I don’t believe that any oil stock is a great investment at the moment. But investors, and in this case, traders, get to decide which stocks are up or down. And they are giving Marathon Oil (NYSE:MRO) a lot of attention. Last month, I gave that group an affirmative nod. By that I mean, MRO stock is more compelling than those oil stocks that are limping out of bankruptcy.
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The company has approximately $3.5 billion of cash in reserve. And, as I noted last month, CEO Lee Tillman says Marathon can break even with oil in the mid-$30 range. And furthermore, Tillman projected every $1 increase in crude prices would yield $55 million in annual free cash flow generation.
The commodities market is certainly testing that thesis right now. In the last 30 or so days, the price of crude tumbled nearly 15%. And shares of MRO stock tumbled even more, approximately 25%. In the last three trading days prior to this writing, crude has made its way back to $40 — physical commodity exchange-traded fund United States Oil Fund, LP (NYSEArca:USO) is up 8% this week — but Marathon is basically flat.
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This simply reflects the uncertainty in the economy. For every better-than-expected jobs report, there is evidence that the economy is not firing on all cylinders. And with a vaccine by the end of the year seeming less likely (as if it ever was), the bears are in control of the oil patch.
And that’s why you have to be realistic about investing in Marathon stock.
Although science continues to learn about the novel coronavirus, one fact hasn’t changed. Population density matters. That’s why, depending on where you live, the economy can almost look normal. Where I live, our local schools are open. And just driving my child to and from school, I find I’m actually driving more than I have in months (relatively speaking). But I don’t live in a densely populated area, and we have not dealt with community spread.
But I don’t have to look too far to see that things are not normal. Even with kids in school, many of my friends are still working from home. Not by choice, but because their offices are choosing to stay closed. High school sports are being played, but largely to empty seats and with all the athletes wearing masks.
And because social media keeps us connected over the miles, I know that my area is more open now than other areas of the state, and the country.
No wonder why analysts are having a hard time predicting where oil prices are going.
Uncertain Economy Will Hang Over MRO Stock
We’re at the point where the novel coronavirus has taken on a life of its own. Recovery is happening unevenly throughout the country. Some areas feel more open than others. And that’s making it difficult to create a national sense of purpose.
It’s also making it difficult for analysts to project how soon oil prices will recover. However without a recovery in oil prices, there’s really no sense in buying any of the oil stocks. I can understand the attraction of MRO stock at such a low price. And in fairness, it’s better than hoping to find some magic in an oil company that is coming out of bankruptcy.
However, I can’t stress enough that Marathon stock is tied to the price of oil. The company has done a heroic job of finding ways to conserve cash. But ultimately playing defense only gets you so far. While breaking even may be all you need to make a quick trade in 2020, that doesn’t make for a sound investment. MRO stock isn’t going anywhere fast, so you don’t have to be in a rush to buy it.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.
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