Marathon Oil Corp (MRO) Annual Valuation

MarathonOilBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Marathon Oil Corp fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Marathon Oil Corporation (Marathon Oil) is an international energy company engaged in exploration and production, oil sands mining and integrated gas with operations in the United States, Angola, Canada, Equatorial Guinea.(E.G.), Ethiopia, Gabon, Kenya, the Kurdistan Region of Iraq, Libya, Norway, Poland and the United Kingdom. The Company operates in three business segments: Exploration and Production Segment, explores for, produces and markets liquid hydrocarbons and natural gas on a worldwide basis; Oil sands mining segment, mines, extracts and transports bitumen from oil sands deposits in Alberta, Canada, and upgrades the bitumen to produce and market synthetic crude oil and vacuum gas oil, and integrated gas, produces and markets products manufactured from natural gas, such as LNG and methanol, in E.G. During the year ended December 31, 2012 , the Company Company acquired approximately 25,000 net acres in the core of the Eagle Ford shale.

MRO Chart

MRO data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary

Key Data:

Recent Price $32.75
MG Opinion Overvalued
Value Based on 3% Growth $34.97
Value Based on 0% Growth $20.50
Market-Implied Growth Rate 2.54%
NCAV -$19.08
PEmg 13.58
Current Ratio 0.69
PB Ratio 1.18

Balance Sheet – 12/31/2013

Current Assets $2,975,000,000
Current Liabilities $4,333,000,000
Total Debt $6,394,000,000
Total Assets $35,620,000,000
Intangible Assets $499,000,000
Total Liabilities $16,276,000,000
Outstanding Shares 697,000,000

Earnings Per Share

2013 $2.24
2012 $2.23
2011 $2.39
2010 $3.61
2009 $1.67
2008 $4.95
2007 $5.68
2006 $6.87
2005 $4.25
2004 $1.86

Earnings Per Share – ModernGraham

2013 $2.41
2012 $2.66
2011 $3.13
2010 $3.85
2009 $4.21
2008 $5.23

Dividend History

MRO Dividend Chart

MRO Dividend data by YCharts


Marathon Oil is not suitable for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the turn-offs are the lack of earnings growth over the ten year period and the poor current ratio.  For the Enterprising Investor, the failings are in the high level of debt relative to the current assets and the lack of earnings growth over the last 5 years.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities, such as by reviewing ModernGraham’s valuation of Chevron Corporation (CVX) or 5 Undervalued Companies for the Defensive Investor.  From a valuation standpoint, the company appears significantly overvalued.  The EPSmg (normalized earnings) have gone from $4.21 in 2009 to $2.41 for 2013, which is the exact opposite that Intelligent Investors want to see.  The market is implying an estimate of 2.54% earnings growth, which is clearly not supported by the recent history of the company.  As a result, the ModernGraham valuation model returns an estimate of intrinsic value that is well below the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Marathon Oil Corp (MRO)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Marathon Oil Corp (MRO) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.





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