Is Marathon Oil Going Bankrupt?

For Marathon Oil (MRO) things are not going well in 2016. Its shares have further lost approximately 37% of their value since the start of the year, due to continued downturn in the oil prices.

Some positives

However, the company has high oil exposure and higher leverage to low-cost resource in the Eagle Ford, Bakken and SCOOP/STACK. All of these resources are capable of generating profits below $50 a barrel. Moreover, the company continues to enhance the efficiencies of its assets through a variety of factors such as reducing water handling costs, contract services, getting more of its products on the pipelines, enhancement in uptimes and development drilling efficiency.

As a result of these efficiency driven initiatives MRO has significantly improved efficiency for its assets.
For example, the company during the third-quarter drilled wells at an average rate of 2,000 feet per day, an 11% improvement over the previous quarter at Eagle Ford.

In fact, the time taken to drill an Eagle Ford well spud-to-total depth dropped to 10 days. With these drilling efficiencies the company exceeded its technical objectives with a 98% success rate geo-steering into a typical 25-foot target.

More positives to consider

Marathon Oil continues to aggressively attack costs. For instance, the company reduced its total E&P production expenses and G&A costs by over $136 million or 28% for the third-quarter as compared to the same quarter a year earlier. In fact, the company generated savings of nearly $290 million for the first nine-months of the year from these costs reductions moves.

In addition, Marathon Oil has significantly reduced its capital expenditure. For instance, the company for the third-quarter reduced its investment on exploration programs by 7% or $623 million sequentially. In fact, the company has reduced its capital expenditure for 2015 program by $200 million to $3.1 billion, primarily through a combination of U.S. resource play efficiency gains, and phasing of international projects. Looking ahead, the company plans to reduce its capital expenditure by over $600 million in 2016 from 2015 levels.

Apart from this, Marathon Oil has adjusted its quarterly dividend. During the third-quarter 2015, its board of directors decided to adjust quarterly dividend to $0.05 per share from $0.21 a share from the third-quarter onwards. This is a good move as this revised dividend will generate approximately $425 million in free cash flow going forward, and improve its balance sheet during this time of lower commodity price environment.

These costs savings over the past year have been very material to Marathon Oil, considering the low commodity price environment. For example, driven by these costs savings the company generated operating cash flows of $1.6 billion at the end of the third-quarter 2015, an increase of 7% as compared to operating cash flow of $1.5 billion at the end of second-quarter of 2015.

Moreover, the company further plans to reduce its operating as well as completions costs during the fourth-quarter of the year through above discussed initiatives. This should certainly enable the company to offset the impact of low oil price and generate higher cash flows.

Marathon Oil’s derivative instrument to protect its balance sheet in 2016

Marathon Oil benefitted considerably from its crude oil derivative instruments. The company generated approximately $108 million and $90 million in the third-quarter and the first nine months of 2015 respectively through its crude oil derivative instruments. Marathon Oil had no derivative instruments in 2014.

Looking ahead, the company has hedged nearly 12,000 barrels per day for January 2016 to December 2016, at a weighted average price of $60.48 per barrel on Floor, $60.00 per barrel on Ceiling and $50.00 per barrel on Sold put. Moreover, its call options have 10000 barrels per day hedged from Jan to Dec 2016 at weighted average price of $72.39 per barrel.


So, all-in-all Marathon Oil looks pretty strong. It is taking various strategic actions to remain competitive during this weak oil and gas price set up. It has reduced operating costs, lowered capital expenditure, cut dividend and enhanced efficiency for its assets through various innovative technologies. Also, it is now using derivative instruments to protect its balance sheet and drive value for its shareholders. These moves should enable the company to remain strong against the backdrop of low oil and gas prices.
Published on Feb 26, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

Posted in ...