Is This Stock A Better Pick Over ConocoPhillips?
The shares of ConocoPhillips (NYSE: COP) and Marathon Oil (NYSE: MRO) currently trade more than 50% above pre-Covid levels largely due to high benchmark prices and expectations of crude oil supply shortages from the Russia-Ukraine war. Both companies are involved in independent exploration and production business with operations in the U.S., Canada, Europe, and Africa. As the finances of oil companies depend on benchmark prices, the recent surge is assisted by strong domestic demand, a recovery in the transportation sector, and broader macroeconomic risks. While both companies have reported comparable revenue growth and financial leverage metrics, Trefis believes that Marathon Oil is a better pick due to higher profitability. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, ConocoPhillips vs. Marathon Oil: Industry Competitors, But Marathon Oil Is A Better Bet
1. Revenue Growth
ConocoPhillips’ growth was comparable to Marathon Oil before the pandemic, with COP’s revenues expanding at an average rate of 11% p.a. from $23.6 billion in 2016 to $32.5 billion in 2019. Marathon Oil’s revenues also reported an 11% average growth rate from $3.8 billion in 2016 to $5.2 billion in 2019. After observing a deep contraction in 2020, revenues of both companies recovered to pre-pandemic levels in 2021.
- ConocoPhillips’ five operating regions, Alaska, Lower 48, Canada, Europe, and the Asia Pacific contribute 12%, 64%, 5%, 13%, and 6% of total revenues, respectively. Moreover, Alaska, Lower48, Canada, Europe, and Asia Pacific regions account for 16%, 46%, 8%, 10%, and 11% of total assets, respectively, with 9% held for corporate purposes. In 2021, the company reported 6,101 MMBoe of total proved reserves and 1,567 MBoed of average production.
- Marathon Oil’s key production regions, Eagle Ford, Bakken, Oklahoma, other U.S., and Africa account for 26%, 32%, 16%, 8%, and 18% of the total production, respectively. Moreover, the oil & gas fields in the U.S. and Africa account for 89% and 11% of the 1,106 MMBoe total proved reserves, respectively. In 2021, the company reported an average production rate of 347 MBoe/day.
- ConocoPhillips has a more diversified geographic presence as opposed to Marathon Oil.
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2. Returns (Profits)
Comparison of cash generation capabilities highlights the profitability of both companies as oil & gas firms re-invest a sizable share of their operating cash flow to develop new wells to continue generating returns. In 2021, ConocoPhillips generated $17 billion of operating cash from $48 billion in total revenues – implying an operating cash flow margin of 35%. Whereas, Marathon Oil reported $5.5 billion in total revenues and $3.2 billion of operating cash flow resulting in a margin of 58%.
- Historically, Marathon Oil has reported better cash generation capabilities than ConocoPhillips.
- In 2021, COP invested $6.3 billion in property, plant & equipment and returned $6 billion to shareholders in dividends & buybacks. Thus, dividend payouts & buybacks account for 35% of the total cash from operations. Notably, the company has been investing in new properties and returning cash to shareholders on a comparable basis in recent years.
- In 2021, MRO utilized $1 billion in investing activities and returned $874 million through dividends & buybacks to shareholders.
- Both companies have been investing around 30-40% of their operating cash in acquiring new properties and developing existing resources. (related: Is First Solar Stock A Good Pick In A Post-Pandemic World?)
ConocoPhillips and Marathon Oil are comparable from the perspective of financial leverage.
- Higher financial leverage coupled with continued revenue growth is a boon for generating surplus equity returns. However, interest expenses weigh on finances as revenues decline – limiting dividend payouts and capital expenses.
- In 2021, ConocoPhillips and Marathon Oil reported $18.7 billion and $4 billion of long-term debt, respectively. Moreover, ConocoPhillips and Marathon Oil reported $90 billion and $17 billion of total assets, respectively.
- Given the long-term debt to total assets ratio of 20-25%, both stocks have a similar downside risk due to financial leverage. (related: Looking For Investment Income? This Stock Is A Better Alternative Over Exxon Mobil)
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|S&P 500 Return||-5%||-13%||85%|
|Trefis MS Portfolio Return||-6%||-15%||233%|
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 Cumulative total returns since the end of 2016
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