In this article, I evaluated two energy stocks, Marathon Oil Corporation (MRO) and Cheniere Energy, Inc. (LNG), to determine which could generate better returns. We believe LNG is the better investment for reasons explained throughout this piece.
The energy sector enjoyed record profits in 2022 as Russia’s invasion of Ukraine sent oil and gas prices surging through much of the year. This year, the sector is well-positioned to maintain this momentum amid high demand from China and other Asian economies and constrained supplies.
According to the latest International Energy Agency (IEA) Oil Market Report (OMR), global oil demand is expected to increase by 2.2 mb/d year-over-year to an average 102 mb/d in 2023. Demand recovery in China continues to exceed expectations, with the nation setting an all-time record of 16 mb/d in March.
The Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, this Sunday made no changes to its planned oil production cuts for the rest of 2023, and the world’s top oil exporter Saudi Arabia announced further voluntary output declines, which would be implemented from July.
Saudi’s Ministry of Energy said in a statement that the Kingdom’s production would decline to 9 mb/d from around 10 mb/d in May, and the total voluntary output cut would be 1.5 mb/d. Also, OPEC+ would limit combined oil production to 40.46 mb/d over January-December 2024.
Earlier in April, Saudi Arabia and other OPEC+ members announced voluntary cuts to their oil production of about 1.16 mb/d in a surprise move aimed at supporting market stability. It added to a production cut of 2 mb/d announced by the alliance in October. Further, Russia extended its voluntary oil production cut of 500,000 barrels per day until the end of 2024.
As OPEC+ pumps more than 40% of the world’s crude and policy decisions, massive production cuts could significantly impact prices. Analysts from ANZ Group Holdings Ltd., Daniel Hynes and Soni Kumari reiterated their $100 per barrel target for the end of this year. ANZ analysts noted, “The oil market now looks like it will be even tighter in the second half of the year.”
MRO’s stock has declined 11.7% in price over the past three months and 15.6% over the past six months. In comparison, LNG’s stock has plunged 9.4% over the past three months and 13.4% over the past six months. Also, LNG is a clear winner in one-year price performance, with 1.3% returns compared to MRO’s 26.2% decline.
Here are the reasons why we think LNG could perform better in the near term:
Latest Developments
On March 30, MRO, through its affiliated company Marathon E.G. Holding Limited, announced the signing of a Heads of Agreement (HOA) with the Republic of Equatorial Guinea (E.G.) and Noble Energy E.G. Ltd, a Chevron company, to progress the following phases (Phases II and III) in the development of the Equatorial Guinea Regional Gas Mega Hub (GMH).
Lee Tillman, MRO’s Chairman, President, and CEO, said, “This announcement builds on our successful partnership of more than 20 years with the E.G. Government, further leveraging and extending the life of E.G.’s world-class gas monetization infrastructure, including the critical E.G. LNG facility, into the next decade.”
On May 16, LNG announced that its subsidiary, Cheniere Marketing International LLP entered a long-term LNG sale and purchase agreement (SPA) with Korea Southern Power Co. Ltd (KOSPO). Under the contract, KOSPO agreed to purchase nearly 0.4 million tonnes per annum of LNG from Cheniere Marketing from 2027 through 2046, with a small annual quantity to be delivered starting in 2024.
This long-term SPA is expected to support LNG’s SPL Expansion Project and boosts the company’s revenue streams.
Recent Financial Results
MRO’s revenues and other income decreased 4.2% year-over-year to $1.68 billion in the first quarter that ended March 31, 2023. Its income from operations declined 19.1% from the year-ago value to $605 million. Also, the company’s adjusted net income and net income per share were $420 billion and $0.67, down 43.9% and 34.3% year-over-year, respectively.
LNG’s revenues decreased 2.3% year-over-year to $7.31 billion for the first quarter that ended March 31, 2023. Its adjusted EBITDA grew 14.2% year-over-year to $3.60 billion. The company’s net income was $5.43 billion, compared to a loss of $865 million in the previous year’s quarter. Its net income attributable to common stockholders came in at $22.10 versus a net loss per share of $3.41 in the prior-year period.
Financial Guidance
MRO’s initially provided 2023 guidance remained unchanged. The company announced a $1.90 to $2 billion capital spending budget for the year. Also, MRO expects to deliver maintenance-level total company oil production of 190,000 net bopd at the midpoint of its 2023 guidance range. Total company oil-equivalent production is estimated to be 395,000 net boed at the midpoint of guidance.
LNG raised its 2023 financial guidance. The company expects consolidated adjusted EBITDA of $8.20-$8.70 billion, higher than the prior guidance of $8-$8.50 billion. In addition, LNG’s full-year distributable cash flow is expected to come between $5.70 billion and $6.20 billion, compared to the previous guidance of $5.50-$6 billion.
Expected Financial Performance
Analysts expect MRO’s revenue and EPS for the fiscal year (ending December 2023) to decrease 16.5% and 39.3% year-over-year to $6.71 billion and $2.72, respectively. Moreover, the company’s EPS is expected to decline 8.8% per annum over the next five years.
For the fiscal year 2023, LNG’s revenue is expected to decline 38.8% from the prior year to $20.47 billion. However, the company’s EPS is estimated to increase 414.7% year-over-year to $29.03. Also, analysts expect its EPS to grow 24.8% per annum over the next five years.
Valuation
In terms of trailing-12-month P/E, LNG is currently trading at 4.66x, 16.3% lower than MRO, which is trading at 5.57x. LNG’s trailing-12-month Price/Sales multiple of 1.08 is lower than MRO’s 2.05. In addition, LNG’s trailing-12-month EV/Sales of 1.91x compared to MRO's 2.73x.
Thus, LNG is relatively more affordable.
POWR Ratings
MRO has an overall rating of D, which equates to a Sell in our proprietary POWR Ratings system. Conversely, LNG has an overall rating of A, which translates to a Strong Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MRO has a grade of D grade for Momentum, consistent with its poor price performance. On the other hand, LNG has a B grade for Momentum, in sync with its relatively better price performance.
In addition, MRO has a C grade for Sentiment. The Sentiment grade is justified by its poor financials and mixed analyst expectations. In contrast, LNG has a grade of A, in sync with its solid financial performance and optimistic analyst estimates.
Of the 93 stocks in the Energy-Oil & Gas industry, MRO is ranked #74, while LNG is ranked first.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Stability, Value, and Quality. Click here to view MRO Ratings. Get all LNG ratings here.
The Winner
Global energy demand is expected to remain high this year, with China and other Asian countries contributing the most. Amid strong demand, a supply crunch induced by huge oil production cuts could push the prices higher, boosting the energy sector’s growth prospects. Therefore, energy producers MRO and LNG should benefit considerably from the sector’s tailwinds.
However, MRO’s relatively bleak financials and poor growth outlook make its rival, LNG, the better buy now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Energy-Oil & Gas industry here.
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LNG shares were unchanged in premarket trading Wednesday. Year-to-date, LNG has declined -4.94%, versus a 12.35% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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