Marathon Oil Corporation

Security & Industry Analysis

Marathon Oil Corporation

By: Connor Ritchey, Skylar Bingaman, Jonathan Seilback, and Skylar MacAndeney

Towson University

FIN 333-001

October 12th, 2019

Overview of Marathon Oil Company

Marathon Corporation is an oil exploration and production company with much of its

business operations located in the United States of America. The main headquarters is based in

the city of Houston, Texas. Marathon Oil and Marathon Petroleum are two completely different

entities in which separated in July of 2011. Prior to Marathon dividing their company into two

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separate entities in 2011, they had 29,667 employees, in which now average 2,850 total

employees over the past eight years. The main job sites are operated in multiple sectors of

sedimentary rock formations in Texas (Eagle Ford), New Mexico (Permian), Oklahoma (Stack &

Scoop), and North Dakota (Bakken) (Marathon…, n.d.). Although this company currently

focuses their E&P in the most oil rich destinations in the U.S., they also operate in Europe

(United Kingdom) and Africa (Equatorial Guinea) (Marathon Oil About…, n.d.). Due to

originally operating in many other countries such as Norway, Canada, and Africa, they have now

either sold their rights or removed their long-term assets completely to focus 91.7% of them in

the United States. The remainder of them still exist in Equatorial Guinea (Bloomberg…, n.d.).

From June of 2014 until present day, the E&P oil and gas industry index has taken a huge hit and

Marathon has as well. But from ending 2017 in a major net loss of roughly negative five-and-a-

half billion, to having a positive net income of more than one billion in 2018, this company is a

force to be reckoned with and is not going anywhere (Bloomberg…, n.d.).

Breakdown of Revenues and Assets

Over the past five years, a clear majority (70.6%) of Marathon Oil Corporation’s revenue

had taken place domestically. This past year’s revenue consisted of 83% domestic and 17%

international, which consists of just Equatorial Guinea (located in Central Africa). In comparison

to the year prior, 2017, domestic revenue was only at 71%, while international was hovering

right below 29% (Bloomberg…, n.d.). This significant change in domestic percentage could

most likely be attributed to our President’s views on international business and the increased

institution of tariffs. Figure 1, below, provides a detailed breakdown of the sources of Marathon

Oil’s revenue these past four years.

Figure 1

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Marathon Oil Corporation

Revenue Disparity (in %)

90 82.8
80 68.6 70.8
70 60.8
60
50
40 29.2
30 18.6 20.8
15.2 16.2 17.2
20
10
0
2015 2016 2017 2018

Domestic International Oil Sands Mining

As of today, Marathon Oil Corporation holds about 92% of long-term assets domestically. The

remaining 8% was split amongst Guinea and other small international locations as 7.6% and .7%

(Bloomberg…, n.d.). As compared to 2015, the amount of domestic extracting has risen 37%.

Figure 2 will paint a better picture of the increase, below. Until 2016, Marathon Oil Corporation

had around 30% of long-term assets in Canada, before selling off its Canadian subsidiary to Shell

for $2.5 Billion in March 2017. The money was then used to create the Permian Basin; hence

America’s long-term assets jump from 53.6% to 86.2% in 2017 (Marathon 2017).

Figure 2

Long Term Assets (in %)

100 91.7
86.2
80
60 54.7 53.7

40 32.8 33.7

20 6.8 6.7 6 8.6 7.6

5.7
0 5.2 0 0.7
0
2015 2016 2017 2018

Domestic Equatorial Guinea Canada Other Int'l

Firm Position

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Marathon Oil Corporation

A major benefit of Marathon Oil is that the company already has a great track record of

reporting profits and free cash flows at low oil prices, which should give confidence to investors

about the company’s ability to perform well during difficult periods. The company has now

reported both profits and free cash flows in the last six consecutive quarters, which is something

a clear majority of oil producers have been unable to accomplish. This includes the final quarter

of 2018 when oil plunged to under $45 a barrel in December and the first quarter of 2019 when

WTI averaged just $54.90 a barrel. In these challenging six months, Marathon Oil not only

earned a profit of $0.46 per share but also free cash flows of $337 million (Khan, 2019).

Therefore, I think in the current oil price environment of around $54-$59 a barrel, Marathon Oil

will likely continue doing well.

