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MRO – Look for a 49% Price Gain

David Kostin, Goldman Sachs’ chief U.S. equity strategist, provides us with a list of stocks with the most upside potential in his new Monthly Chartbook.   Kostin notes early May was solid for the S&P 500, but cited month-end drags in telecom services and utilities (-7 and -9 percent, respectively).  Nevertheless, he projects the S&P will end up 7.3% by year end, at 1750.

One stock on the Goldman list to watch is Marathon Oil (MRO).  The stock is up 39% in the past year but Goldman Sachs is projecting an increase of 49% in the stock.  In addition, Marathon offers a 1.96% dividend yield.

Production grew 8% (excluding Libya; 48 thousand barrels of oil equivalent per day; MBOE/d) in 2012, to 388 MBOE/d. MRO expects development at U.S. onshore plays to drive a 7%-10% production boost in 2013 (ex Libya and Alaska), to 405-425 MBOE/d, and a 5%-7% production CAGR (compound annual growth rate) through 2017. MRO believes these assets are 80% liquids. We expect a lower planned 2013 rig count, made possible by drilling efficiencies, to keep cost inflation down. Since the fourth quarter 2012, Eagle Ford and Bakken production are up 22% and 6%, respectively. MRO is ending shale activity in Poland on weak tests.

MRO spun off its downstream business to shareholders in a tax-free transaction in mid-2011. We had been looking for reduced refining contributions over the next five years and believe greater exposure to upstream projects in new international and U.S. onshore basins will drive upstream growth at lower operating costs. MRO’s streamlined asset base (75% oil, based on reserves) is one of the higher-content liquids portfolios among domestic E&P companies. Operations in Libya resumed in late 2011 and MRO is looking to ramp up production there. MRO lowered its onshore U.S. rigs to about 25 as of October 2012, versus 34 rigs earlier in 2012, in response to lower prices.

MRO’s growth assets are where it expects to make significant investment in order to realize oil and gas production and reserve increases. It is focused on U.S. growth by developing liquids-rich shale play positions, a strong position in the core of the Eagle Ford shale. In addition, growth assets include the development of Angola Block 31, discoveries in Iraqi Kurdistan, select Gulf of Mexico blocks and Canadian in-situ assets. Exploration is focused on Poland, Iraqi Kurdistan, Norway and the Gulf of Mexico. MRO had a goal of divesting between $1.5 billion and $3.0 billion of non-core assets between 2011 and 2013. For the two-year period ended December 31, 2012 , it had entered into agreements for approximately $1.3 billion in divestitures, of which $785 million were completed. The remaining $545 million in asset sales were completed by February 22, 2013

We see 2013 and 2014 EPS of $2.76 and $3.35, respectively, versus $2.45 (adjusted) in 2012.

High Yield Dividend Stocks with Low Valuation

Based on Grey and Vogel’s research paper called “Analyzing Valuation Measures: A Performance Horse-Race over the past 40 Years,” the best valuation measure wasn’t the classic price-to-earnings (P/E) ratio.  It’s something similar to the P/E ratio though, with a more intimidating name: “EV-to-EBITDA.”

Grey and Vogel found that buying the cheapest 25% of stocks based on EV/EBITDA returned 17.66% a year from 1971-2010. This beat buying cheap stocks based on the P/E ratio, which returned just 15.23% a year over the same time.

My idea is to apply the EV/EBITDA metric to dividend stocks. It makes sense to buy dividend stocks at a lower value which gives the investor higher dividend rate of pay while waiting for a stock price increase to a higher valuation.  I am looking at stocks with a dividend yield of at least 3% and a return on equity of at least 10%.  The table below shows the best stocks meeting the criteria along with their EV/EBITDA ratios.

The list is loaded with companies in the oil industry with EV/EBITDA ratios below 5.0 such as: StatOil (STO), Marathon Oil (MRO), Total (TOT), ConocoPhillips (COP), and Chevron (CVX).  Among this group, TOT has the highest dividend yield at 5.0% with an EV/EBITDA of 3.23.

The telecom industry is well represented by companies such as Telecom Argentina (TEO), China Mobile (CHL), P.T. Telekomunikasi Indonesia, (TLK), BT Group plc  (BT) and Telefonos de Mexico SA de CV Co (TMX).  TLK has a 7.2% dividend yield with an EV/EBITDA of 4.01.

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