Why Marathon Oil’s Normalized Free Cash Flows Are Trending Down



Marathon Oil’s normalized free cash flow in 2017

In 9M17 (the first nine months of 2017), Marathon Oil (MRO) had normalized free cash flows (or FCF) of ~20%, the second highest among the upstream producers we have been tracking. To know more about our normalized free cash flow methodology and filtering criteria, refer to part one of this series. In this part, we’ll study MRO’s quarterly free cash flow and quarterly normalized free cash flow trends.

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Marathon Oil’s free cash flow trend

In 3Q17, Marathon Oil reported positive free cash flow (or FCF) of ~$34 million, which is ~28% lower when compared with MRO’s FCF of ~$47 million in 3Q16. In the last four quarters, Marathon Oil’s free cash flow showed an inverted U-shaped trend. On a quarter-over-quarter basis, MRO’s free cash flow rose sharply in 4Q16 and 1Q17 but fell sharply in 2Q17 and 3Q17.

Marathon Oil’s normalized free cash flow trend

In the last one year, Marathon Oil’s (MRO) normalized free cash flow (or FCF) fell from ~18% in 3Q16 to ~6% in 3Q17. The decrease in MRO’s normalized FCF in the last four quarters can be attributed to the higher increase in its capital expenditures than the increase in its OCF (operating cash flow) in the last four quarters.

Marathon Oil’s OCF rose sharply by ~110% from ~$268 million in 3Q16 to ~$564 million in 3Q17. However, Marathon Oil’s capital expenditures increased even more by ~140% from ~$221 million in 3Q16 to ~$530 million in 3Q17. The steep increase in MRO’s capital expenditure can be attributed to its increased focus on unconventional resources in the US.

Marathon Oil’s stock performance in 2017

Year-to-date in 2017, MRO’s stock is down by ~4.4%. In comparison, the SPDR S&P Oil and Gas Exploration & Production ETF (XOP), which has more than 78% exposure to upstream companies, fell ~13.1%, whereas the SPDR Dow Jones Industrial Average ETF (DIA) rose ~27.9%.

Next, we will take a look at Murphy Oil’s (MUR) free cash flow trends.


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