Marathon Oil stock has dropped by 20% in the last six months to $12.50 and is currently

hovering near annual lows of $11.39 (Khan, 2019). I believe the long-term oriented investors

should consider buying Marathon Oil stock at this price. The company’s shares will likely

recover as it grows production, delivers free cash flows, and repurchases shares. The

improvement in oil prices, in the long run, will fuel significant earnings and cash flow growth,

which will also push the company’s shares higher. Value hunters, however, might want to wait

for further weakness in prices since the shares are still priced almost 21x next year’s earnings

estimates. This makes Marathon Oil more expensive than other large-cap oil stocks, such as

Devon Energy (DVN), Diamondback Energy (FANG), and EOG Resources (EOG), whose

shares are trading between 9x and 15x next year’s earnings estimates (Khan, 2019).

According to Net Advantage, Marathon Oil currently has 2400 employees. With net

profit margin of 11.24 % company achieved higher profitability than its competitors. Comparing

the results to its competitors, Marathon Oil reported total revenue increase in the second quarter

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of 2019 by 1.13 % year-to-year. The revenue growth was below Marathon Oil's competitor’s

average revenue growth of 1.3 %, recorded in the same quarter. Oil prices will likely remain

weak, but Marathon Oil, which has a low-cost asset base, will likely continue reporting profits

and free cash flows. The company looks well-positioned to meet or exceed its target of growing

high-margin US oil production by around 12% in 2019.

While Marathon Oil is roughly half the size of its competitor Apache, it has almost as

much debt. That is why its credit rating is lower. In downgrading the company's credit to junk,

the rating agency cited the likely "considerable deterioration" in its credit metrics this year due to

weak oil prices. Furthermore, it warned that there was some refinancing risk on the horizon due

to upcoming debt maturities in 2017 and 2018 that the company might need to address with

sizable asset sales. While Marathon Oil has completed more than $1 billion in non-core asset

sales this year, it also spent $888 million to acquire assets in the STACK play of Oklahoma

(DiLallo, 2016).

Apache, on the other hand, has less leverage and therefore stronger credit thanks to asset

sales completed before the oil market downturn. Also, after generating excess cash flow last

quarter, its net debt improved, which puts it on pace to meet its goal to end 2016 with net debt at

or below where it ended last year (DiLallo, 2016). With a stronger credit rating and lower

leverage, Apache clearly has the stronger balance sheet.

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Marathon Oil Corporation

Apache's larger scale and greater international diversification give it the stronger portfolio.

Marathon Oil Corporation Innovation

As of today, Marathon Oil uses digital technology called “Digital Oilfield Data”. Digital

Oilfield Data is a collection and analysis combined with field automation, which already

maximizing oilfield recovery and increasing profitability. Internally, this would analyze large

amounts of discrete data, sort the data with that is important, then automate certain decisions and

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processes (Well Data Labs, 2019). Due to this innovation, the Eagle Ford oil field could add 2-3

barrels of production to every well per day. This may not seem like a significant addition looking

at the day-to-day operations, however, it resulted in thousands of more barrels of oil being

produced annually, all with no incremental increase in cost. In addition to data analysis, the

Digital Oilfield has affected how people do their work. From predictive alerting, which points

out potential issues to alert before they happen, to real time decision-making through data

dashboards and notifications, the Digital Oilfield will lead Marathon Oil Corporation to become

a more efficient, data driven, and safer oil company (Marathon, 2017). Despite Marathon Oil

Corporation lacking a large market share, they still can set the standard for digital innovation and

operational excellence. Now obviously, with oil and natural gas drilling being such a hot topic

today, there always is possibility of an industry regulatory change. There is growing concern in

the Texas area that oil and gas extracting is getting too close to residences. The law right now

states that 400 feet is the closest one can be to any residences, due to the possibility of a gas well

“blowing back” (exploding). 400 feet seemed to be a good enough buffer; however, residents

have now suggested that the safe zone should be somewhere between 1,000 and 2,000 feet, based

off data driven results and measurements (Hildebrand, 2015). This, in turn will significantly limit

where oil companies can drill in Texas, so the option of finding a new oil field might be ideal.

