Marathon Oil Corp. (MRO, Financial) is a global exploration and production company based in Houston. The company operates across four core regions of North America, Europe, the Middle East and Africa with three reportable operating segments:
- North America Exploration & Production: This segment explores, produces and markets crude oil, condensates, natural gas liquids (NGLs) and natural gas in North America.
- International E&P: This segment also explores, produces and markets crude oil and condensates, NGLs and natural gas outside of North America and produces and markets products manufactured from natural gas, such as liquefied natural gas (LNG) and methanol in Equatorial Guinea.
- Oil sands and mining: The company mines, extracts and transports bitumen from oil sands deposits in Alberta, Canada, and upgrades the bitumen to produce and market synthetic crude oil and vacuum gas oil.
Marathon Oil has been involved in selling off some of its nonproductive assets and at the same time acquiring some meaningful assets. Also, if we closely monitor the company’s strategic plans it is moving to a more U.S.-centric resource portfolio. This is primarily to cut down on its general and administrative costs and focus on its three value assets. In addition to value expansion the company has been managing its liquidity well.
Cost reduction plans
Oil and exploration companies had to cut down on their expenses to survive the economic downturn. One of the key ways is to sell/divest nonoperated or unprofitable assets and acquire value assets. Marathon Oil has been doing this successfully.
The company sold some of its nonoperated CO2 and water-flood assets in West Texas and New Mexico for $235 million on Oct. 3. The company sold some of its upstream and downstream noncore assets in Wyoming for $950 million on April 11. Further, the company has sold assets worth $1.5 billion since August 2015.
The proceeds of asset sales have been used in the acquisition of some value-rich assets. One such acquisition is of Payrock's STACK position for $888 million. The acquisition would expand the company’s quality and scale of existing portfolio in one of the best unconventional oil plays in the U.S. In fiscal 2017 it is expected to provide a minimum of four rig-drilling programs that would achieve leasehold drilling requirements while accelerating delineation work.
This portfolio management of concentrating and simplifying its asset base and focusing on higher margin plays has resulted in unit and absolute cost reduction. There has been about a 40% decrease in total E&P production expense since first-quarter 2015, resulting in a consistent high operational efficiency.
Liquidity and debt management
Marathon Oil had available cash of $2 billion as of Sept. 30. With available revolving credit facility of $3.3 billion the company has liquidity of $5.3 billion. For the nine months ended in September, operating cash flow and dividend distribution were $618 million and $119 million. Considering the same rate of cash inflow and dividend payout for fiscal 2016 the company would potentially report operating cash flow of $824 million and dividend payout of $168 million.
With oil prices moving higher and expectations that exploration and production activity will accelerate, we can expect better operating cash flows and higher capex requirements in the next financial year. Assuming a conservative operating cash flow of $1 billion for fiscal 2017 and with available cash and cash equivalents of $2 billion, the company is expected to have $3 billion to meet capex. This will ensure that the available liquidity buffer remains strong at the end of 2017 considering the revolving credit facility of $3.3 billion that remains unused.
Marathon will be in a position to offer better returns in the form of dividends to its shareholders in fiscal 2017.
Conclusion
Marathon Oil is one such exploration and production Company, which I believe is well positioned to benefit as oil moves higher. At the same time, the company is making significant cost reduction and investment decisions, which would translate to better margins in the future.
Disclosure: No position in the stock discussed.
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