Energy Business

Despite Dilutive Offering, Could Marathon Shares Really Still Double?


Marathon Oil Corp. (NYSE: MRO) has placed old investors and newer investors in an interesting spot. By announcing the pricing of an upsized stock offering, the company is raising more cash than many might have expected. Is it possible that Marathon could have become the cheapest stock in the energy patch today?

A fresh research report from Credit Suisse is effectively signaling that Marathon shares could still double. The first thing to consider with this maintained Outperform rating is that Credit Suisse did trim the price target to $16 from $18 in this call. That still implies just over 100% upside from the $7.96 prior close.

Marathon recently priced the sale of 145 million shares of common stock at a price of $7.65 per share. All in all, this came to about $1.11 billion in fresh capital, versus a $5.6 billion market cap — and then consider that Marathon shares were down a sharp 75% from their 52-week high.

Marathon Oil also granted the underwriters a 30-day option to purchase up to 21,750,000 additional shares of its common stock. If the deal priced at $7.65 and shares are now over $8.00, there is a better than great chance that the overallotment option has been exercised.

Marathon Oil’s use of proceeds is to bolster the company’s balance sheet. The company also said that it will use the funds for general corporate purposes, including funding a portion of its capital program.

When you see an analyst give a solid target right into a secondary offering, the first thing that might be considered is whether that analyst is in the underwriting syndicate. It turns out that Morgan Stanley was the book-running manager for the offering, and no other firms were listed as selling agents or co-managers in the syndicate.

Again, Credit Suisse did lower Marathon’s target price to $16. That is still an implied 100% upside from the $7.96 close. The firm’s Edward Westlake said:

While Marathon’s bottom of cycle 2016 leverage metrics suggested some more assertive balance sheet protection was needed, Marathon also had decent liquidity. Well, now Marathon’s liquidity is even more decent at $5-plus billion. History will tell whether it would have been more or less dilutive for management to roll the dice and wait for oil to rebound against a backdrop of rising medium term recession risks. The rest of the Marathon game plan should remain unchanged. Marathon has assets which it could sell (e.g. $750 million to $1 billion of midstream and likely gassier producing assets). Marathon has assets which could prove quite valuable over time (e.g. the oil sands, which would be worth selling once oil recovers given the improvement in operational performance). Marathon has a deep inventory of shale inventory which is not reflected in the share price.

Bank of America Merrill Lynch recently maintained its Neutral rating, but that firm’s call lowered the price objective to $19 from $23. The firm’s investment rationale said:

We view Marathon as a levered option to a recovery on oil prices. However, at the current oil price futures curve, Marathon has relatively less upside. Marathon pays a larger dividend relative to peers, which we believe is a threat to the balance sheet in a weaker commodity price environment.

It was just in mid-February that Goldman Sachs named Marathon a long-term survivor even at $35 oil.

Marathon hit a 52-week low of $6.52 on February 19, 2016. Its 52-week high is $31.53. The last time Marathon shares were under $10 before this last cycle was more than 10 years ago, on a split-adjusted basis.

Marathon shares were last seen up 3% at $8.20 on Wednesday, on more than 13 million shares in the first 40 minutes alone.

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