Morgan Stanley Is Upgrading Marathon Oil, But Why?

In a report published Monday, Morgan Stanley analysts upgraded the rating on

from Equal-Weight to Overweight, while raising the price target from $25 to $37. The upgrade comes in the wake of the ongoing rerating of the E&P segment. Marathon Oil's shares are currently trading at a discount to peers despite the company's above average production. "The energy rally in the current year has been concentrated amongst smaller number of US unconventional producers and we prefer value at this state of recovery," the analyst said. Marathon Oil has so significantly lagged in the 2015 recovery in the E&P segment. MRO's discounted valuation has been traditionally justified by the company's shorter than peer inventory life but oil price driven pullback in activity has narrowed the gap. "The $37 new price target is based on 1x our risked NAV. MRO currently trades at 8.8x 2016e forward EBITDAX, compared to peers at 9.0x (8.4x with PXD)," the analysts stated. Marathon Oil's down spacing efforts and enhanced completion are expected to provide the company with a steady stream of catalysts in the near to medium term leading to an increased NAV of $56 per share. Morgan Stanley raised the price targets for the E&P group by 20 percent on average, based on expectations of a continued improvement in the US unconventional basins performance. Moreover, the OFS price reduction and efficiency gains are less conservative and more in-line with operators' expectations for this year and updated estimates for E&Ps acreage.