How Has Marathon Oil Contained Its Leverage?



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.

Marathon Oil’s peers ConocoPhillips (COP), EOG Resources (EOG), and Devon Energy (DVN) have debt-to-equity ratios of ~79%, ~58%, and ~144%, respectively.

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.

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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.


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