Company Profile: Marathon Oil Corp
Today, I would like to introduce you to Marathon Oil Corp ($MRO), an Oil & Gas Production company based in the United States that focuses on finding oil and gas in the ground. With the recent value drop in crude oil, the incentive to find oil has been drastically reduced, similar to miners mining Bitcoin when the value drops. However, I had researched quite a few oil companies as I believe when the dust settles, there should be a great recovery coming for both the oil producers and crude oil itself.
Recent Updates from Marathon Oil Corp
Marathon Oil has decided to cut its spending budget for the 2020 period from $2.4 billion to $1.3 billion. With an almost 50% budget reduction, they want to focus on establishing a proper liquidity position as well as prioritizing the company's values, which are their employees and dividends to its shareholders. They have been able to reduce their budget by suspending oil exploration in higher risk territories and investing in projects that were already successful. This philosophy is not common with other oil exploration and production companies within this time frame. Other companies are just playing the waiting game and expect governments or OPEC to solve the issue, but in fact, those outcomes are unpredictable inherently, thus Marathon Oil decided to take action as soon as possible.
The Future of Oil
In my opinion, oil will not be useless in the coming years, even with the rise of electric vehicles (EVs). With oil you can manufacture many other products than just gasoline. In fact, U.S. oil grew 13% according to Marathon Oil in 2019. We have seen crude oil prices drop from $60 to $20 in a matter of weeks but that does not mean it will continue to decline forever. Oil is a commodity after all, and it comes down to supply and demand, and other variables that can affect the supply and demand to find its equilibrium. As we have seen in the news, there are some factors that have caused the demand to decrease and supply to increase. Referring back prior in this article, once the dust settles I believe there will be great opportunities in oil.
So what are the Risks for Marathon?
Marathon Oil hedges for oil prices like 99% of the oil companies. However, a part of their production is not hedged, which could be considered a risk if oil prices fall even more in the short term. I consider their newly cash position to be somewhat of a hedge against this but it could backfire if they do not manage their production accordingly. I always like companies with low debt, Marathon is fairly balanced within the oil sector and its competitors. The debt (and interest on the debt) are of course paid by its cash flows from production. If oil prices are kept stable at roughly $15-$25 a barrel, then Marathon Oil will have to cut its margins and their loans will be prolonged. This means that Marathon's total repayment will be higher, which could set them back against its competitors with a better balance sheet.