Oil prices hit a three-month high as of this writing, and the rise couldn’t come at a better time for companies like Marathon Oil Corp. (MRO). Management began divesting the company of non-core assets, having sold $1.5 billion of these assets since August of 2015. These were considered high-cost sites. The company also sold stock to increase its cash holdings.

However, the company’s primary strategy is to gradually replace expensive sites with more efficient ones. Management has ramped up activities in Oklahoma as it divests itself of more expensive locations. This could positively affect revenues going forward, based only on the cost savings.

If oil prices rise, the increased revenues could be dramatic.

Oil prices on September 3rd flirted with $50 per barrel before settling at $48.81. While this upward trend certainly bodes well for Marathon, investors should note that much of the price is based on optimism that OPEC will successfully limit oil production, and that non-OPEC countries will cooperate. Optimism is not a long-term influence on prices, however, and some sort of actionable proposal to limit supply will need to appear in November, at OPEC’s next meeting over this issue.

That said, Marathon looks to be in a position to weather current oil prices even if they don't rise. The oil glut is predicted to end some time in 2017, according to the International Energy Agency. In other words, even without OPEC action, the end could be in sight for depressed oil prices.

Marathon’s stock is also depressed in price, due in part to the fact that its asset sales are a large part of its recent revenues. Such sales are a one-time event, and investors look for income from operations to value a stock.

If Marathon starts to show income from its cost-cutting and efficiency measures, it could begin to attract attention from investors. In the event oil prices increase significantly, Marathon could become a star in the oil field.

Trading the news can be risky, but Marathon management has made some wise moves that could comfort investors who don’t rely on extremes of optimism and pessimism, and instead look for efficiency and productivity.

 

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