Expect Strong Upside Potential From This Stock In 2013

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Marathon Oil (NYSE: MRO) is in a good position right now and will only get better as we enter and go through 2013. It is a well-oiled machine that has the lowest production expenses amongst its peers. The company also has a good balance between its exploration and production in the U.S. and with the rest of the world.

Currently the company is trading around $30 per share. While its 52 week high was just over $35 per share, it was trading above $52 per share in the summer of 2011. Its P/E ratio is on the high end of its peers - almost 12 for Marathon while Chevron (CVX) trades around 9BP (NYSE: BP) around 7, and Exxon Mobil (NYSE: XOM) over 9. But the company is seeing increased revenue and profits despite the decline in oil prices. For the third quarter of 2012, the company saw net income of $454 million, an increase of $38 million versus the third quarter of 2011. Recently Marathon Oil and Marathon Petroleum (NYSE: MPC) spun off from one another. Marathon Petroleum is devoted to oil refining, allowing Marathon Oil to focus on exploration and production. Therefore, it took a significant part of the parent company's profits. But profits are still healthy at $.064 per share.

Another thing to like about this company is that the dividends it issued for the third quarter of 2012 were $0.17 per quarter, annualized $0.68-2.20% of the stock price. While this dividend is lower than the dividend paid out by some its peers, there is good reason for that. BP, Total (TOT), and ConocoPhillips (COP) all proffered dividends with yields of 5% or more, while Exxon Mobil was more in line with Marathon offering a 2.5% yield. Marathon is expanding territory rapidly and needs as much cash as it can. While the dividend may suffer to some extent, growth will more than make up for it. Its peers may proclaim their dividend yield as a big advantage, but Marathon's aggressive expansion will show that sitting on your laurels is not going to result in tremendous growth. I will take lower dividend yields and aggressive expansion over higher yields alone any day.

Marathon also maintains good profit margins. Another thing to like about the firm is the good profit margins. They are a very reasonable 15.97%. The revenue is $14.83 billion. It does have $655 million in cash on hand, as well as $4.76 billion in debt. The firm's balance sheet is also quite good, and shows that there is value in the stock price.

Marathon Oil recently announced it was buying the private energy company, Paloma Partners, for $750 million in cash. Paloma is based out of Houston. This firm owns roughly 17,000 acres of oil fields, and it produces roughly 7,000 barrels of oil daily. Marathon will see more oil and gas drilling due to this deal. The land Paloma owns is estimated to have some 10 billion barrels of oil and gas reserves. This will prove to be a very nice deal and increase Marathon's profits into the future.

Marathon Oil is focusing on boosting its production in the U.S. This is evidenced by the acquisition of Paloma, and also the spin off with Marathon Petroleum. Petroleum is devoted to the refining side of the business, which enables the bigger Marathon Oil company to focus more specifically on the exploring and production side. Marathon Oil's focus on these two areas is something that a lot of companies in the industry are doing, and it is following the trend. It will increase efficiency in operations. The split has taken its toll on Marathon's stock price, but it has also created value for the investor who investigates properly.

Not only is there value in the stock resulting from the recent spin off, but Marathon is aggressively increasing production which will only help boost margins. The company is increasing its production at its Texas Eagle Ford site by 15,000 barrels of oil per day. In North Dakota's Bakken formation it will increase production by 3,000 barrels a day, and it is increasing natural gas production in Oklahoma as gas prices improve.

There are a lot of things to like about Marathon Oil. It has a good balance between its U.S. and international production holdings. That is a strong positive in the industry since it is rarely seen. It also has the lowest cost per barrel of production among any of its competitors, which gives it a very big leg up and is proof that it manages its expenses very well.

The firm is in good shape financially, and its future outlook is positive. It has a good reserve base, project pipeline and a strong balance sheet. It is showing good revenue growth and great profit margins. Increased U.S. production will continue to add revenue and help profit margins. Most importantly, there is a great deal of value to be found in this stock after its spin off this summer. I believe its good management and aggressive expansion will result in the stock returning to the high points that it saw in the summer of 2011 - somewhere around $53 per share. If oil prices stabilize and the global economy grows at a somewhat faster pace, than I believe the stock will rise even higher. Investors should be very bullish on Marathon and expect to see great things from it in 2013.

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