Is Marathon Oil Trading Cheaper Compared to its Peers?



Marathon Oil’s relative valuation

The table below shows the different fundamental ratios for upstream companies that have similar production mixes and overlapping geographical areas of operations.

As you can see, Marathon Oil (MRO) has forward EV-to-EBITDA ratio of ~12x, which is much lower than that of Diamondback Energy’s (FANG) ratio of ~19x. EOG Resources (EOG) and Devon Energy (DVN), which operate in the unconventional resource space, have forward EV-to-EBITDA ratios of ~15x and ~16x, respectively.

MRO’s forward EV-to-EBITDA ratio is slightly higher EOR (enhanced oil recovery) company Denbury Resources’ (DNR) forward EV-to-EBITDA ratio of ~11x. Marathon Oil’s forward enterprise multiple thus appears to be on the low side compared to peers.

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Marathon Oil’s price-to-sales and price-to-book multiples

In the price-to-book metric, MRO appears to be cheapest among peers, with a multiple of only ~0.64x. As for its price-to-sales ratio, MRO comes in the middle of the pack, with a multiple of ~2.8x.

Is Marathon Oil’s lower forward enterprise multiple justified?

Typically, companies with lower leverage or higher current ratios trade at higher enterprise multiples. One possible explanation for this trend could be a fear of an energy-driven debt crisis if commodity prices stay low or move further down for much longer than anticipated.

As of 2Q16, MRO had a low debt-to-equity ratio of ~38%. MRO had a higher current ratio of ~2.7x at the end of the same quarter.

But as we discussed previously this series, due to MRO’s declining earnings, its net debt-to-adjusted-EBITDA ratio has been on an upward trajectory. MRO’s lower adjusted EBITDA-to-cash-interest-payment ratio (see Part 6), declining production (as a result of lower capex), lower hedging effectiveness, and lower margins (see Part 3) are concerning. Given all these factors, that MRO’s stock trading at the lower end of the multiple range appears to be justified.

Now let’s discuss short interest.


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