United States Macro-Economic Outlook

In February of 2016 oil prices dipped to one of the lowest points that they have been at

since January of 2002, at a price of $36.55 per barrel. Since then oil prices have fluctuated, but

mostly risen, ultimately selling for a price of $54.70 per barrel in October of 2019. Since oil is

an essential input cost for many businesses, especially manufacturing, the price of oil will not

have a significant effect on Marathon oil directly, but the higher price will influence the

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economy, which will in turn effect the company. Higher oil prices drive job creation and

investment since it becomes more financially viable for the companies to exploit higher-cost

shale oil deposits. But at the same time the higher oil costs hurt businesses and consumers since

manufacturing and transportation costs will rise with the price of the oil. Because of this, when

analyzing Marathon Oils business prospects in the U.S. it is important to consider the availability

of new drilling as well as the health of the manufacturing industry.

New Drilling Prospects

Since the price of oil is currently higher than it has been in the past, Marathon Oil will

likely be looking to invest some of the profits to expand their operation. According to an article

from CBS News, the federal government has opened 725,000 acers of land in California to oil

and gas drilling that has previously been off limits. This opens the potential for new drilling sites

inside the U.S. which were not previously available, allowing the U.S. to become more self-

sufficient in terms of energy (CBS 2019). Once this new drilling site is occupied by oil

companies it is likely that the price of oil will be driven down since more oil will be extracted

domestically, helping profit margins for the oil companies as well as the overall health of the

economy.

Oil and Manufacturing

According to The Beige Book, in recent months manufacturing in the U.S. has either flat

lined or taken a slight dip in most parts of the country (Beige…, n.d). Since manufactures use oil

as an essential input to their business operation they have had to transfer the rise in the cost of

the oil to the consumer by raising the cost of their products (Beige…, n.d). This influences the

macroeconomic economy since people will demand less of the manufacture’s product at the

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higher price, which in turn affects the oil companies because the manufactures are not going to

be producing as much goods if they are not selling.

World Economic Outlook

According to the International Monetary Fund’s report of the world economic outlook,

global growth of the economy is forecasted at 3.2 percent growth throughout 2019. GDP so far

this year shows that there has been weaker than anticipated global activity in the economy.

Firms and households are continuing to hold back on long-term spending on investments as well

as consumer durables (MacroTrends…, n.d). The subdued growth of the global economy can be

in a large part to trade disputes between the U.S. and china. The U.S. has continued to further

increase tariffs on certain Chinese imports, which in turn prompted China to do the same to the

U.S. Because of these tensions between two major traders in the world economy, there has been

a lack of trust in the economy that causes firms and consumers to hold onto their money rather

than invest it or spend it on durable goods. The lack of spending in the economy effects

Marathon Oil because they support the companies that provide the economy with goods to spend

money on, but if people are not spending money on these items, the manufacturing companies

will need less oil from Marathon Oil to support their operation.

Risk-Free Rate

The Risk-Free Rate used to compute Marathon Oil Corporation’s intrinsic value was

identified to be 1.942%. The Risk-Free Rate of Return is another name for the yield of the 10-

year U.S. Treasury bond. We used a ten-year rate to allocate the range of the previous decade

after the economic recession of 2008 and to display the progress in the current ten-year span.

This value is a good benchmark in analysis and comparison of this and other stocks due to the

Risk-Free Rate being a representation of a zero-beta portfolio, which is a portfolio that does not

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Marathon Oil Corporation

take any risk. Ever since interest rates peaked at 3.2% in October of 2018, they have been on a

steady decline, reaching 1.942% as of today (CNBC.com 2019). Interest rates significantly

affects representations of Marathon Oil’s intrinsic value. Even the slightest changes to the

interest rate can significantly alter Marathon’s value.

Market Risk Premium

In order to identify the Market Risk Premium, one must determine the average return of

the S&P 500, the relevant market Marathon Oil is part of. From there, subtract the risk-free rate

to obtain the Market Risk Premium, which is 8.484%. Both the expected S&P 500 and risk-free

return values were located from the Bloomberg Application.

