This Stock Seems Well Poised For A Rally

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The fiscal cliff has been avoided (if not permanently), and oil is again above the $110 mark. Moreover, according to recent economic data, China’s crude imports have risen by 6.8% in 2012, and in November 2012 Indian Crude imports surged by 13%. The trend is expected to continue, and the rising crude prices present a bullish picture for oil companies.

Bullish Prospects of Marathon Oil

The management of Marathon Oil (NYSE: MRO) expects its Q4 oil production to be around 415,000 barrels per day, which would be 4.5% higher on a sequential basis. The management also announced that it would be ramping up its oil production from the Bakken region and Eagle Ford by 10% and 20%, respectively. Moreover, the recoverable resources from its Bakken assets are nearly double what was earlier estimated.

Since the Bakken and Eagle Ford regions consist of hydrocarbon rich resources, oil produced from the region generally carries higher margins. This move highlights management’s focus of high margin oil production, while it would be slowing down its production of lower margin oil. Earlier this year Marathon Oil entered a $750 million deal to acquire more acreage in the Eagle Ford region. This would further boost the company’s hydrocarbon reserves, and it can ramp up its production without straining its other hydrocarbon assets.

In the recent quarter, the company reported revenues of $4.16 billion, beating the Street’s estimated $3.5 billion. Additionally, its net income stood at $450 million, which was up by 9% on a sequential basis. But that’s not all--its debt/equity stands at a modest 36%, with a net debt of $1.7 billion. The company ended the quarter with $671 million in cash, and its debt seems modest since its FY11 debt/capital ratio equates to 22%. Also, the company enjoys a net profit margin of 11.45%, which is higher than most of its peers, and altogether its balance sheet looks solid.

Avoid Anadarko Petroleum and Apache Corporation

Although shares of Apache Corporation (NYSE: APA) trade at reasonable earnings multiples, its PEG ratio of 2x suggests that the company is overvalued with respect to its growth prospects. Moreover, its P/C and P/FCF equate to ridiculously high multiples of 103x and 539x, respectively. Had there been some positive news for the company these metrics could have been ignored, but as of now there is absolutely no catalyst that justifies initiating long positions in Apache at such high valuations.

Shifting focus to Anadarko Petroleum (NYSE: APC), its shares appear to be overvalued with a forward P/E of 19.33x and a PEG of 4.57x.  Moreover its debt/equity ratio of 69% and debt/capital ratio of 36% are pretty high compared to its counterparts. Analysts expect its annual EPS growth to average around a modest 4.73% for the next 5 years. In addition the company reported disappointing numbers, with revenues declining by 3.4% YoY. Even though its production rose on a YoY basis, its net profit margin is the lowest amongst its peers, which is definitely not a good sign.

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Brent Crude Oil Spot Price data by YCharts


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Brent Crude Oil Spot Price data by YCharts

Over the last 5 years, oil prices have declined from $140 in 2008 to $110 levels, and it’s understandable that the margins of oil companies have remained under pressure. But the net income and free cash flows of Apache Corporation have dipped way more than the respective metrics of Marathon Oil. Over the last year, shares of Anadarko Petroleum have lost 4.5%, whereas Marathon Oil's market cap has appreciated by 4.12%.

A Short Conclusion

I believe that Marathon Oil offers more upside than Anadarko Petroleum.  The $25 billion lawsuit against Anadarko, which was originally filed by Tronox, and later taken up by EPA, had been causing a drag on its share price.  Its dividend yield of 0.46% is also unimpressive, which altogether is not as lucrative as Marathon Oil.

Marathon Oil sports a solid balance sheet and is ramping up its production, which would definitely power up its stock. Shares of Marathon Oil trade at a forward P/E of 9.95x, indicating that its shares are still undervalued, and analysts expect its EPS growth next year to be around 24.23%. Marathon Oil undoubtedly gets a Foolish Buy rating.

PiyushArora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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