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Robinhood's Most Popular Oil Stock Sees a Gusher of Cash Flow Ahead

By Matthew DiLallo – Aug 6, 2020 at 3:25PM

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Marathon Oil has lowered its oil price breakeven level into the $30s, positioning it to start producing free cash in the coming quarters.

Marathon Oil (MRO 10.59%) is currently the most widely held oil stock on popular trading app Robinhood. More than 190,000 traders own shares, putting it ahead of well-known peers like energy behemoth ExxonMobil. Fueling the company's popularity among the service's traders are its low-priced stock -- shares currently fetch less than $6 apiece -- and its upside potential if crude prices head higher. 

The company highlighted that potential in its second-quarter earnings report Wednesday, where it detailed its current cash flow breakeven levels for the balance of this year and 2021. Those numbers are well below where oil is trading now, which suggests Marathon is in position to produce a gusher of cash in the coming year.

An oil pump with the sun bursting behind it.

Image source: Getty Images.

Drilling down into the report

There's no way to sugar coat things. Marathon's second-quarter numbers weren't pretty. The company posted an adjusted loss of $477 million as its production declined by 5% year over year. It only generated $9 million in net cash from operations, which didn't come close to covering the $137 million it spent on capital projects. 

The culprit, of course, was lower oil prices -- crude crashed during the first quarter, bottomed out in late April, and remained low despite a rebound through the rest of the second quarter. Overall, Marathon realized an average of just $21.65 per barrel for its oil in the U.S., down 51% from the first quarter and 63% from the prior-year period. That forced the company to shut-in some of its wells during Q2 because it was cheaper to turn off the pumps than to have them continue producing.

However, the company made several other moves during the period that put it in a better position for the future. These included suspending its dividend, reducing capital expenses, and becoming even more efficient. The company also lowered its operating expenses, which pushed its U.S. unit production costs down to $4.09 per barrel of oil equivalent. That's its lowest level for that metric since the company spun off its refining and midstream assets in 2011. This all significantly reduced Marathon's cost structure, putting it in a better position to operate in a low-oil-price environment.  

A look at what's ahead for Marathon Oil

Marathon currently estimates that it only needs the price of U.S. benchmark West Texas Intermediate (WTI) crude to be in the low $30s to support its current operations during the second half of this year. With WTI recently around $42 a barrel, Marathon is on track to generate free cash flow in the back half of this year. Meanwhile, the company believes it can produce enough cash at $35 a barrel in 2021 to maintain its year-end 2020 production rate throughout next year. While no one knows where prices will be next year, the oil futures market currently forecasts a $44 per barrel price for WTI next May. If that turns out to be accurate, Marathon should generate lots of free cash in the coming months. 

Marathon is already well-positioned when it comes to cash on hand, with the tally on its balance sheet rising to $611 million as of early July after it received a tax refund. With its business on track to produce free cash over the next few quarters at current oil prices, that number could keep rising.

Marathon has lots of options when it comes to what to do with these funds. It could invest in expanding its operations by drilling more wells or acquiring producing wells and drillable land. It could also pay down debt -- it had $5.5 billion outstanding at the end of June -- though none of it matures until 2022. Finally, it could start returning cash to investors again by reinstating the dividend and restarting its share repurchase program. With its stock price down by about 58% year to date, a buyback could retire a significant number of shares, which could boost the price. 

Loads of upside potential if oil prices cooperate

Marathon Oil spent much of the second quarter resetting its business to run on much lower oil prices. Because of that, it can generate free cash during the second half of 2020 if oil prices stay above the low $30s. That puts it on track to cash in, since WTI crude is currently in the low $40s. That gusher of cash has the potential to fuel a rally in the share price, especially if Marathon uses some of this money to buy back its beaten-down stock.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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