The U.S. consumer remains in a precarious state. Wages are rising at a slow pace, keeping many workers from boosting their earning -- and spending -- power on an inflation-adjusted basis. In fact, consumers may start to feel that they are losing ground if gasoline prices hit $4 a gallon this spring, as many economists now expect. The price of West Texas Intermediate Crude (WTI), the benchmark for U.S. oil prices, has been surging lately, and seasonal effects imply "pain at the pump," come this spring.
I've been thinking about oil prices as I review the holdings in my $100,000 Real-Money Portfolio. Stocks such as Ford (NYSE: F), Alcoa (NYSE: AA) and Hasbro (NYSE: HAS) could all be vulnerable to rising oil prices if consumers start to retrench.
To hedge against such a possibility, it's time to add exposure to crude oil. If prices do indeed rise, then an oil producer is likely to see its stock rise by a significant amount, as was the case in the oil "Super-Spike" of 2008.
Of course, I could simply look to acquire shares of an "oil major" such as ExxonMobil (NYSE: XOM) or ConocoPhillips (NYSE: COP). But I've got my eye on an oil stock with potentially much more upside. Best of all, this company's stock looks undervalued even if oil prices pull back by a moderate amount.
I'm talking about Marathon Oil (NYSE: MRO). The company got its start back in 1887 (known then as the Ohio Oil Co.), was acquired by U.S. Steel (NYSE: X) in 1982, and was spun off as an independent company in 2002. Marathon has recently completed a pair of transactions that help establish broadly-diversified regional exposure and also sets the stage for robust free cash flow in coming years. Against that backdrop, shares are quite inexpensive, trading for less than four times projected 2012 EBITDA.
A cleaner story
Oil production is a very profitable business. Yet many oil-related businesses such as petrochemicals and refining are not always consistent money-makers. That's why Marathon spun off Marathon Petroleum (NYSE: MPC), it's oil refining division, last July.