On Wednesday, Barclays (LON:BARC) initiated coverage on Marathon Oil Corporation (NYSE: NYSE:MRO), bestowing an Overweight rating and setting a price target of $35.00. The firm highlighted Marathon Oil's capacity to generate substantial free cash flow, which could potentially enable the company to repurchase half of its shares within five years. This optimistic stance is rooted in the company's efficient cost structure and its profitable international gas business.
The analysis from Barclays pointed out that Marathon Oil's free cash flow is uniquely positioned within their coverage universe, due to the company's low-cost operations and lucrative international gas segment. The re-contracting of liquefied natural gas (LNG) volumes from Equatorial Guinea, starting this year, is expected to contribute to an approximate $130 million year-over-year increase in EBITDX for 2024, even with the current lower TTF gas prices of about $8.80/MMBtu.
Barclays also noted that Marathon Oil's international gas operations, particularly its gas processing and liquefaction facilities, offer a continuous source of cash flow with minimal capital expenditure requirements. This aspect of the business is reportedly undervalued by the market.
Additionally, Marathon Oil has successfully maintained well productivity onshore in the United States, matching 2023 levels with those of 2022 across its legacy development areas, despite the natural maturation of its asset base.
Further potential for Marathon Oil is seen in the Permian Basin, where the company has been investing less compared to other regions. Barclays suggests that improvements in cost management and cycle times here could offer additional benefits beyond their current projections.
The Overweight rating and the $35 price target are based on a blended target multiple, which includes 5x the estimated 2025 enterprise value to EBITDX and 1x the net asset value.
InvestingPro Insights
As Barclays initiates coverage on Marathon Oil Corporation with a positive outlook, it's worth noting that the company's strategic moves are reflected in its financial metrics and market performance. Marathon Oil's management has been proactive in enhancing shareholder value, as evidenced by the aggressive share buyback strategy and a consistent increase in dividends, with the dividend having been raised for three consecutive years. This commitment to returning value to shareholders aligns with Barclays' recognition of the company's strong free cash flow generation.
Real-time data from InvestingPro shows a market capitalization of $16.9 billion and a P/E ratio that stands at an attractive 11.42, indicating a potentially undervalued stock relative to earnings. The company's revenue for the last twelve months as of Q4 2023 was $6.453 billion, with a robust gross profit margin of 76.49%. Moreover, Marathon Oil's stock has demonstrated a strong return over the last three months, with a 29.67% total price return, signaling investor confidence and market momentum.
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