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Understanding Marathon Oil’s Profitability Metrics in 3Q16

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Operating income

Marathon Oil (MRO) reported an operating income of about -$203 million in 3Q16, up from about -$1.1 billion in 3Q15. That represents a rise of ~$867 million in operating income on a YoY (year-over-year) basis. But Marathon Oil’s 3Q16 operating income was lower by ~$51 million from about -$152 million in 2Q16.

Despite its ~$250 million YoY fall in 3Q16 revenues (see Part 1), MRO’s operating expenses fell ~$1.1 billion, mainly due to lower exploration expenses and lower impairment charges in 3Q16 as compared to 3Q15. The company’s production expenses were marginally higher in 3Q16, whereas G&A (general and administrative) and DD&A (depreciation, depletion, and amortization) expenses were marginally higher in 3Q16 from 3Q15.

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Net income

In 3Q16, Marathon Oil’s reported higher net income YoY (year-over-year) but lower on a sequential basis. Marathon Oil reported net income of about -$192 million, or -$0.23 per share, in 3Q16, as compared to about -$749 million, or -$1.11 per share, during 3Q15. Sequentially, MRO’s 3Q16 net income was ~$22 million higher than its -$170 million in 2Q16.

Peers ConocoPhillips (COP), Diamondback Energy (FANG), and EOG Resources (EOG) reported net income of about -$1.04 billion (roughly -$0.84 per share), approximately -$2.2 million (roughly -$0.03 per share), and about -$190 million (roughly -$0.35 per share), respectively, in 3Q16.

The Energy Select Sector SPDR ETF (XLE) generally invests at least 95% of its total assets in oil- and gas-related equities from the S&P 500.

Adjusted net income

After deducting special non-recurring items, MRO’s 3Q16 net income came in at about -$95 million, or -$0.11 per share. Marathon Oil reported non-recurring losses of ~$97 million related to the termination of rig contracts, pension settlement expenses, and non-cash impairments charges, which explains in the deviation between GAAP (generally accepted accounting principles) and adjusted net income.

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