Marathon Oil’s leverage
Due to its rise in total debt and its fall in stockholder equity, Marathon Oil’s (MRO) total debt-to-equity ratio, or leverage, rose from ~30.3% in 4Q14 to ~38.4% in 3Q16. This level of leverage is on the much lower side when compared with other oil and gas companies.
A higher debt-to-equity ratio usually indicates a higher risk of default because it hints at potential difficulties a company may have repaying or servicing its debt via the very assets that the debt financed.
How is MRO’s debt trending?
In 3Q16 Marathon Oil’s (MRO) total debt of ~$7.3 billion is almost at the same level as in 2Q16. MRO’s total debt in 3Q16 is ~$918 million higher, or ~14%, as compared to its total debt of ~$6.36 billion at the end of 2014. In 3Q15, Marathon Oil reported debt of ~$8.36 billion—its highest since 1Q10.
Stockholder equity on decline
Lower crude oil (USO) prices since 3Q14 have resulted in a steep decline in Marathon Oil’s total profit margin and have caused MRO to take non-cash impairment charges related to its proved and unproved reserves. This caused a falling trend in Marathon Oil’s retained earnings since 1Q15. From 4Q14 to 3Q16, Marathon Oil’s retained earnings fell from ~$17.6 billion in 4Q14 to ~$14.1 billion in 3Q16.
Despite the ~$3.6-billion fall in retained earnings, Marathon Oil’s total stockholder’s equity fell from ~$21 billion in 4Q14 to ~$18.9 billion in 3Q16, or by ~$2.1 billion, mainly because of MRO’s various equity offerings during the same period.
Now let’s take a look at a chart that reveals how negative changes in Marathon Oil’s retained earnings have affected its stockholder equity.