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Marathon Oil: Conventional Stability, Unconventional Growth

Summary

Marathon Oil Corporation materially shored up its financial position in Q2 2016.

The company made a big bet on the Meramec with its purchase of an additional 61,000 net acres, a bold but potentially very worthwhile endeavor.

Marathon Oil completed the Alba 3B Compression project in July and will use FCF generated from Equatorial Guinea to fund unconventional investments in America.

Riding oil prices higher, Marathon Oil Corporation's (NYSE:MRO) operating cash flow, including working capital effects, firmed up to $178 million in Q2 2016 versus $74 million in Q1. Without including working capital effects, Marathon Oil's cash flow surged from $55 million to $290 million over that time frame. Stacked up against $90 million in non-capitalized quarterly interest payments, $299 million in cash additions to property, plant and equipment, and $39 million in dividend payments, Marathon Oil Corporation still has a ways to go.

At the end of Q2 2016, Marathon Oil had $3.75 billion in current assets versus just $1.38 billion in current liabilities (keep in mind its $888 million STACK purchase had yet to be recorded). With ample levels of liquidity, the real issue is Marathon Oil's $7.3 billion in long term debt. The next maturity isn't until Q4 2017, when $682 million of its debt comes due, but it is a situation that needs to be monitored. Marathon Oil's $3.3 billion revolving credit line remains undrawn, providing it additional access to liquidity for whatever situation arises.

In regards to Marathon Oil's asset sales, it had received a total of $80 million from the sale of its 10% stake in the Shenandoah discovery in the Gulf of Mexico, undeveloped West Texas acreage, and its Piceance Basin operations in Colorado during the second quarter. Marathon also booked $690 million of its $870 million in expected proceeds from the sale of its Wyoming assets, with the rest forecasted to pad its balance sheet by the end of the year. Those numbers are before factoring in closing adjustments.

By shedding these assets, Marathon Oil was able to raise the funds needed to justify its purchase of additional STACK acreage in June. For $888 million, Marathon Oil Corporation bought PayRock Energy Holdings and its 61,000 net acres in the STACK region (with a particular focus on the Meramec shale play) that was producing 9,000 net BOE/d as of its acquisition announcement. That deal closed on August 1 and will be reflected during its Q3 update.

Even with the increased levels of drilling activity that coincided with the purchase, Marathon Oil was still able to lower its 2016 capex budget by $100 million to $1.3 billion. As of the first half of this year, the upstream firm has spent roughly $600 million of that, implying a slight pick up in spending going forward as drilling ramps up. A fourth rig is going to be added to Marathon's STACK operations at the end of this quarter to speed up its delineation process in the emerging and prolific Meramec shale play.

STACK update

Marathon Oil Corporation turned two operated extended lateral length wells online in the...


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