Houston-based Marathon Oil (MRO, Financial), the $10.3 billion oil and gas company, nearly doubled its revenue to $1.07 billion in the first quarter compared to $570 million in first-quarter 2016.
Despite this impressive top-line growth, the company’s bottom line dropped a little more than 12 times its previous year and recorded a heavy loss of $4.96 billion compared to the loss of $407 million in first-quarter 2016.
Marathon Oil experienced a significant operational change as it divested its Canadian business in the first quarter, having recorded a $4.91 billion loss on the business. The company divested its Canadian business for $2.5 billion, excluding closing adjustments, to Shell (RDS.A, Financial) and Canadian Natural Resources Ltd. (CNQ, Financial).
In addition, the company expects production available for sale from the combined North America and International E&P segments, excluding Libya, to average 340,000 to 360,000 net boed, about 6% higher than 2016 at the midpoint on a divestiture-adjusted basis for full-year 2017.
Marathon Oil raised its full-year 2017 E&P production guidance range primarily due to the inclusion of production from its recent $1.8 billion Northern Delaware acquisitions (totaling 91,000 net surface acres and 5,000 net boed of production in the Permian basin, primarily in Northern Delaware).
"We’re off to a strong start in 2017, highlighted by our transformative portfolio moves to enter the Northern Delaware basin and exit the Canadian oil sands.
“With solid operational execution and strong well results in the first quarter, we held production flat sequentially in the resource plays and are well positioned to resume high-return production growth there in the second quarter. We're on track to deliver our 2017 capital program, having ramped up resource play activity from 12 to 20 rigs in the first quarter. We've also raised production guidance to reflect our Northern Delaware acquisitions.” –Â Marathon Oil President and CEO Lee Tillman
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Valuations
Marathon Oil has generated losses in the past four quarters leading to no trailing price-earnings (P/E) multiple. The company, nonetheless, traded at a price-book (P/B) ratio of 0.82 times vs. the industry median of 1.23 times and a price-sales (P/S) ratio of 2.04 times vs. the industry median of 3. The company also had a forward P/S ratio of 2.26 times.
The company also had trailing dividend yield of 1.65% with 0% payout ratio.
Total returns
Marathon Oil has failed to generate any positive returns in the past decade with (-)4.62% (annualized) total returns vs. the Standard & Poor's 500 index’s 7.05% annualized gains (Morningstar). So far this year, the oil and gas company generated 29.29% total losses vs. the index’s 9.6%.
Marathon Oil
According to filings, Marathon Oil was incorporated in 2001 and is an independent exploration and production company based in Houston and focused on U.S. unconventional resource plays with operations in North America, Europe and Africa.
As of December 2016, Marathon Oil had total proven reserves of 1.4 billion boe (barrels of oil equivalent). This compares to 2.2 billion boe on Dec. 31, 2015.
The company has two reportable operating segments: North America E&P and International E&P.
North America E&P
North America E&P explores for, produces and markets crude oil and condensate, NGLs and natural gas in North America.
In the recent quarter, revenue in Marathon Oil’s North America business rose by 29.8% to $680 million (75% of total sales excluding any adjustments) and had a segment loss of (-)$79 million compared to (-)$195 million the same period last year.
The segment has recovered pretty well as it experienced a 49% revenue drop back in first-quarter 2016 on a year-over-year basis.
Nonetheless, the North America segment generated revenue growth despite 13% lower overall net sales volumes of 208 mboed (thousand barrels of oil equivalent per day) as a result of the company’s disposition of Wyoming and certain nonoperated assets in West Texas and New Mexico in 2016.
International E&P
International E&P explores for, produces and markets crude oil and condensate, NGLs and natural gas outside of North America and produces and markets products manufactured from natural gas, such as LNG and methanol, in Equatorial Guinea.
Revenue in the first quarter jumped by 108% to $231 million year over year and generated a segment income of $93 million compared to $4 million in the first quarter of 2016.
This segment also demonstrated significant recovery having exhibited a 46.6% revenue drop back in first-quarter 2016 vs. 2015 operations.
According to filings, net sales volumes in international operations jumped by 31% to 126 mboed (thousand barrels of oil equivalent per day) year over year coming from Equatorial Guinea and Libya operations.
Sales and profits
In the past three years, Marathon Oil registered an annual revenue decline average of 32.26% (Morningstar). The company also recorded losses in both fiscal years 2015 and 2016.
Cash, debt and book value
As of March, Marathon Oil had $2.49 billion in cash and cash equivalents and $7.26 billion in debt with debt-equity ratio of 0.58 times vs. 0.41 times in the same period last year. Overall debt has declined by $17 million year over year while equity has dropped by $6.77 billion.
Goodwill elements were a negligible part of the company’s $24.5 billion assets. Book value declined by 35% to $12.58 billion year over year.
Cash flow
In the recent quarter, Marathon Oil’s cash flow from operations jumped by 7.3 times year over year to $501 million due to massive cash flow derived from discontinued operations. Capital expenditures were $283 million leaving the oil and gas company with $218 million in free cash flow compared to (-)$372 million in free cash outflow the year prior period.
In addition, the company allocated 22.4% of its free cash flow in dividends and share repurchases having spent about $7 million in the latter. According to filings, the company bought 376,000 of its shares back in the first quarter having an average repurchase price of $16.37 – unimpressively way higher (34.8%) than today’s share price of $12.14 (at the time of writing).
In review, the company failed to generate any positive free cash flow in the past two out of three fiscal years while having provided $2.17 billion in payouts, mostly dividends, in the same time period.
In the recent quarter, Marathon Oil neither issued nor repaid any debt.
Conclusion
Despite having recorded hefty discontinued operational profits in relation to the recently divested Canadian operations, Marathon Oil exhibited a strong recovery in the recent quarter in the rest of its operations. Further observation indicated that the company has been able to generate more of its growth from its operations overseas.
Marathon Oil’s recent purchase of Delaware assets indicated that the company is trying to milk in more business from its North American business in the coming quarters. Nonetheless, proven reserve has fallen year over year as of December 2016.
Despite the turmoil in the energy industry, Marathon Oil seemed to carry an acceptable leveraged balance sheet. Free cash flow generation, meanwhile, did not perform well as a result of this occurrence.
Twenty-nine analysts have an average price target of $18.31 per share –Â 50.8% higher than the share price of $12.14 (at the time of writing). Applying a three-year P/S multiple and revenue decline averages followed by a 30% margin indicated a value of $4.58 per share.
In summary, Marathon Oil is a pass.
Disclosure: I do not have shares in any of the companies mentioned.
