uploads/2016/09/MRO-2Q16-net-debt-to-adjusted-EBITDA-1.jpg

Is Marathon Oil’s Debt Load Becoming Too Heavy for Its Declining Earnings?

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Marathon Oil’s debt

As of June 30, 2016, Marathon Oil’s (MRO) total debt stood at ~$7.3 billion. With ~$2.6 billion in cash and cash equivalents, MRO’s net debt was ~$4.7 billion at the end of 2Q16.

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Net debt-to-adjusted EBITDA

Net debt-to-adjusted EBITDA is a debt ratio, which shows how many years it would take for a company to pay back its debt in the current situation.

In 2Q16, MRO’s net debt-to-adjusted EBITDA was high at ~3.1x. When compared to its net debt-to-adjusted EBITDA historical average of ~1.7x, MRO’s current net debt-to-adjusted EBITDA is also high.

Net debt-to-adjusted EBITDA trend

In 1H16, Marathon Oil’s net debt-to-adjusted EBITDA ratio has risen from ~2.7x to ~3.1x, despite the ~22% fall in its net debt. This increase in net debt-to-adjusted EBITDA ratio in 1H16 can be attributed to the ~31% fall in its trailing-12-month adjusted EBITDA to ~$1.5 billion in the same period.

From 4Q14 to 2Q16, Marathon Oil’s net debt-to-adjusted EBITDA ratio has increased from ~0.9x to ~3.1x. This steep rise in net debt-to-adjusted EBITDA ratio since 4Q14 can be attributed to the steep fall in MRO’s earnings.

From 4Q14 to 2Q16, Marathon Oil’s net debt has fallen from nearly $4.0 billion to ~$4.7 billion, whereas its trailing-12-month adjusted EBITDA has fallen ~65% from ~$4.4 billion to ~$1.5 billion during the same period.

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Other upstream players

Other upstream companies like Diamondback Energy (FANG), Consol Energy (CNX), and EOG Resources (EOG) have net debt-to-adjusted EBITDA ratios of ~0.8x, ~5.1x, and ~2.5x, respectively. The Energy Select Sector SPDR ETF (XLE) generally invests at least 95% of its total assets in oil and gas related equities from S&P 500.

Marathon Oil’s adjusted EBITDA

In 2014, 2015, and 2016, MRO reported before tax non-cash quarterly charges totaling ~$376 million, ~$1.3 billion, and ~$141 million, respectively, related to the impairment of its proved and unproved reserves. These quarterly impairment charges and other quarterly one-time charges have been excluded to calculate its quarterly adjusted EBITDA.

The above chart shows the net debt-to-adjusted EBITDA ratio calculated using these adjusted EBITDAs in its trailing-12-month EBITDA calculations. To know more about how MRO’s adjusted EBITDA was affected due to lower crude oil prices, please refer to the Part 1 of this series. Continue to the next part for more on Marathon Oil’s debt.

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