Identifying the key driver
Marathon Oil’s (MRO) stock price was in an uptrend from October 2011 to September 2014 when NYMEX (New York Mercantile Exchange) WTI (West Texas Intermediate) crude oil (USO) prices were in an uptrend.
But NYMEX WTI crude oil started to fall in June 2014, and Marathon Oil’s stock price had topped within three months. Since then, Marathon Oil’s stock price was in a downtrend until February 2016.
NYMEX WTI crude oil prices found a bottom in February 2016 and have been trending higher since. Marathon Oil’s stock price rallied strongly with crude oil.
Clearly, crude oil is a key driver behind movements in Marathon Oil’s stock price. Upstream companies Devon Energy (DVN), ConocoPhillips (COP), and EOG Resources (EOG) also have strong correlations with crude oil prices.
Stronger dollar and broader market
There’s also an inverse relationship between Marathon Oil’s stock price and US dollar index movements. The stronger dollar weakens energy prices, which affects Marathon Oil’s earnings.
In 2016, Marathon Oil has been outperforming the S&P 500 ETF (SPY), having risen ~17%, whereas the S&P 500 has risen by only ~8% during the same period.
Marathon Oil has a relatively higher cost of production. Despite its lower leverage, MRO’s net debt-to-adjusted-EBITDA ratio has been on an upward trajectory due to falling earnings. Meanwhile, unfavorable energy prices and reduced capex have led to declining production. If crude oil prices fall, Marathon Oil will be at a greater risk of steep reductions in earnings.
For more updates on this industry, keep checking in with Market Realist’s Upstream Oil and Gas page.