Required Rate of Return (k)

The required rate of return is based off the CAPM equation using a combination of the

current beta, risk free rate, and market risk premium, which are all values found through

Bloomberg. To find the correct value, multiply the market premium by the beta, then add the

risk-free rate. After computing, the required rate of return equates to 13.921%. This amount is

the minimum return an investor would expect to receive from investing in Marathon Oil

Corporation.

Growth Rate Analysis

By diversifying into two companies as of 2011, Marathon Oil and Marathon Petroleum

experienced some difficult bouts along their journey to financial success. Within the realm of

Marathon Oil, they experienced a three-year period in which there were no positive earnings, but

shortly after, operations took a turn for the better. Thankfully, this company has seen consistent

growth from the previous year until this current month in 2019. As of 2015 to 2017, the company

didn’t have a ROE. To adjust for this, we created our own ROE using the price/earnings

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Marathon Oil Corporation

calculation. The majority of our calculations on the DDM approach as well as the Multi-Stage

growth model involves using the previous five years ROE to get the intrinsic value. With these

negative values, the calculated growth rates ended up reflecting negative projected growth.

With a steady growth projection in the following years, Valueline expects the dividends

to increase from 0.2 in 2018 and 2019 to 0.28 in 2020 and 0.4 from 2022-2024. Using the

dividend discount model, there were three growth rates used to calculate the intrinsic value. We

used the historical growth rate, forecasted growth rate and the growth rate calculated by

multiplying the 5-year ROE by the retention rate.

The first model uses the historical growth rate. This is calculated by the historical average

dividend. That is, we assume that dividends will continue to grow at its historical average and

use the historical average as our first future growth rate estimate. To get the historical average

dividend, we calculate the geometric average of dividend growth rates between 2015 and 2018.

This sadly gave a growth rate of negative 38.97%. Using the second day of January for the

following nine years, this dropped the dividend from 0.2 in 2020 to 0.0007 in 2029 to get a

terminal value of 0.0303. The terminal value was calculated by multiplying the 2029 dividend by

one plus the growth rate at maturity, 5.734%, and then dividing it by the required rate of return,

13.921%, minus the growth rate at maturity. The present terminal value was then calculated by

taking the dividend terminal value, 0.0023, and dividing it by one plus the required rate of return,

13.921%, to the power of t, 9.11, which was the time value of January 2nd, 2029. This did not

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fare well in terms of the present value of the final intrinsic value ended up being calculated to

forty-three cents compared to their current stock price of $11.73.

The second model used the forecasted growth rate which took the 12% forecasted growth

from Valueline. Although many models were shown to be much less positive, this approach at

least allowed us to stray away from the negative projections. The calculations presented a more

optimistic approach than the historical data. This is because we used the multiplied the 2020

dividend of 0.2 by one plus the growth rate. The final terminal value of the dividend in 2029 was

7.1624 using the same calculation mentioned previously above. Allocating for the terminal

present value, we still had an outcome of 2.184. Overall the calculation still showed progress

with an intrinsic value of $4.01, which is much more accurate than the intrinsic value calculated

using the historical growth rate.

The final method we employed was the sustainable growth rate. This was found by

multiplying the Return on Equity by the Retention Rate in which gave us the growth rate. The

combined ROE is the average performance of the past five years from 2015-2019 and the

retention rate was calculated using the projected plowback rate of 2022-2024 from Valueline.

The equation led us to a growth rate of -8.59%. With such a negative growth rate, we expected

similar results from the historical growth rate. We acquired a dividend terminal value of 1.1509

and a present terminal value of 0.3509. This followed up with an intrinsic value of $1.24.

Comparing all three methods in obtaining a true intrinsic value, we agreed that out of

these calculations, the forecasted growth model was the most accurate. This is because of the

sustainable growth model and historical growth model using an average of 2015-2019 which

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contained negative earnings, throwing off the calculations although this company has seen

consistent growth in the past two and projected following five years.

Dividend Discount Model

After completing a thorough analysis of the growth rate for Marathon Oil, the intrinsic

value of the company's stock was calculated based on three different growth rate forecasts. The

three forecasts that were used to calculate the separate intrinsic values were the historical average

growth rate of the dividends for the company, the forecasted growth rate based on data pulled

from the Bloomberg model, and the sustainable growth rate that was calculated.

