 2023, ET successfully completed its merger with Crestwood Equity Partners LP, solidifying its dominant position in the midstream sector. The acquisition expands ET’s ownership of pipelines and assets to over 125,000 miles across 41 states, bolstering its presence in major U.S. regions.
Furthermore, the transaction boosts ET’s distributable cash flow per unit, bringing in substantial cash flows from long-term contracts and acreage dedications. The integration of the two companies is projected to yield annual run-rate cost and efficiency synergies of at least $40 million, with additional financial and commercial benefits anticipated.
Recent Financial Results
MRO’s total revenue and other income for the fiscal third quarter (ended September 30, 2023) declined 19.3% year-over-year to $1.81 billion. Meanwhile, the company’s adjusted net income amounted to $466 million and $0.77 per share, down 43.9% and 37.9% from the prior-year quarter, respectively. Also, its income from operations declined 39.4% from the year-ago value to $669 million.
On the other hand, for the fiscal third quarter, which ended on September 30, 2023, ET’s revenues amounted to $20.74 billion, while its operating income rose 13.2% from the prior-year quarter to $2.23 billion. During the same quarter, the company’s net income came in at $1.05 billion and $0.15 per share. In addition, its adjusted EBITDA improved 14.7% from the year-ago value to $3.54 billion.
Past and Expected Financial Performance
MRO’s revenue has grown at a CAGR of 1.3% over the past five years. Street expects MRO’s EPS for the fiscal fourth quarter (ended December 2023) to decline 15.3% year-over-year to $0.75, while its revenue for the same quarter is projected to decline marginally year-over-year to $1.72 billion.
Conversely, ET’s revenue has improved at an 8.6% CAGR over the past five years. Analysts predict ET’s EPS for the fourth quarter (ended December 2023) to decline marginally year-over-year to $0.34. However, its revenue for the same period is expected to come in at $21.92 billion, reflecting a 6.9% year-over-year improvement.
Profitability
ET’s trailing-12-month asset turnover ratio of 0.74x is higher than MRO’s 0.34x. However, MRO’s trailing-12-month gross profit margin of 77.80% is higher than ET’s 16.88%.
Valuation
In terms of the forward Price/Sales ratio, MRO’s 2.12x is 285.5% higher than ET’s 0.55x. Likewise, MRO’s forward EV/Sales ratio of 2.97x is 123.3% higher than ET’s 1.33x. Thus, ET is more affordable.
POWR Ratings
MRO has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. Conversely, ET has an overall rating of B, translating 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 C grade for Value, justified by its mixed valuation metrics. In terms of the forward non-GAAP PEG, MRO’s 0.73x is 61.9% lower than the industry average of 1.92x. However, the stock’s forward EV/Sales ratio of 2.97x is 46.7% higher than the 2.02x industry average.
On the other hand, ET’s B grade for Value is consistent with its discounted valuation metrics. In terms of the forward EV/Sales ratio, ET’s 1.33x is 34.3% lower than the industry average of 2.02x. Likewise, ET’s forward Price/Sales ratio of 0.55x is 60.7% lower than the 1.40x industry average.
Furthermore, MRO’s D grade for Sentiment is justified by its negative analyst estimates for the to-be-reported quarter. In contrast, ET’s C grade for Sentiment is consistent with the mixed analyst estimates for the quarter ended December 2023.
Among the 84 stocks in the Energy - Oil & Gas industry, MRO is ranked #62, while ET is ranked #11.
Beyond what we’ve stated above, we have also rated both stocks for Growth Momentum, Stability, and Quality. Click here to view MRO ratings. Get all ET ratings here.
The Winner
With industry experts anticipating a surge in oil prices this year, companies like MRO and ET are well poised to benefit. However, ET’s stronger financial position, better analyst estimates, and comparatively attractive valuation could position it as a superior investment compared to MRO.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Energy - Oil & Gas industry here.
What To Do Next?
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ET shares were trading at $13.93 per share on Tuesday afternoon, down $0.05 (-0.36%). Year-to-date, ET has gained 0.94%, versus a -0.24% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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