Marathon Oil: Buying On A Fresh Swing Low (Technical Analysis) (NYSE:MRO)

Intro

It will be interesting to see if Marathon Oil Corporation (NYSE:MRO) can once regain its 200-day moving average as it has done in recent times. As we can see from the chart below, Marathon Oil regained its 200-day average at multiple points last year, which resulted in a sustained trend of higher highs. Differentiating continuation patterns from reversal patterns can be very difficult at times in financial markets, especially when we have clear overhead resistance as we do now in Marathon Oil. However, we continue to believe an ascending triangle (Bullish continuation pattern) is playing itself out here in the oil & gas player as opposed to something like a double-top formation, which would be a bearish pattern in nature.

The technical reasons behind our premise are the following:

• Lack of any meaningful bearish divergence. Divergences can be looked for in many technical indicators, but we like to use the “On Balance Volume” indicator” for this very purpose. Why? Well, taking into account that we believe that volume trends actually precede price action on technical charts, it stands to reason that the volume pattern should indeed be bullish (or, at the very least, match the pattern of higher highs we presently are seeing in MRO) on the technical chart. As we see above, the OBV line continues to make higher highs (just like MRO stock), which leads us to believe that a continuation pattern is in play here over anything else.
• MACD Crossover & Histogram Strength. MACD buy signals (Bullish crossovers) are always noteworthy when they occur in alignment with the prevailing trend. The reason is that the MACD indicator is a solid read on both Marathon’s underlying momentum and trend. As we see above, when we had similar conditions in this play in recent months, shares of MRO quickly rebounded and produced a sustained move to the upside. We need shares of MRO, however, to move above their 200-day moving average once more before running with this signal.

Sound Financial Base

The fundamental reason behind our bullish stance pertains to the following. Marathon, at present, trades with a forward GAAP multiple of 4.75, a forward sales multiple of 1.99, a forward book multiple of 1.5, and a forward cash-flow multiple of 3.15. Furthermore, the company`s long-term debt came in at $3,579 billion at the end of Q3 as opposed to its $11.187 billion shareholder equity (Debt to equity ratio of 0.32). The company’s trailing return on capital percentage continues to top 14%

Suffice it to say, Marathon is working off a very solid base with management now looking for further improvement in the financials to come off the recent Eagle Ford acquisition. Growth is what it is about at the end of the day in that as long as there is sufficient cash flow to keep on rewarding shareholders, to invest, and to bring down the float accordingly, then shares should continue to rise over time.

Accretive Eagle Ford Deal

Based on the deal alone, management expects to see a 15% increase in next year’s free cash flow, which would result in accelerated share buybacks and an expected increase to $0.10 per share for the quarterly dividend. If enacted, the increase will be the seventh quarterly increase in the dividend in the past eight quarters. This is an encouraging trend, to say the least, given how low Marathon’s payout ratio remains extremely low.

Furthermore, taking into account the inventory life of Ensign’s net acreage of 130,000 acres and how Marathon can leverage its expertise in this region, Marathon should be able to hit the ground running here rather quickly. The balance sheet is plenty strong enough to undergo this deal where management will be hoping to pay down the acquisition debt rather quickly.

In terms of strategy, since implied volatility remains low in MRO, if we can get a quick up-move back above the stock’s 200-day moving average, we may look to something like a call debit spread on a positive swing low. As we see below, implied volatility once more appears to be rising, which would suit something like a call debit spread as we approach the announcement of the company’s fourth-quarter numbers in mid-February.

Conclusion

Although energy bears will point to recent poor PMI figures out of China, we remain very much focused on trading what is in front of us. Marathon Oil continues to make higher highs and higher lows, profitability is strong, and Ensign’s inventory is expected to continue to drive Marathon Oil’s cash-flow generation forward. We look forward to continued coverage.