Table 2

The intrinsic values provided by each of the three models is equivalent to the present

value of all future cash flows for a share of Marathon Oil stock. The historical average growth

rate of dividend payouts was calculated using data of the company's dividend payouts from 2015

to 2020, to produce an intrinsic value of $0.43 per share. The historical values used to calculate

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the intrinsic value in this model are skewed due to the dividend that was paid in 2015. This was

the year that the company first went public, so in order to attract new investors they paid a high

dividend, $0.88 per share to be exact. In the following years the dividend remained constant but

was much less than the first year at $0.20. This causes the company to have a historical growth

rate of -38.97%, which causes the intrinsic value to be very low. When trying to troubleshoot this

rather insulting equation, we used the average over 2016 to 2019 in which gave us a zero percent

increase due to the dividends remaining at $0.2 for this four-year period of time. The forecasted

growth rate was calculated using the data that came directly from the Bloomberg terminal and

returned an intrinsic value of $4.01. Much higher since the growth rate used to calculate the

intrinsic value was 12% compared to the previous -38.97%. The sustainable growth rate was

calculated using forecasted values for the return on equity and plowback ratio from the value line

report, returning an intrinsic value of $1.24.

Multi-Stage Model

Under the multi-stage growth model, the projected dividend is used to calculate the

intrinsic value after periods of growth, transition and constant growth. With a recent increase in

dividends and earnings over the past fiscal year, we projected a growth period of nine years in

order to give them a complete decade to improve their stats. Starting in 2020, the EPS is

estimated to be 0.85 with a .3 increase in the year of 2021. This directly reflects varied growth in

the payout ratio from 23.53% to 24.35% in the following year. Data from Valueline shown in

table 1 is implemented into this model. The dividend is then calculated by multiplying the EPS

by the payout rate to get a dividend of 0.2 in 2020 and 0.28 in 2021. Once truly establishing

themselves at the end of the growth period, it was decided upon a seven-year transitional period

in which the company will continue to provide increases in the dividend payout and earnings per

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share but at a more gradual and stable exponential rate. We employed the constant growth rate of

1.55% per year for the following seven years to show a consistent increase in the EPS. This

directly affects the dividend projected in the remainder of the growth years. With consistent

increase in the past two years, we agree with this model. Adjusting for the present value by

dividing the dividend by one plus the required rate of return, 13.921%, to the t-power, we

obtained the present value of each dividend specific to that year. After adjusting to a transitional

growth rate, we used the Bloomberg estimation of the constant growth rate, 5.734%, and

implemented this into our calculation of an increased growth rate of roughly 0.53% every year

for the following eight years. This positively affected the EPS and incrementally raised the

payout rate. The dividend increased from 0.39 to 0.79, nearly doubling the return in just eight

years. The final stage was the beginning of true constant growth in which the dividend amounted

to 0.84. But with adjusted for present value using the equation mentioned above, the dividend

amounted to an average of 0.095 over those eight previous years and a final present value of

0.08. Even with a payout rate of 45% and a projected dividend of 0.84, the present value still

does not boast any relevant gain in enticing investors. After adding all of the values from 2020 to

2038, we still only obtained an intrinsic value of 3.63. Still compared to their stock price of

$11.73, a $3.63 intrinsic value shows that this stock is currently overvalued. Within all these

calculations, we can conclude that investors do not see Marathon Oil to be a profitable company

that would benefit their portfolio.

Table 3

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Sensitivity

The dividend discount model is relatively sensitive to changes in the value of k. One

percentage point decrease in the value of k results in a 13.73% change in the intrinsic values of

Marathon Oil’s stock. This is relevant information to investors because interest rates are steadily

rising on average, which is going to have a relatively significant effect on the intrinsic values

calculated for Marathon Oil’s stock.

Forward PE Ratio

Table 4

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Different models in respect to EPS values and P/E ratios can provide contrasting values

in Marathon Oil’s intrinsic value. The first number, being the forward P/E ratio, is 13.80. The

forward P/E ratio was located from the Bloomberg Application. The second number needed to

obtain the intrinsic value is the forward earnings per share of $13.80 in 2022. This value can be

located via the company’s ValueLine publishing. From there, multiply the forward EPS by the

P/E ratio to obtain a target price per share of $33.81 for January 31st, 2020. We then discount this

value back to current time. The intrinsic value of Marathon Oil Corporation is $22.32.

