Stolen Investment Idea

Here’s an investment idea stolen from creditbubblestocks.com. This how the website described Marathon Oil Corp. in May this year:

Marathon is an independent E&P company, based in Houston, with operations in the Eagle Ford, Bakken, STACK/SCOOP and Permian. It’s a bit smaller than our Canadian oil majors - the market capitalization (at $27) is $18 billion and the enterprise value is $21 billion. [T]hey repurchased 3% of outstanding shares in one quarter. They’re trading at 6 times annualized, adjusted net income, and the FCF/EV yield based on guidance for 2022 is 21%.

Fast forward to yesterday, August 7, 2022:

The market capitalization is down to $15 billion now and the enterprise value is $18.3 billion. They reported second quarter 2022 net income of $966 million, operating cash flow of $1,678 million, and free cash flow of $1,323 million. Their projection is $4.5 billion of 2022 free cash flow, assuming $100/bbl WTI and $6/MMBtu Henry Hub. (A $1/bbl change in WTI is ~$60MM of annual CFO, which would imply $3.9 billion at $90 WTI.)

So they are now trading for less than 4 times annualized net income, and the annualized FCF/EV yield is currently 29%, and is likely still north of 20% at $90 oil based on their projections.

They have returned over $1.7 billion of capital to shareholders year-to-date. Over the past 10 months (since October 2021) they have reduced share count by 15%, and year-to-date they have reduced it by 7.3%.

From the company’s last conference call:

We’re trading at a free cash flow yield more than 25%, one of the lowest trading multiples in the entire S&P 500. We continue to believe that our equity is fundamentally mispriced. And as long as that’s the case, we’ll aggressively repurchase our stock. As I’ve said before, it’s the best acquisition we can make.

From barchart.com, the company is trading at very reasonable P/E of 6.13.

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Oil stocks tend to rise and fall with oil prices.

In a recession, oil prices will fall with falling demand.

Its a bad time to buy an oil stock if you think there will be a recession.

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