Marathon Oil (NYSE: MRO) is a prime example of an oil play that investors shouldn’t be considering.especially since MRO stock is worth just about a third of what it was in January.
Volatility has become the new normal in the US stock market, as the novel coronavirus continues to hang over global economic growth like a storm cloud. Many investors have turned to the energy sector to look for value as tech stocks’ valuations have skyrocketed— but beaten-down oil stocks are depressed for a reason.
This year a handful of bankruptcy-bound stocks have made their way higher as speculative investors bump their share prices higher. MRO stock is one of these risky bets that Robinhood investors have been loving in recent weeks.
Part of the reason for the interest in Marathon is likely investors’ search for pockets of value in the current market, and the energy sector certainly qualifies.
But importantly, a big part of the reason for MRO stock’s sudden popularity could be that a lot of people are buying it— a fact which makes me even more dubious.
Robinhood Traders Flock to MRO Stock
I want to preface this by saying that not all Robinhood traders are cowboys flying by the seat of their pants. Even if they are, in some cases many are showing up the so-called “smart money” institutional investors. But one of the problems with the Robinhood stock trading platform is that it’s set up as a sort of social media for stock traders.
Not only does it gamify the trading process by making suggestions and encouraging sales, but it keeps users up to date with what their fellow semi-pro traders are buying. As InvestorPlace’s David Moadel pointed out earlier this week, once MRO stock was recognized by the Robinhood contingent as a stock to buy, traders rushed in.
The rush into MRO stock is seemingly unjustified, considering that the firm has yet to deliver positive quarterly earnings. Moadel went as far as saying that Robinhood and its merry band of traders may be looking to MRO because its similar to Whiting Petroleum, another energy firm that’s been popular on the platform.
The Trouble with Marathon Stock
Just because a stock is popular doesn’t mean it’s a bad play, though. Just look at some of the big tech names that have been thriving throughout the pandemic. But Marathon doesn’t have a whole lot going for itself these days, and that’s what makes it a poor choice.
Production at MRO fell by 7.6% from the first quarter to the second quarter and output is seen declining once again in the third quarter. By Q4 the firm may be ramping up production once again to move back toward normal levels.
That means the firm’s finances depend on the price of oil moving forward. Marathon is able to break-even when oil prices are between $30 and $35 per barrel. That’s a testament to management’s cost-cutting efforts—but it doesn’t mean the company is going to be a cash cow anytime soon.
Oil prices have only risen slightly above those levels to sit below $40 per barrel. At the time of writing, WTI was trading at roughly $37 per barrel.
Oil Uncertainty Makes Marathon a Poor Choice
Over the summer investors seemed to be looking at the world through rose-colored glasses. Most were expecting increased driving and a sharp economic rebound to boost demand for the commodity. But September has seen oil prices start to come crashing back down to earth as demand hasn’t quite lived up to investors’ lofty expectations.
Not only that, but no one is sure exactly how the pandemic will impact oil prices in the months to come. Renewed lockdowns and a potentially deep recession have the potential to derail the rebound in oil prices through the end of the year.
That would be bad for the sector as a whole, but specifically for MRO stock investors, who really need prices to be above $40 to expect positive returns, it could prove disastrous.
On the date of publication, Laura Hoy did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Laura Hoy has a finance degree from Duquesne University and has been writing about financial markets for the past eight years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.