Shares of Marathon Oil (MRO 4.88%) got pummeled in June, falling 9.5% for the month, due to a combination of lower oil prices and a slew of analyst downgrades.
Crude prices continued their downward slide through most of June, with the price of U.S. oil benchmark WTI ending the month down 4.7% and closing around $46 per barrel. That decline would have been even worse if it hadn't been for oil's 7% rally to end the month -- notching its longest winning streak in 10 months -- due to some positive data points, including the first drop in the oil rig count in 23 weeks.
That said, crude's last-ditch effort to salvage the month of June didn't provide much support for Marathon Oil's stock. That's because several analysts weighed in toward the end of the month with downgrades. Leading the way was Seaport Global, which threw in the towel on the oil patch, downgrading more than 50 energy-related stocks, including Marathon Oil. Driving that rash of downgrades was Seaport's decision to ax its oil price forecast. Seaport now sees the oil market growing "significantly oversupplied in 2018" due to surging shale output, leading it to slash its oil price forecast from $55 a barrel to $35 for the first half of next year.
Morgan Stanley also downgraded Marathon Oil, cutting its rating from overweight to equal weight and dropping its price target from $17 to $14. The bank, likewise, cut its oil forecast, which it now sees staying in the range of $40 to $45 a barrel.
Those oil price forecasts are not what Marathon Oil had anticipated when it released its long-term growth forecast earlier this year. At the time, the company was expecting that oil would average around $55 per barrel over the next few years, which would give it the cash flow to fuel 10% to 12% compound annual production growth through 2021. That oil price was in line with industry expectations and matched the level that peers such as Pioneer Natural Resources (PXD 1.65%) and Encana (OVV 4.69%) used in their growth projections. However, with oil price expectations coming down due to surging shale production, it's becoming increasingly unlikely that Marathon Oil, as well as fellow drillers Pioneer Natural Resources and Encana, will grow as fast as anticipated in future years.
Marathon Oil, like most of its shale drilling peers, had planned to deliver significant production growth in 2017 and beyond, which it could finance with internally generated cash flow as long as oil averaged around $55 per barrel. However, after falling again in June, and closing nearly $10 a barrel below that level, it's becoming less likely that crude will cooperate. Consequently, analysts are adjusting their expectations to this view, which is leading investors to revalue Marathon's stock to reflect a lower growth rate.