Energy was the best performing sector in 2021, and again in 2022. And the sector is set up for a great year to come, asserts Sean Brodrick, senior editor of Weiss Ratings.
One important reason why is that China is reopening after a long series of lockdowns due to its strict zero-Covid policies. Also, the U.S. Strategic Petroleum Reserve was a seller of oil throughout 2022 — a whopping 180 million barrels. Now, though, the SPR is about to switch from a seller to a buyer.
Also, dire warnings that demand was about to fall off never materialized. Meanwhile, if the Fed becomes less aggressive about raising interest rates, then that could cushion any economic downturn, boosting oil demand.
What it boils down to is the fundamentals haven’t really changed much, and both oil and oil & gas stocks sold off hard recently. That makes them buying opportunities.
You could ride this oil bull with ETFs. But the bigger returns will be in individual stocks. I have such an opportunity for you — Marathon Oil Corp. (MRO).
Marathon is an independent oil & gas company that works in the oil rich areas of the U.S. — the Eagle Ford in Texas, the Bakken in North Dakota, the STACK and SCOOP in Oklahoma and the Permian in New Mexico – as well as Equatorial Guinea. Its production is roughly balanced with a 50-50 split between oil and natural gas.
Importantly, I’m not recommending Marathon just because it delivered a massive earnings beat in Q3. Yes, earnings per share more than quintupled as revenues jumped 55%. But all well-run oil companies are beating earnings now.
Earnings will go lower in the next quarterly report, simply because oil and gas prices are lower. Then I expect oil prices will head higher again, boosting Marathon’s bottom line.
More interesting to me is what Marathon did with that $1.3 billion in free cash flow it raked in during Q3. It did three things: 1) Bought back a lot of its own shares; 2) Raised its dividend; and 3) Bought more assets in the Eagle Ford.
The purchase of $3 billion worth of assets from Ensign Natural Resources — announced November 2 — will double the size of Marathon’s position in the Eagle Ford, an oil- and gas-rich basin.
This will raise its production when many oil and gas producers are seeing production trend lower. And Marathon expects those new wells alone will increase its free cash flow by 15%. That sounds like another dividend raise coming to me.
Meanwhile, the Fibonacci retracement lines — which are used by many technical analysts — show that Marathon is bouncing from support. This raises the odds of the stock’s success. And if I’m wrong, you’re paid a nice — and rising — dividend to wait.