Relative P/E and Market Regression

Table 5

The relative P/E

model that is shown above is derived from a relative P/E ratio of 0.17 and a benchmark forward

P/E ratio 18.85 that both came directly from Bloomberg. The sum of these two P/E figures gives

a forward P/E ratio of 3.14, which is then multiplied by the forward EPS of 0.85 in 12/31/2019 to

provide an intrinsic value per share of $2.63. Out of the three different models based on the P/E

the relative P/E provides the lowest intrinsic value per share.

Valuation

In order to determine the most accurate intrinsic value of Marathon Oil’s stock, the

dividend growth model was employed. Before articulating the data in a specific manner, the flaw

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in our equations is that Marathon Oil possessed a negative historical growth rate as well as a

negative growth rate by multiplying beta by the previous five years return on equity. Firstly, the

year of 2015 boasted a dividend yield of 0.88 followed by a yield of 0.2 for the following years

of 2016 to 2018. This led to the historical average dividend yield to be roughly negative thirty-

nine percent. Secondly, the five-year average return on equity was extremely negative from 2015

to 2017 and only raised to 5.3% and 5.5% in 2018 and 2019 respectively. This leads to the

average ROE in a five-year span to be a dilapidated -10.27%.

With the previous findings mentioned, the rest of the intrinsic value calculations were

either skewed to value Marathon Oil at a much higher or an unreasonably low value. One

example of this is documented in Table 4 with an intrinsic value of $22.44 from the forecasted

forward p/e method. Another example is listed in Table 6 with an intrinsic value of $34.44 using

the market regression method. Although these two models would assume that the current price of

Marathon Oil is extremely undervalued; as an investor: this would not be a correct assumption in

reference to actually allocating funds into MRO’s stock. From these assumptions, there is no way

that this stock can be valued so highly without any future breakthroughs that would push this

company up at least one hundred rankings in the S&P 500.

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Marathon Oil Corporation

Other methods that seem way too low were shunned away from our valuation such as

Table 5 that used the relative P/E ratio method in the current year show an extremely low value

of only $2.63. Although it is not believed that Marathon Oil is a great company to invest in, these

numbers show such a low valuation that it is irrelevant in terms of actually justifying an intrinsic

value of such.

In reference to the dividend growth model seem in Table 2, these values are still bearish

compared to the current stock value. Luckily, Valueline predicted a forecasted growth rate of

12% as the predicted dividend payout is getting increasingly higher over the next year and

combination of the following three years. Although the dividend was predicted to be 0.28 in

2020 and 0.4 from 2022-2024, a current dividend of 0.2 was used to get continue to accuracy of

these intrinsic value predictions.

Using the historical growth rate, the dividend dropped from a modest 0.2 to nearly

nothing (0.002) in the growth years of 2020 to 2029. Using the required rate of return and the

growth rate at maturity, the terminal value of dividends was only 0.03 and the present value was

0.009. This led to the intrinsic value of forty-four cents, which is way too low to truly assess this

company.

The forecasted growth rate of twelve percent leads us to the only value that seems

relatively accurate towards the current stock price. In this calculation, the dividend continued to

rise from 0.2 to 0.55 in 2020 to 2029. The overall terminal value of dividends is 7.16 and present

value equals only 2.2. The intrinsic value of $4.03 seems to be the closest to the current value of

$12.59 as of December 10, 2019.

Lastly, the growth rate given by the five-year return on equity multiplied by the predicted

plowback ratio of 2022-2024 still formulated an outcome of a negative number of -8.59%. The

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return on equity is only -10.27% and the plowback ratio is 83.67%. These dividends dropped

from 0.2 to 0.09 from 2020 to 2029. The terminal value of dividends equaled out to be 1.15 with

a present value of 0.35, completely lowballing an intrinsic value $1.25.

