In this article, I have evaluated two prominent energy stocks, Marathon Oil Corporation (MRO) and Cheniere Energy, Inc. (LNG), to determine which could be a better pick this month. I believe LNG is the better investment for reasons explained throughout this piece.
While crude oil prices surged to over $100 per barrel during Russia's invasion of Ukraine, leading to substantial profits for producers, prices have since stabilized but remained at or above pre-pandemic levels.
Moreover, driven by the expectations of long-term demand and reinvesting profits from the surge in fossil fuel prices due to the Ukraine war, the oil industry is increasing its search for new reserves. Moreover, the International Energy Agency (IEA) predicts a rise in global upstream oil and gas investments, while Barclays expects a surge in approved offshore projects.
MRO has declined 15% year-to-date, while LNG has gained 2.5%. LNG is a clear winner in one-year price performance, with 16.5% returns compared to MRO’s gain of 2%. Moreover, LNG has soared 5.5% over the past month, whereas MRO has plummeted 1.1%.
Here are the reasons why I think LNG could perform better in the near term:
Latest Developments
On March 30, 2023, MRO and its affiliated company forged a deal with the Republic of Equatorial Guinea and Noble Energy, marking a significant step forward in developing the Equatorial Guinea Regional Gas Mega Hub (GMH).
This achievement not only strengthens their existing partnership but also seeks to enhance and prolong the lifespan of Equatorial Guinea's gas monetization infrastructure. MRO anticipates substantial enhancements in earnings and cash flow thanks to increased exposure to global LNG pricing.
On June 26, LNG announced that its subsidiary, Cheniere Marketing, LLC, had entered into a long-term liquefied natural gas sale and purchase agreement with ENN LNG (Singapore) Pte. Ltd, a wholly-owned subsidiary of ENN Natural Gas Co., Ltd. This is the second long-term SPA signed between ENN and Cheniere Marketing.
Moreover, on June 21, LNG announced that its subsidiary, Cheniere Marketing, LLC, had entered into a long-term liquefied natural gas sale and purchase agreement with Equinor ASA.
Under the SPA, Equinor has agreed to purchase approximately 1.75 million tonnes per annum of LNG from LNG on a free-on-board basis for a purchase price indexed to the Henry Hub price, plus a fixed liquefaction fee.
Jack Fusco, LNG’s President and Chief Executive Officer, said, "This SPA is expected to provide further commercial support to the SPL Expansion Project, which we continue to rigorously develop in order to meet the world’s growing demand for secure, long-term energy supplies and the economic and environmental benefits of Cheniere’s LNG."
Recent Financial Results
During the fiscal first quarter that ended March 31, 2023, MRO’s revenues and other income decreased 4.2% year-over-year to $1.68 billion. Its income from operations declined 19.1% from the year-ago quarter to $605 million.
Moreover, the company’s adjusted net income and net income per share declined 43.9% and 34.3% year-over-year, respectively, to $420 million and $0.67.
Conversely, LNG’s revenues decreased 2.3% year-over-year to $7.31 billion for the first quarter that ended March 31, 2023. However, its adjusted EBITDA grew 14.2% year-over-year to $3.60 billion.
In addition, the company reported a net income of $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.
Past and Expected Financial Performance
MRO’s revenue and EPS grew at a CAGR of 14.5% and 134.2% over the past three years. The company’s EPS is expected to amount to $0.55 in the current quarter and $2.66 in the current year. Its revenue is expected to come in at $1.62 billion in the current quarter and $6.73 billion in the current year.
On the other hand, LNG’s revenue and EPS grew at a CAGR of 51.7% and 107.2% over the past three years. The company’s EPS is expected to amount to $2.85 in the current fiscal quarter and $31.50 in the current year. Its revenue is expected to come in at $4.42 billion in the current quarter and $21.31 billion in the current year.
Valuation
In terms of forward P/E, LNG is currently trading at 4.84x, which is lower than MRO, which is trading at 8.98x. LNG’s forward P/S multiple of 1.74 is lower than MRO’s 2.11.
Thus, LNG is relatively more affordable.
Profitability
LNG’s trailing-12-month asset turnover ratio of 0.82x is higher than MRO’s 0.39x. Furthermore, MRO’s trailing-12-month cash from operations of $5.23 billion is lower than LNG’s $11.29 billion.
Hence, LNG is more profitable.
Dividend History
MRO pays an annual dividend of $0.40, which translates to a 1.74% yield on the current share price. Its four-year dividend yield is 1.51%.
On the other side, LNG pays an annual dividend of $1.52, which translates to a 1.04% yield on the prevailing price level, compared to its four-year dividend yield of 0.30%.
POWR Ratings
MRO has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, LNG has an overall rating of A, translating to a Strong Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MRO has a grade of C for Value. While its forward P/E multiple of 8.98 is 2% higher than the industry average of 8.80, its trailing-12-month EV/EBITDA multiple of 3.89 is 18.7% lower than the industry average of 4.79.
On the other hand, LNG has a grade of B for Value. Its forward P/E and trailing-12-month EV/EBITDA multiples of 4.84 and 4.53 are 45.1% and 5.5% lower than the respective industry averages of 8.80 and 4.79.
Additionally, MRO has a Momentum grade of C, reflecting its mixed-price performance. Conversely, LNG’s B grade in Momentum indicates its relatively stronger price performance.
In the 91-stock Energy-Oil & Gas industry, MRO is ranked #70, while LNG is ranked first.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Stability, Sentiment, and Quality. Click here to view MRO ratings. Access all LNG ratings here.
The Winner
The energy sector is expected to witness robust demand and growth in investments. Thus, both MRO and LNG stand to benefit significantly from these favorable market conditions.
However, considering MRO's weak price performance and elevated valuation multiples, I think LNG presents a more compelling investment opportunity this month.
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 Tuesday. Year-to-date, LNG has gained 3.05%, versus a 16.92% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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