Analysts at Morgan Stanley and Imperial Capital separately explain why they are bullish on both Marathon Oil Corporation (NYSE:MRO) and Gastar Exploration Inc (NYSEMKT:GST), as Marathon announced yesterday its $888 million acquisition of Oklahoma-based PayRock Energy Holdings LLC from Houston’s EnCap Investments. Will Marathon pick up properties that Gastar is shedding in the Stack area as well? Let’s take a closer look.
Marathon Oil Corporation
In a research issued today, Morgan Stanley analyst Evan Calio upgraded shares of Marathon Oil from Equalweight to Overweight with a price target of $21, after the company announced the acquisition of Payrock Energy for $888M in cash, providing yet another strong marker of interest in the STACK play in Central Oklahoma.
Calio commented, “We are upgrading MRO to OW from EW largely driven by: (1) higher oil price leverage and (2) portfolio improvements (accelerated with today’s acquisition). In our January 2016 MRO downgrade, we noted: “we would get more positive on MRO (again), once we have clear line of sight to a commodity recovery.” We think we have that line of sight now on a longer-term basis. Concurrently, MRO increased its Oklahoma unconventional exposure in the “STACK” (Sooner Trend Anadarko [basin] Canadian and Kingfisher [counties]) – both through non-core asset sales and acreage acquisitions – as our understanding and conviction in the STACK value upside has increased.”
According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Evan Calio has a yearly average return of -8.4% and a 37.5% success rate. Calio has a -53.2% average return when recommending MRO, and is ranked #3632 out of 3977 analysts.
Out of the 13 analysts polled by TipRanks (in the past 3 months), 8 rate Marathon Oil stock a Buy, while 5 rate the stock a Hold. With a return potential of 17.50%, the stock’s consensus target price stands at $17.72.
Gastar Exploration Inc
With PayRock’s 61,000 net acreage position in close proximity to Gastar’s, Imperial Capital analyst Kim Pacanovsky believes that the transaction provides an implied value of over $300 million for Gastar’s previously shopped 26,000 net acre package, which was withdrawn from the market on May 5.
Pacanovsky reiterated an Outperform rating on Gastar Exploration with a price target of $1.30, which represents a potential upside of 42% from where the stock is currently trading.
Pacanovsky wrote, “We are highly encouraged by the transaction as it not only provides an excellent valuation data point for a potential GST carve out (or total sale of the company) after further delineation efforts, but it also highlights industry’s growing focus on the STACK in the belief that it exhibits the most competitive onshore unconventional economics. The specific discussion on the acquisition call on 6/20/16 concerning the southeastern STACK acreage exhibiting the same potential as the rest of the play also bodes well for GST, in our view.”
“We believe MRO could be a ready buyer for GST acreage or the entire company as GST’s acreage position largely interlocks with PayRock’s and MRO looks set to continue to divest non-core asset and build-upon its pro forma 210,000 net acre STACK position. Using MRO’s valuation metrics for PayRock, we conservatively estimate a valuation of about $2.68 for GST shares by discounting its acreage position by 40%,” the analyst added.
According to TipRanks.com, analyst Kim Pacanovsky has a yearly average return of -30.5% and a 23.5% success rate. Pacanovsky has a -43.6% average return when recommending GST, and is ranked #3877 out of 3977 analysts.
Out of the 5 analysts polled by TipRanks, 3 rate Gastar Exploration stock a Buy, while 2 rate the stock a Buy. With a return potential of 80%, the stock’s consensus target price stands at $1.66.