Behind Marathon Oil’s Enterprise Multiple



Marathon Oil’s enterprise multiple

As of 3Q16, Marathon Oil’s (MRO) EV-to-normalized-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio came in around 27.4x, which was much higher than its historical average EV-to-normalized EBITDA ratio of ~15.4x during the past two years.

MRO’s EV-to-normalized-EBITDA ratio rose steeply in the first two quarters of 2016, mainly due to the rise in EV and a much steeper fall in normalized EBITDA. From 4Q15 to 2Q16 Marathon Oil’s enterprise value rose from ~$14.6 billion to ~$17.4 billion, whereas its trailing-12-month normalized EBITDA fell from ~$1.1 billion to ~$383 million during the same period.

In the longer term, MRO’s EV-to-normalized-EBITDA had been on a rising trend from 1Q15 to 2Q16. But in 3Q16, its EV-to-normalized-EBITDA fell steeply due to a higher trailing-12-month normalized EBITDA.

Marathon Oil’s forward EV-to-EBITDA multiple is ~17x, which is higher than its own historical average of ~15.4x.

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Enterprise multiple

The EV-to-EBITDA ratio is also referred to as enterprise multiple and is preferred to the PE (price-to-earnings) ratio—especially for upstream companies—because the former takes into account the debt of a company. In the enterprise multiple, enterprise value is the summation of market capitalization and market value of debt minus total cash and cash equivalents.

Other upstream players

Upstream companies W&T Offshore (WTI), Devon Energy (DVN), and Murphy Oil (MUR) have enterprise multiples of ~10x, ~16x, and ~18x, respectively.

Notably, the Direxion Daily Energy Bull 3X ETF (ERX) is a leveraged ETF that invests in domestic companies from the energy sector.


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