Hilary Kramer's Daily Picks & Pans

Analysts are starting to say that the energy stocks have peaked. It sure looks that way if you take a look at the price of Marathon Oil, which was up around $92 at the end of August and has since dropped to $77. And if you drive a lot, I’m sure you’ve noticed gas prices have been significantly reduced over the past week or so. Meanwhile, lots of emails are streaming in and asking me if this is the end of the run up in big oil.  

But I’m not jumping on that anti-oil bandwagon yet. As much as I think there’s enormous potential in green tech companies and believe there’s an emerging consensus that we need new ways of producing and thinking about energy, in the short term we are all dependent on oil, and I think this could be a good time to buy selected companies at the right discount.  

Marathon is one of those oil companies worth keeping an eye on. It’s not nearly as large as Exxon, and in the oil industry size really does matter (Exxon’s operating margins are 15% whereas Marathon’s are less than 6%). There’s lots of competition and Marathon has some eyebrow-raisers like pension concerns and potential debt left over from its days as part of U.S. Steel.  Plus, annual production has been declining since 1999, so MRO makes most of its money in the more competitive refining areas.  

But despite these concerns, I think this could be a good company to pick up if you can get it at the right price. Revenues have been increasing over the past few years, Marathon has good reserves, and it’s increasing its efforts in the exploration business, looking into Africa and the Middle East (and especially Libya). In fact, Libya will become increasingly important as a source of oil in the coming year!

These are risky places, of course, but I think it’s encouraging to see MRO trying to address its weaknesses. The company has also purchased Ashland, giving it greater refining capacity and a network of gas stations. On the forward-looking front, Marathon has also signed a letter of agreement with The Andersons (ANDE) to potentially build ethanol plants (although I a bearish on corn based ethanol as a viable alternative energy with scalability).

Type of stock: Compared to Exxon, Marathon may be tiny, but it’s a $69 billion oil concern with a global reach and potential to grow more.
Price target: MRO is currently trading at $77, off its 52-week high of $93. I still think it’s a bit high, though. If you see it drop below $70, I’d buy it and keep as a part of your long term portfolio.

(Photo Credit: AP)

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• #1 Comment from crossprofit 
  9/22/06 12:56 PM | Permalink

  Make that below $65.00 and we are in agreement.
  
  Disclosure: This comment was written by a CrossProfit analyst and does reflect the opinion of CrossProfit.com. AOL and Hilary Kramer are not affiliated with CrossProfit.
  http://www.crossprofit.com