There are many reasons for the lack of earnings in the year of 2015. In the United States,

this was an industry-wide deficit in which the average price of oil went from $115 a barrel in

2014 to $35 a barrel in 2015. According to Investopedia, “the strong U.S. dollar was the main

driver for the price decline of crude oil in 2015. In fact, the dollar was at a 12-year high against

the euro, leading to appreciation in the U.S. dollar index and a reduction in oil prices. That put

the market under a lot of pressure because commodity prices are usually in dollars and fall when

the U.S. dollar is strong.” (Tarver, 2019). With such high increases in the value of the dollar,

especially compared to the Euro, it was extremely difficult for companies to keep up with the

increased value, likely causing the dip in oil prices and detrimental decrease in revenue.

Additional to this, the OPEC remained consistent on resisting the increase of oil prices.

This organization is one that determines the operations of petroleum exporting countries and

instead of matching the market price, they continued production and further decreased the value

of oil. Of course, with the innovation of fuel-efficient hybrid vehicles like Toyota Prius and

Chevy Spark plus adding electric engines to assist and decrease the amount of fuel combustion:

demand continued to decrease. Fully electric vehicles like Tesla’s and the BMW I8 drew the

public to their sporty sleek models while also developing public praise towards the electric

vehicle industry. The continuous production without the actual sale of oil, gas and petroleum led

to inventory turnover rates decreasing and holding costs at an all time high. “Crude futures

declined in late-September 2015 when it became clear that oil stockpiles were growing amid

increased production. U.S. commercial crude oil inventories rose by 4.5 million barrels from the

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previous week. At almost 500 million barrels, U.S. crude oil inventories were at their highest

level in at least the last 80 years. Total oil production by the end of 2015 was expected to

increase to more than 9.35 million barrels per day—higher than previous forecasts of 9.3 million

barrels per day.” (Tarver, 2019). With only so much demand, there was no way that these oil

companies could sell their inventory for a competitive price and with respectable profits.

Although the US economy continuing to rise, China and other countries in Europe seemed to be

faltering. “China's devaluation of its own currency suggested that its economy may be worse off

than expected. With China being the world's largest oil importer, that was a huge hit to global

demand and caused a negative reaction in crude oil.” (Tarver, 2019). As American oil and gas

companies rely on these countries to import resources, the decrease in the value of their currency

and lack of economic up rise strongly affects not only the importing countries, but the ones

exporting them. Finally, the Iran Nuclear Deal led to removing their ability to produce nuclear

weapons with the trade-off that they were allowed to export more oil. With such an increase in

oil reserves and a lack of demand, this further worsened the ability for companies including

Marathon to push through this economic challenge.

With values on the dividend growth model ranging from $0.44 to $4.03, we concluded

that Marathon Oil is currently overvalued. This model is contingent on relying on Bloomberg to

provide the current amount of growth years of nine, which seems to be an accurate representation

as they are just starting to earn profits and turn their business around for the better. With all of

these models mentioned, it is still concluded that holders of Marathon Oil should sell their stock

to prevent loss of current funds. Over the past year, MRO reached a current high of $17.76 on

April 8th, in which followed by a considerable dip down to $12.98 on June 10th. Even so, these

values are still higher than what Marathon Oil is currently trading at in which dips in the past six

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months have let it get to an even lower value of $11.09 on October 9th. With such volatility and

variation in the stock price, it is still not predicted that it will ever reach a value of $0.44 or even

$4.03 but it is also not predicted that it will reach a value near the highest estimation of $33.44.

This company has averaged a range of $11.03 to $18.93 in the past fifty-two weeks but is not

predicted to raise to a point where a sound investment should take place.

Major Competitor: Devon Energy Corporation

Devon Energy Corporation is a company that extracts petroleum, natural gas, and other

fossil fuels. Just like Marathon Oil Corporation, Devon has operations located throughout

various parts of the country. Devon Energy Corporation’s revenue in 2018 totaled 10.7 billion,

which was a 20.9 percent increase as compared to 2017’s. Marathon’s revenue, on the other

hand, had increased to 5.9 billion, which equates to a 33.86% increase. However, the reason that

Devon Energy Corporation’s percent increase was smaller comparatively to Marathon’s was due

to Devon being in the maturity growth stage, as compared to Marathon Oil, which is in the initial

growth stage, where growth rates tend to be more volatile. Obviously, these two companies have

different locations where they extract their natural gases and oil, however the one major

difference one could see when comparing Devon Energy to Marathon Oil are the products they

produce. While both produce petroleum and natural gas, Devon also produces natural gas liquids,

which is a special kind of natural gas that comes from either crude oil wells, dry gas wells, or

condensate wells.

