Sunday, May 15, 2022

Marathon Oil Reports First Quarter 2022 Results

We mentioned Marathon Oil Corporation (MRO) in a Links post in March:

Marathon Oil caught the market a bit off guard today when it disclosed that it had bought back $724mm of its stock in 4Q21. Halfway through February, it further disclosed that the buyback is still running hot with ~$375mm repurchased year to date. Measured as a % of market cap, MRO’s repurchase activity is heads above the rest of energy, beating CNX who took advantage of 4Q price strength to step up its buybacks, and MPC who is in the midst of a laborious return of capital after selling its Speedway business for $21B last year. Even on an absolute basis, MRO’s 4Q activity stands out, falling behind only COP (7x market cap) and MPC (3x market cap, distributing asset sale proceeds). We learned a while ago to follow the capital, not the narrative.

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. They reported earnings for Q1 last week - highlights:

  • Marathon Oil Corporation (NYSE:MRO) reported first quarter 2022 net income of $1,304 million, or $1.78 per diluted share, which includes the impact of certain items not typically represented in analysts' earnings estimates and that would otherwise affect comparability of results. The adjusted net income was $749 million, or $1.02 per diluted share. Net operating cash flow was $1,067 million, or $1,280 million before changes in working capital.
  • Outstanding first quarter financial delivery highlighted by $940 million of adjusted free cash flow at 27% reinvestment rate. Returned 50% of first quarter cash flow from operations (CFO) to equity investors through $592 million of share repurchases and $52 million base dividend.
  • Expect over $4.5 billion of 2022 adjusted free cash flow at a reinvestment rate of approximately 20% on a $1.3 billion capital budget, assuming $100/bbl WTI and $6/MMBtu Henry Hub. 
  • In the last two quarters, we've returned approximately 60% of our total CFO back to our equity investors, meaningfully exceeding our minimum 40% commitment. We've executed $1.6 billion of share repurchases over the last seven months, driving significant per share growth through an 11% reduction to our outstanding share count, and have announced five consecutive increases to our quarterly base dividend. With over $4.5 billion of adjusted free cash flow generation expected this year, we remain well positioned to continue delivering financial results and return of capital that are compelling not only relative to the best companies in energy, but relative to the best in the S&P 500.
  • The Company continues to expect oil and oil-equivalent production to remain flat with the 2021 averages.

So they 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%.

Some highlights from Q1 conference call:

  • My third key takeaway is that Marathon Oil represents a truly compelling investment opportunity. We've rebased our 2022 financial outlook to pricing more consistent with the current environment $100, WTI and $6 Henry Hub. At these prices, we expect to generate over $4.5 billion of free cash flow this year at a reinvestment rate of just 20%. That translates to a free cash flow yield of about 25% on the current equity value.
  • I have long said that our company and our sector must deliver truly outsized financial outcomes relative to the S&P 500 during periods of constructive pricing to attract increased investor sponsorship. We are successfully delivering on this obligation.
  • As a reminder, our framework calls for delivering a minimum of 40% of cash flow from operations to our equity holders when WTI is at or above $60 per barrel. This represents a return of capital commitment at the top of our E&P peer space and is competitive with any sector in the S&P 500. The overall objectives of our framework are to maintain capital return leadership versus peers and the S&P 500, maximize our equity valuation, and reduce downside equity volatility by providing clear minimum capital return commitments tied to specific commodity price environments.
  • Our return of capital targets are based on our cash flow from operations, not our free cash flow. This is purposeful, intended to make clear that our shareholders get the first call on cash generation.
  • And while our equity value has appreciated since we kicked off our buyback program, our free cash flow yields is actually appreciated even more. We're trading at about a 25% free cash flow yield at $100 oil. Even testing buybacks at our current share price against a longer dated forward curve of $60 to $70 WTI. Our free cash flow yield is in double digit territory. Buybacks remain a very good use of cash, because we believe our equity is fundamentally mispriced. As long as that's the case, we'll continue to aggressively repurchase our own stock, it's the best acquisition we can make.

The latest investor presentation is worth a look.

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