Analysis Summary - Marathon Oil (NYSE: MRO) is fully funded for 2016 and 2017 capital expenditure and the company’s credit health is unlikely to worsen in the next 12-24 months. No significant debt maturity in near-term is added positive.
The chart below gives the company’s liquidity analysis for 2016 with potential sources of cash inflow and outflow.
With the recent public offering of common stocks, Marathon Oil has created a strong liquidity buffer to navigate the current crisis. I see the following key observations from the company’s liquidity position –
First, with expected capital expenditure of $1.43 billion, Marathon Oil is likely to close FY16 with liquidity buffer of $3.1 billion. For FY15, the company recorded operating cash flow of $1.5 billion and with 6% to 8% decline in production likely in FY16, the company’s OCF ball-park estimate is at a conservative $1.2 billion.
Second, with $3.1 billion likely liquidity for FY16, Marathon Oil is fully funded for 2017 assuming that the company increases capital expenditure for 2017 to $2.0 billion.
Third, Marathon Oil has undrawn credit facility of $3.0 billion and this implies FY16 total liquidity buffer of $6.1 billion. However, I expect the company’s credit facility to remain undrawn over the next 24 months.
Fourth, Marathon Oil has no debt maturity for 2016 and $682 million in debt maturity as of 2017, I expect the company to repay FY17 debt from existing cash instead of debt refinancing. It is also important to note here that of the $7.3 billion in debt, $4.9 billion in debt maturity comes after 2020. Therefore, the extended debt maturity profile is another credit positive.
I had last discussed the liquidity profile for Pioneer Natural Resources and similar to PXD, Marathon Oil has an excellent liquidity buffer with no balance sheet concerns even in the current crisis for the industry.
However, I maintain my view of remaining cautiously optimistic on the sector and investors can consider small exposure to few quality stocks in the energy industry.
There are speculations that major oil producing countries are likely to agree on production freeze. If this happens in the next few weeks, oil can continue to trend higher translating into more upside for quality energy names.
On the flipside, global economic activity seems to be weakening and investors need to keep a close watch on this factor over the next few months.