QE3 : A Turnaround for Oil
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Either I am just obsessed with oil exploration and production companies, or they have a really bright future ahead. Crude has risen nearly 25% from the lows it created earlier this year. The oil exploration companies on the back of this surge can run more profitable operations. In my opinion, crude could rise further in the coming future, which would ensure a good ride for oil exploration companies like Marathon Oil (NYSE: MRO), for at least the next couple of years.
QE3 has barely come out in action, and bankers are already talking of a fourth round of quantitative easing. In my opinion QE3 would be a big positive for oil companies, as the Fed has announced that it would be printing new currency notes in order to buy $40 billion worth of bonds. The Federal Reserve Bank is looking to inject as much as half a trillion dollars in the market over the period of 12 months.
These injections of liquidity into a market, in a low interest rate environment, are expected to increase infrastructural spending in the country. Additionally the liquidity would also trickle down to the people of the country in the form of added disposable income. With the increase in both personal and industrial spending it’s obvious that crude will surge and this is where oil companies are expected to profit.
Also, increased liquidity would result higher inflation levels. The Keynesian models suggest that any short term spike in inflation is expected to increase the employment rates. More people will have, more disposable income to spend, which would be the growth driver for crude at least in the US.
Additionally the stimulus packages around the globe are being well received by the markets. Also the looming problems with Iran's oil being boycotted, is creating a shortage of oil supply globally. It is due to these reasons that I'm bullish on crude.
Taking a look at Marathon Oil, the company with a market cap in excess of $21 billion, is one of the oldest players in the oil exploration business. The company is known for its conservative approach, for having low debt levels on its books. Unlike the industry majors, the debt/equity ratio stands at only 0.3.
An example of its conservative approach was its sale of non-core oil assets which helped the company raise $3.5 billion. The company is planning to sell more of its noncore oil assets, in order to raise up to $3 billion by the end of 2012. Since the company already has low levels of debt, these funds could be used for expansion and acquisition purposes.
The company shares its market space with Apache Corp (NYSE: APA) and Anadarko Petroleum (NYSE: APC). Taking a look at the comparative stock performance of the three companies, Marathon Oil leads the race by outperforming its peers by a significant margin, over a period of one year.
|
Company |
Forward P/E |
Net Profit Margin |
Debt/Equity |
P/S |
|
Marathon Petroleum |
8.12 |
11.43% |
0.3 |
1.3 |
|
Anadarko Petroleum |
16.5 |
-9.15% |
0.73 |
2.56 |
|
Apache Corp |
9.15 |
19.15% |
0.43 |
1.98 |
On taking a look at the financial metrics, Marathon Oil has the second best net profit margin, but is available at the cheapest forward P/E multiples. Additionally the debt/equity is the lowest coupled with again the lowest P/S ratio.
The stock performance and metrics suggest that Marathon Oil should be our pick and rightly so. With low debt compared to equity on its books, and with added cash reserves in hand due to the sale of its assets, the company can involve in strategic acquisitions and tactical expansions. To top it all, Marathon Oil yields a decent 2.27% and has outperformed its peers in terms of stock returns. It is due to these mentioned compelling reasons we think that the company would be the best investment option to play increasing oil prices.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Apache. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