Data Comparison: Market Cap & Price-Earnings Ratio

As compared with Marathon Oil’s market cap of 10 Billion, Devon Energy Corporation

has a slightly smaller market cap value of 8.9 Billion. Moving on, Devon’s P/E Ratio is 9.45,

which is found by dividing the current price by the EPS of the future year. In comparison,

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Marathon Oil’s P/E Ratio is 13.80. These ratios both are somewhat similar in the regard that they

are lower than the industry average, however, Marathon’s is noticeably closer.

P/E Model Comparison

When looking at the forward P/E model in the first table, the intrinsic value for Devon

Energy is 15.38. To calculate this number, one must identify the P/E ratio, which is the current

price divided by the forward EPS. The intrinsic value of 15.38 for Devon Energy using the P/E

model is considerably less than actual price of 23.48. This indicates a 34.5% downside, which

when compared to Marathon Oil, offers a 75.4% upside. Due to that, one could assume that

Devon Energy is overvalued using the forward P/E model. The Relative P/E method for Devon

Energy estimates an intrinsic value of 36.15. This value is a lot higher compared to the current

price and represents a 53.9% upside. The main difference in Relative P/E as opposed to the

Forward P/E model is that it includes the relative average, which compares Devon Energy to its

S&P 500 counterpart.

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Marathon Oil Corporation

The DDM for Devon Energy seems to produce intrinsic values that are on the complete

opposite side of the spectrum in comparison to the P/E Model. The first value, which is $ .93, is

derived from the historical growth rate. This, however, is not an accurate representation of the

intrinsic value. Just like Marathon Oil’s, Devon’s 2015’s dividend was significantly higher

compared to every other year moving forward. This was due to the 2014-2015 E&P crash where

the oil price dropped from $115 in June 2014 to only $35 in February 2016 (Rogoff 2016). The

oil market is very volatile and obviously has rebounded since the crash. Due to this however, the

historical growth rate would equal a negative number, which in turn would significantly alter the

intrinsic value based off the historical growth rate. In order to analyze this further, we changed

the dividend to a lower value than the current dividend. With the Historical Growth Rate now

being a positive number, the intrinsic value is now in line with the forecasted value as well as the

growth rate at maturity. All of these values are lower than the actual price, so according to the

DDM Model, Devon Energy seems to be overvalued and would not be a good choice to apply to

someone’s portfolio.

Recommendation

The calculations we produced led us to believe that Marathon Oil is highly overvalued.

The dividend discount model and multi-stage model provide the most accurate estimation of the

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Marathon Oil Corporation

intrinsic value. The historical growth rate and calculated growth rate method of the dividend

discount model should be excluded from this because they provide a negative growth rate for the

company since they paid out a dividend in 2015 of $.88, which they then dropped significantly to

$.20 each year after as previously discussed. Even when 2015 is removed from the calculations

they show a growth rate of 0%, which does not provide the best estimation for the intrinsic value.

Despite these factors, the dividend discount model using the forecasted growth rate of 12%

provides a more accurate intrinsic value of $4.01 while the multi-stage model produces an

intrinsic value of $3.63. Both values are far less than the current stock price of $11.73, which is

why we concluded that Marathon Oil is overvalued, and investors will not see it as a beneficial

addition to their portfolio.

Contrary to what the models we created show, outside sources say that Marathon Oil’s

stock is actually undervalued. According to Zack’s Investment Research website and the

valuation metrics that they practice, they concluded that Marathon Oil may in fact be

undervalued, which contradicts our data. According to their research the financial health and

growth prospects of the company demonstrate a potential for it to perform in line with the current

market. Marathon oil has implemented a strategy to reposition their upstream asset portfolio, by

building an integrated natural gas business through investments in liquefied natural gas, in an

effort to strengthen their balance sheet (Zacks.com 2019). If these efforts prove to be successful,

our valuation and outlook of Marathon oil will likely have to be reevaluated.

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Rogoff, K., Cabot, T. D., Professor of Economics, & Harvard University. (n.d.). What's behind the drop
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