Why Marathon Oil Looks Better on Leverage



Marathon Oil’s debt trends

In 2Q16 Marathon Oil’s total debt of ~$7.3 billion is ~$918 million higher, or by ~14%, than its total debt of ~$6.4 billion at the end of 2014. In 3Q15, Marathon Oil reported its highest-ever debt of ~$8.7 billion since 1Q10.

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Marathon Oil’s equity trend

One thing that is not working in Marathon Oil’s (MRO) favor are lower crude oil prices (USO) UWTI) (DWTI) and natural gas prices (UNG) (UGAZ) (DGAZ).

Lower crude oil prices have resulted in steep declines in Marathon Oil’s total profit margin and have caused MRO to take non-cash impairment charges related to its proved and unproved reserves. These charges have caused a declining trend in Marathon Oil’s retained earnings since 1Q15. From 4Q14 to 2Q16 Marathon Oil’s retained earnings fell from ~$17.6 billion in 4Q14 to ~$14.3 billion in 2Q16.

But despite its ~$3.3 billion fall in retained earnings, Marathon Oil’s total stockholder’s equity only fell from ~$21.0 billion in 4Q14 to ~$19.2 billion in 2Q16, or by ~$1.87 billion, due to MRO’s various equity offerings during the same period.

Marathon Oil’s leverage

Due to its rise in total debt and its fall stockholder equity, Marathon Oil’s total debt-to-equity ratio, or leverage, rose from ~30% in 4Q14 to ~38% in 2Q16. This level of leverage is much lower than that of other oil and gas companies. SM Energy (SM), Gulfport Energy (GPOR), and WPX Energy (WPX) have debt-to-equity ratios of ~170%, ~43%, and ~87%, respectively.

A higher debt-to-equity ratio usually indicates a higher risk of default because it can hint at difficulty a company may be having in repaying or servicing its debt through the assets that the debt financed.

Now let’s take a look at how the negative change in Marathon Oil’s retained earnings has affected its stockholder equity.


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