We’ve discussed the top investment trend of 2014. Nine years ago, energy companies foolishly expanded their production when oil surged above $100 per barrel.
Two years later, oversupply hammered the global energy markets. We saw crude plunge under $40.
That eroded shareholder confidence. Since then, activist investors have pushed aggressively for executives to enhance shareholder value. And as public policy tilts away from carbon-based fuel production, the cost of capital for new energy projects has soared.
Today, I want to take you inside another big energy name that should be a part of any long-term portfolio. I consider it to be a top oil investment of 2023. It’s energy week here, and we’ll add another name to the list.
It’s Expensive to Drill
According to Goldman Sachs, the cost of capital in 2012 for new solar and energy projects was in the 8% to 9% range. Nearly a decade later, the cost of capital for new solar projects slumped to 3%, while crude projects increased to nearly 20%.
Meanwhile, the impact of inflation is hammering this industry. New oil-well production is very capital-intensive. It requires spending on rising labor, mineral, and metal prices.
It’s estimated that companies in the Exploration and Production space spent 20% of their CAPEX last year just to maintain current production due to inflation increases.
The U.S. government hasn’t made it any easier on the sector. The White House has called on energy producers to increase production, but policies effectively strip the demand for crude from some of the nation’s largest markets by 2035.
In California, a ban on new gasoline-powered vehicles would neuter the gasoline markets, thus dramatically cutting expected demand.
When a company builds a well, these things have shelf lives of 20 to 30 years. But the government wants to effectively sunset that production in the next 15 years. Shareholders want nothing to do with this.
That’s why companies are keeping their costs and production increases in check. In addition, they’re focused on improving shareholder value by increasing dividends, buying back stock, and paying off debt.
All three of these things can make for an attractive investment.
As I’ve noted, investors should look for oil producers with a Piotroski F Score of 9 – a perfect figure. This score suggests a very shareholder-friendly executive team, and a commitment to consistently delivering results.
There are 11 companies in the drilling, E&P, and integrated oil industry space. From a value perspective, no name stands out more than Marathon Oil (MRO).
Digging Into the Eagle Ford Basin
Marathon Oil makes a lot of money in Equatorial Guinea. But it’s been increasing its output in the energy-rich Permian Basin in Texas and other shale locations over the years.
It also operates in the Scoop/Stack basin, Eagle Ford, and the Bakken. A lot of investors are increasingly concerned that shale production may have peaked.
The combination of rising oilfield services inflation and the dwindling of prime drilling acreage are weighing on that sentiment. The challenge is that costs will rise.
But Marathon has increased its pipeline of energy production through a well-timed purchase of 130,000 new acres in the Eagle Ford formation.
With more than 600 drilling locations, the company has about 15 or more years of capacity that will fall under its portfolio.
Meanwhile, MRO has been buying back stock, and if crude prices remain above $45 per barrel, there will be more cash to return to shareholders. They’ve been the most aggressive company among its peers to reduce its outstanding shares.
Between Q3 2022 and 2021, the company reduced its share count by 14.5%. The next closest competitor in terms of outstanding share reduction during that period was 6.7% by Apache (APA).
And, in this environment. A major geopolitical event in Ukraine or the Middle East could shock the global supply-demand imbalance overnight.
Marathon has been a winner for the last two years. And with improving asset quality, a commitment to a strong balance sheet, and an industry that will likely see higher prices for longer, MRO is a great play for investors looking to squeeze every penny possible out of this business.
My current upside target for MRO is $35 in a market that works through the economic kinks. Once the Fed pivots, I anticipate greater energy inflation in the future. MRO is a great place to park some cash for now.
To your wealth,
P.S. Please let me know if you have any feedback, questions about today’s issue, or anything else. Just email us at firstname.lastname@example.org.
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
Market Momentum is Yellow
If you’re looking for value in the energy sector, visit my Tactical Wealth Investor. There, I offer you my favorite two energy plays that provide even greater shareholder value, strong dividends, and incredible upside. Momentum remains yellow at the moment, but investors can anticipate a possible move lower as we head into the final two weeks of February.