Amid the Russia-Ukraine conflict, strong crude oil demand, optimistic industry outlooks, and OPEC+ cuts, there's potential for a rise in Brent crude prices. In this context, let's assess prominent energy stocks, Marathon Oil Corporation (MRO) and NOW Inc. (DNOW), for their prospects.
Let's understand this in detail.
The oil and gas market has attained stability post the Russia-Ukraine conflict, with robust demand for crude oil in the last two years. In October and November, GlobalData surveyed the industry's capital expenditure (capex) outlook for 2024. About half of the respondents conveyed optimism, foreseeing a significant upswing in capex for 2024.
Additionally, as energy security concerns take center stage, the medium-term projection for oil and gas demand is not expected to decline rapidly over the next five to ten years. Moreover, the consistent implementation of strategic production cuts by the OPEC+ group is poised to uphold elevated oil prices.
That said, despite currently implementing cuts of approximately 5 million barrels per day (bpd), Saudi Arabia, Russia, and other OPEC+ members, who collectively contribute over 40% of the world's oil production at around 43 million bpd, are likely to agree on enforcing output reductions of at least 1 million bpd early next year.
This agreement is expected to be led by Saudi Arabia, which will roll over its voluntary additional cut, accompanied by smaller curtailments by other participating nations, according to two OPEC+ sources.
Looking forward, the U.S. Energy Information Administration predicts that Brent crude oil prices will rise, projecting an average of $90 per barrel in the fourth quarter of 2023 to an average of $93 per barrel in 2024.
For the fiscal fourth quarter ending December 2023, MRO is anticipated to reveal an EPS of $0.81, reflecting a 7.7% year-over-year decrease. Concurrently, revenue is forecasted at $1.79 billion. In contrast, DNOW is expected to disclose an EPS of $0.16 and revenue of $540.43 million for the corresponding period.
In terms of price performance, MRO has declined 7.9% in the past month, while DNOW declined 8.9% during the same period. Moreover, MRO witnessed a 3.2% plunge over the past three months, while DNOW plummeted 11.2% over the same duration.
However, MRO has marginally gained over the past nine months, closing the last trading session at $25.30, whereas DNOW has declined 23.1% during the same period, closing the last trading session at $9.88.
But which Energy stock could be a better pick? Let's find out.
Recent Financial Results
For the fiscal third quarter that ended September 30, 2023, MRO’s revenues and other income decreased 19.3% year-over-year to $1.81 billion. Its income from operations declined 39.4% from the year-ago value to $669 million. Moreover, its adjusted net income and adjusted net income per share decreased 44% and 37.9% from the prior year’s period to $466 million and $0.77, respectively.
For the fiscal third quarter that ended September 30, 2023, DNOW’s revenue increased 1.9% year-over-year to $588 million. Its net income and EPS attributable to DNOW were $35 million and $0.32, respectively. Also, as of September 30, 2023, the company’s total assets amounted to $1.38 billion, compared to $1.32 billion as of December 31, 2022.
Past and Expected Financial Performance
Over the past three years, MRO’s revenue increased at a CAGR of 22.3%. Its total assets grew at a 2.2% CAGR during the same period.
Analysts expect MRO’s revenue to decline 15.8% year-over-year to $6.77 billion for the fiscal year ending December 2023. Likewise, the company is expected to decrease 38.8% from the prior year to $2.74.
DNOW’s revenue rose at a CAGR of 6.1% over the past three years. Its total assets increased at a CAGR of 9.8% during the same time frame.
For the fiscal year ending December 2023, DNOW’s revenue is expected to increase 8.1% year-over-year to $2.31 billion. Similarly, the company's EPS for the current year is expected to be $0.97, up 1.6% from the previous year.
Valuation
In terms of trailing-12-month P/E, DNOW is trading at 8.38x, 10.2% lower than MRO, which is trading at 9.33x. Moreover, DNOW’s trailing-12-month Price/Sales of 0.46x is 81.1% lower than MRO’s 2.43x. In addition, DNOW’s trailing-12-month EV/Sales of 0.39x compares with MRO’s 3.17x.
Profitability
MRO’s trailing-12-month revenue is 2.8 times that of what DNOW generates. DNOW’s trailing-12-month ROCE, ROTA, and ROTC of 15.53%, 11.31%, and 11.20% compare with MRO’s 15.01%, 9.80%, and 8.66%, respectively. However, DNOW has a trailing-12-month gross profit margin of 23.22%, which compares with MRO’s 77.80%.
POWR Ratings
MRO has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, DNOW has an overall rating of B, translating to Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MRO has a D grade for Value, reflecting its higher-than-industry valuation. Its forward EV/Sales and forward Price/Sales of 3.02x and 2.19x are 49.2% and 57.3% higher than the respective industry averages of 2.03x and 1.39x, respectively.
In contrast, DNOW has a B grade for Value, consistent with its lower-than-industry valuation. The stock’s forward EV/Sales and forward Price/Sales of 0.39x and 0.45x are 77.2% and 65.6% lower than the industry averages of 1.71x and 1.32x, respectively.
In addition, MRO has a D grade for Stability, justified by its 60-month beta of 2.31, while DNOW has a C grade for Stability, in sync with its 60-month beta of 1.51.
Of the 85 stocks in the Energy - Oil & Gas industry, MRO is ranked #57, whereas DNOW is ranked #6 out of 49 stocks within the Energy - Services industry.
Beyond what we've stated above, we have also rated both stocks for Growth, Momentum, Sentiment, and Quality. Click here to view MRO’s ratings. Get all DNOW ratings here.
The Winner
Despite MRO and DNOW poised to gain from a surge in crude oil prices, DNOW's lower valuation, enhanced stability, and favorable analyst sentiment currently position it as the preferable investment choice over MRO.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Energy - Oil & Gas industry here. Click here for all the top-rated stocks in the Energy - Services industry.
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MRO shares were trading at $25.32 per share on Thursday afternoon, up $0.02 (+0.08%). Year-to-date, MRO has declined -4.93%, versus a 19.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
Marathon Oil (MRO) vs. NOW (DNOW) - Evaluating Energy Stocks for Q4 Potential StockNews.com
