Marathon Oil knows that U.S. gasoline demand won't decline forever

Posted Apr 20th 2009 6:00PM by Joseph Lazzaro
Filed under: Stocks to Buy

Readers of the this space know that two preferred sectors are integrated oil and refining sectors. Would that the United States could wean itself from oil relatively quickly and transition to a cheap, environmentally-friendly, alternative energy source (natural gas, electric, fuel cell) for auto transportation. Unfortunately, as researchers remind us, that goal is at least a decade away, which means companies like Marathon Oil (NYSE: MRO) will remain in the catbird seat.

Marathon Oil recently concluded that, rather than spin-off units, it is in the best interests of its shareholders to remain an integrated business. Net result? Earnings stability for investors, thank you.

True, U.S. gasoline demand will decline (how strange does that sound?) and present challenging conditions through most of 2009, with only modest gasoline margins, but look for MRO's upstream and downstream investments to pay-off as gasoline demand starts to pick up again as amid the U.S. economic recovery in Q3/Q4. The First Call FY 2009/FY 2010 EPS estimates for MRO are $2.32 to $3.62.

The risks? True, an oil price collapse would hurt almost all integrated oil stocks, but Marathon's production increases, cost controls, and reasonable p/e of 7 tip the risk/reward in favor of the company.

Stock Analysis: Marathon Oil is a moderate-risk stock. Consider buying a 25% position in MRO now; then buy another 25% in three months, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your MRO position in the first half of 2009. Sell/Stop Loss if you were to buy shares in this company: $17.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: Marathon Oil, MRO, oil stocks, refiners