Marathon Oil Stock: Grab 17%+ Yield Even If Oil Prices Tumble (NYSE:MRO)

Petroleum, petrodollar and crude oil concept : Pump jack and a black barrel on US USD dollar notes, depicts the money received or earned from sales after investment in the development of oil industry.

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Introduction

After Marathon Oil (NYSE:MRO) endured a turbulent ride throughout 2020 as they faced the onslaught of the Covid-19 pandemic, 2021 and now 2022 have seen oil prices and thus their operating conditions strengthening, thereby lifting their share price. Whilst the easy money appears to have already been made, thankfully shareholders can still grab a very high 17%+ shareholder yield even if oil prices tumble later in 2022, despite the otherwise boring surface-level appeal of their very low 1.12% dividend yield.

Executive Summary & Ratings

Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.

Marathon Oil Ratings

Author

*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and also best captures the true impact upon their financial position.

Detailed Analysis

Marathon Oil Cash Flows

Author

After fighting through the now infamously tough severe downturn of 2020, unsurprisingly, the strong oil prices of 2021 saw their operating cash flow surge back to $3.239b, thereby easily surpassing their previous result of $1.473b during 2020 and also providing ample free cash flow of $2.137b. This obviously had no issue providing very strong coverage to their relatively very low dividend payments of only $141m, which also left plenty of scope to fund their $734m of share buybacks. When looking ahead, their shareholder returns appear poised to surge during 2022 following their very generous guidance, as the slide included below displays.

Marathon Oil Guidance For 2022

Marathon Oil Fourth Quarter Of 2021 Results Presentation

It can be seen that management forecasts utilizing between 40% and 70% of their operating cash flow for shareholder returns during 2022 and given these very strong prevailing operating conditions, the latter seems more probable, especially considering their subsequently discussed very healthy financial position. This means that their shareholders can look forward to seeing circa $3.1b returned through a combination of dividends and share buybacks during 2022 and possibly beyond, depending upon oil prices, which appears weighted towards the latter, as per the commentary from management included below.

“We certainly, from a variable dividend perspective, have considered that and it remains a potential tool for us, use in the future to supplement the base dividend and share repurchases. I wouldn’t want to do it to the detriment of the yield of the base dividend or share repurchases, especially when the implied free cash flow yield is so high on those repurchases…”

-Marathon Oil Q4 2021 Conference Call.

Since their quarterly dividends are currently only $0.07 per share, they only cost $204.6m per annum and thus even if they were to continue growing throughout 2022, it still appears that the vast majority of their shareholder returns will be provided through share buybacks. Whilst I would have preferred a higher weighting towards dividends, $3.1b of shareholder returns still sees a very high shareholder yield slightly above 17% on their current market capitalization of approximately $18b.

Despite already being very exciting, it actually gets even better because their guidance for 2022 was based upon Western Texas Intermediate oil prices of $80 per barrel, which following the Russian invasion of Ukraine now seems to represent a bearish outlook. Whilst the full extent of this geopolitical shock remains to be seen, it compounded an already very strong outlook for oil prices as companies scramble to sever ties with Russia, which the International Energy Agency expects could see 3mmb/d of their production lost, thereby equalling approximately 3% of forecast global demand during 2022 and thus eliminating the spare capacity of OPEC.

Since these dynamics have already seen oil prices trading well north of $100 per barrel, which many analysts feel could continue during the rest of 2022, if not climb even higher, it means that even if oil prices tumble lower, their shareholders should still enjoy very desirable returns. Meanwhile, if oil prices continue trading around $100 per barrel, which now seems to be the baseline outlook, their variable shareholder returns policy stands to see even more exciting returns.

When looking back at their guidance for 2022 shareholder returns, if circa $3.1b equals 70% of their operating cash flow when Western Texas Intermediate oil prices are $80 per barrel, it indicates that their operating cash flow would be approximately $4.5b. At $100 per barrel, their operating cash flow quickly becomes $5.7b given their sensitivity of $60m for every $1 per barrel increase, as per slide fourteen of their fourth quarter of 2021 results presentation. Unless they deviate from the expected 70/30 split, this indicates shareholder returns of a massive $4b during 2022 if Western Texas Intermediate oil prices continue averaging at least $100 per barrel, which would amount to a massive shareholder yield slightly above 22%.

After making these shareholder returns, they would be left with roughly $1.7b, which after funding their guidance for $1.2b of capital expenditure for 2022 would leave circa $500m of excess free cash flow retained for deleveraging. Alternatively, if oil prices were to tumble lower and thus only average $80 per barrel during 2022, their guidance for shareholder returns of circa $3.1b means that there would be roughly $1.4b remaining before capital expenditure, which sees circa $200m of excess free cash flow retained for deleveraging after subtracting their capital expenditure guidance.

Marathon Oil Capital Structure

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Despite lifting their share buybacks during 2021, their ample free cash flow still managed to push their net debt down a very solid 26.34% year-on-year to end the year at $3.434b versus its previous level of $4.662b at the end of 2020. When looking ahead into 2022, their expected 70/30 split between shareholder returns and deleveraging should ensure this continues with between circa $200m and $500m directed towards deleveraging, thereby helping push their net debt even lower.

Marathon Oil Leverage Ratios

Author

Following their net debt ending 2021 at the lowest point in recent history, it was no surprise to see their leverage plunge thanks to strong oil prices lifting their financial performance. This saw their net debt-to-EBITDA decrease from 4.13 at the end of 2020 to only 0.90 at the end of 2021, which now sits comfortably beneath the threshold of 1.00 for the very low territory. Meanwhile, their net debt-to-operating cash flow ended 2021 at 1.06, which should easily fall beneath the threshold for the very low territory following the first quarter of 2022 given the very strong triple-digit oil prices and resulting prospects of further deleveraging. Since they have minimal requirements to deleverage significantly further after 2022, it would not be surprising to see management lift the relative portion of their shareholder returns during 2023 and subsequent years, thereby potentially offsetting a degree of downside risk in future years if oil prices were to tumble lower.

Marathon Oil Liquidity Ratios

Author

Apart from their very low leverage, their financial position is further supported by their strong liquidity, which sports current and cash ratios of 1.11 and 0.35 respectively. Whilst not necessarily required given their ample free cash flow and variable shareholder returns policy, they still retain the entire $3.1b balance available under their credit facility if required, plus with no relatively large debt maturities until after 2026, as the table included below displays, their liquidity should stay strong for years to come.

Marathon Oil Debt Maturities

Marathon Oil 2021 10-K

Conclusion

Oil prices are notoriously volatile, especially following the Russian invasion of Ukraine but even if they tumble lower, their shareholders still appear set to grab a very high 17%+ shareholder yield during 2022. Or alternatively, this should climb to a massive 22%+ yield if oil prices continue averaging at least $100 per barrel, which seems entirely possible given the prospects for significant lost Russian oil production. Whilst I would have personally preferred a greater portion directed towards dividends, I nevertheless still believe that a buy rating is appropriate given these very desirable returns and their very healthy financial position.

Notes: Unless specified otherwise, all figures in this article were taken from Marathon Oil’s SEC Filings, all calculated figures were performed by the author.

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