3 Reasons Marathon Oil Corporation's Stock Could Rise

Despite Marathon Oil's spinoff of its downstream business in 2011, things haven't been all too rosy for this independent exploration and production company. Since the spinoff on June 30 2011, the stock has risen a miserly 7.5% compared to a solid 43% gain in the S&P 500.

MRO Chart

MRO data by YCharts


Still, looking into the company's fundamentals, there are some solid reasons to own this stock. Below are three reasons why Marathon Oil could be rewarding to shareholders in the long run. 

A solid business model tuned for long-term gains
Marathon Oil holds a well-diversified international portfolio of assets. However, management's aim is to build a reserve base that gives the best returns. The era of easy and cheap crude oil is over. Newer discoveries are often made in hostile terrain or amid other challenging conditions. What investors must keep in mind is that not all frontier oil discoveries make great business propositions. Instead of spending billions on projects that could potentially deliver sub-par returns, management had been busy streamlining its asset portfolio. This week, Marathon closed a $2.7 billion sale of its Norwegian business. According to CEO Lee Tillman, this deal "demonstrates [the company's] commitment to rigorous portfolio management." Earlier this year, Marathon had closed its working interests in non-operated assets in Angola for approximately $2 billion that also resulted in a $576 million after-tax gain.

Marathon's first priority is to increase production through organic replacement with the proceeds from dispositions, rather than look out to simply accumulate property. From a shareholder perspective, this is highly commendable. The company's production growth in the Eagle Ford, Bakken, and SCOOP are testimony to that.

Average net sales volumes from the Eagle Ford grew 30% in the first half of 2014 when compared to the same period a year ago. Similar growth in the Bakken stood at 21% while production from the SCOOP region in Oklahoma grew a solid 31%. In all, second quarter production from the three unconventional liquids-rich plays grew 29% from the year ago quarter. How did the company mange to achieve this? Enhanced completion designs in the Eagle Ford, a greater number of wells drilled per drill spacing unit in the Bakken, and extended laterals in the SCOOP wells are the answer.

Management's philosophy is that every asset in Marathon's portfolio must compete for capital. This naturally leads to higher capital efficiency, which leads to efficient production -- which in turn should eventually drive shareholder value.

A laser focus on returns and profitability
There are reasons why organic replacement seems to be management's mantra. Consider the following chart from Marathon's second quarter earnings call:

Source: Second quarter earnings conference, company website

We notice that the North American E&P segment reported after tax-earnings of $302 million for the second quarter -- a $60 million, or 25% growth from the first quarter. What majorly contributed to this growth was the volume variance, or in other words, production growth. And production growth in the North American segment was primarily organic in the prolific unconventional plays.

If we take a look at the company's various return measures, there has been a vast improvement in the last couple of years.

MRO Return on Invested Capital (TTM) Chart

MRO Return on Invested Capital (TTM) data by YCharts

The stock looks cheap
For the given profitability, Marathon Oil's stock definitely looks cheap compared to other large independent E&Ps. Let's take a look at the following charts, which compare Marathon's stock with ConocoPhillips and EOG Resources over various valuation metrics.

MRO EV to EBITDA (TTM) Chart

MRO EV to EBITDA (TTM) data by YCharts

All three companies have majority of their production coming from the Eagle Ford and the Bakken, but Marathon looks to be the cheapest of the lot.

MRO Price to Free Cash Flow (TTM) Chart

MRO Price to Free Cash Flow (TTM) data by YCharts

Marathon also looks significantly discounted for the amount of free cash flow it generates per share.

Overall, Marathon Oil's innovative approach to increasing production volumes isn't a very common sight among exploration and production companies. "Organic replacement" is the management's mantra, and this could truly drive shareholder value.

"As significant as the discovery of oil itself!"
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The article 3 Reasons Marathon Oil Corporation's Stock Could Rise originally appeared on Fool.com.

Isac Simon has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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