Goldman Sachs Upgrades Marathon Oil, Sees It Positioned for Strong Free Cash Flow Growth and Returns to Shareholders

Goldman Sachs analyst Neil Mehta upgraded Marathon Oil Corp MRO from Sell to Neutral and a $25 price target.

Following the strong inflection in Equatorial Guinea (E.G.) cash flows in FY22 due to higher natural gas prices, MRO expects slight moderation in 2023, E.G., income driven by lower gas prices — for FY23, management has guided for $200 million - $250 million of Equatorial Guinea income. 

However, heading into 2024, the analyst sees the potential for upside to cash flows from Equatorial Guinea through re-contracting in 2024 at the Alba field and tariff uplift from higher TTF pricing from the third-party Alen field (operated by CVX). 

Management has also highlighted its plan to develop a regional gas Mega Hub.

MRO’s U.S. onshore portfolio is weighted towards the Eagle Ford and Bakken, with upside potential from the Delaware and Oklahoma assets. 

The company plans to keep its U.S. onshore production flat in the Eagle Ford and the Bakken, where MRO’s healthy productivity is above peers due to less differentiated inventory depth. 

Given the maturity of the Eagle Ford and the Bakken shale plays, investor focus has been on the running room of top-quality wells to get comfortable around the duration of FCF. 

While the Ensign acquisition in the Eagle Ford has improved the resource life of the company, on resource life, the analyst believes MRO remains less differentiated vs. peers. In the Permian, the company has shown significant improvement in well productivity recently, and management has indicated the potential for two decades of undeveloped inventory in the play.

Strong commodity prices in the past year drove robust FCF growth and improved leverage metrics from debt reduction, which supported attractive capital returns. 

With improving productivity from combined Eagle Ford assets and expected growth from the Bakken, Mehta expects MRO to continue generating strong FCF in 2023, allocating it towards debt reduction and shareholder returns. 

Heading into 2024E, the analyst expects an uplift to cash flows driven by re-contracting in Equatorial Guinea from Henry Hub linked pricing to international linked pricing. 

The analyst expects MRO to generate 14%/19% FCF yield in 2023/2024 vs. oil/diversified peers at ~8%/9%. With management’s commitment to its capital returns framework, which calls for a 40%+ return of CFO back to shareholders, Mehta sees MRO well positioned to cumulatively return ~60% of its current market cap to shareholders via dividends and share repurchases from 2023-2026.

Mehta sees MRO well positioned to generate strong FCF over the next 3-4 years, supported by his above consensus commodity price views, stable production profile, and uplift from Equatorial Guinea driven by exposure to international gas pricing (especially in 2024/25). 

The analyst sees MRO trading at an average FCF yield of ~16% (2023E-2026E) vs. oil/diversified peers at ~11%.

Price Action: MRO shares traded higher by 1.73% at $24.75 on the last check Wednesday.