NEW YORK (TheStreet) -- Marathon Oil (MRO) has been having a profitable garage sale for the past three years as it makes room for powerful domestic growth. Since 2011, the Houston energy company has sold over $6 billion worth of assets in order to simplify and concentrate on its core business.
Marathon is employing the time-honored principle of concentrating on what you do best and spending the majority of your time and resources on the most lucrative activities.
Utilizing this approach the company recently sold its operations in Norway for about $2.7 billion in cash. This prized North Sea part of Marathon's production fetched a good price as management waited patiently for oil and gas prices to spike in synch with its increased production.
The proceeds from the Norwegian sale, which is expected to close by the end of 2014, will be mainly spent to beef up onshore domestic energy production. Company officials also suggested the possibility of an additional $1 billion or $2 billion share buyback following the disposal of the North Sea assets.
Marathon's future growth is more attainable on its home turf. With gushers flowing in Texas' Eagle Ford shale, North Dakota's Bakken shale, and Oklahoma's SCOOP and STACK resource basins, the company has the chance to increase production in these locations by 30% during 2014.
By reducing its international operations Marathon has positioned itself to focus its productive efforts where costs are more predictable and operating margins are best. Of the company's nearly $6 billion capital spending budget this year, over 70% is focused on North American exploration and production.
Apparently the value of Marathon's acreage in the Bakken shale, Eagle Ford shale, and Oklahoma Resource Basins is worth a lot more than investors first believed. This may be why the company stated that the "breakeven time" for its North American wells is now less than two years.
Marathon shares are up over 13% based on the Monday close of $40. Analyst Credit Suisse suggested Marathon's North American assets are worth about $35 per share, or around $24 billion. That's 88% of the current price of Marathon's stock.
When the value of its share buyback program and its remaining international assets are factored in, my conclusion is the market will soon understand that shares of MRO are still undervalued. This is colorfully implied in the following five-year price chart that includes both its operating and profit margins.
MRO data by YCharts
With its quarterly profit margin approaching 33% and the operating margin above 34%, the investment community should soon understand that shares of Marathon Oil have exceptional upside potential. This is partly why Barclay's raised its 12-month price target to $47 on June 19.
The price increase reflects the sale of Marathon's Norway business, according to analyst Thomas R. Driscoll. "The sale will likely add several percentage points to MRO's long-term growth prospects. We forecast long-term production growth rates of 8%-10%, in line with MRO's guidance."
The company may increase its dividend when it reports earnings the first week in August. If that happens, Marathon Oil shares should pop.
For now, consider accumulating the stock when shares dip below $39, bringing the dividend yield closer to 2%.
At the time of publication the author had no positions in any company mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates MARATHON OIL CORP as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:
"We rate MARATHON OIL CORP (MRO) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, attractive valuation levels, expanding profit margins, largely solid financial position with reasonable debt levels by most measures and increase in stock price during the past year. We feel these strengths outweigh the fact that the company shows weak operating cash flow."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income increased by 200.0% when compared to the same quarter one year prior, rising from $383.00 million to $1,149.00 million.
- The gross profit margin for MARATHON OIL CORP is rather high; currently it is at 61.01%. Regardless of MRO's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, MRO's net profit margin of 34.09% significantly outperformed against the industry.
- The current debt-to-equity ratio, 0.33, is low and is below the industry average, implying that there has been successful management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.97 is somewhat weak and could be cause for future problems.
- Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
- You can view the full analysis from the report here: MRO Ratings Report