What does Marathon Oil Corporation’s (NYSE:MRO) Balance Sheet Tell Us About Its Future?
There are a number of reasons that attract investors towards large-cap companies such as Marathon Oil Corporation (NYSE:MRO), with a market cap of US$12.64B. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to extending previous success is in the health of the company’s financials. I will provide an overview of Marathon Oil’s financial liquidity and leverage to give you an idea of Marathon Oil’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into MRO here. Check out our latest analysis for Marathon Oil
How much cash does MRO generate through its operations?
MRO’s debt levels have fallen from US$7.27B to US$5.49B over the last 12 months , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$563.00M , ready to deploy into the business. On top of this, MRO has produced cash from operations of US$2.13B during the same period of time, resulting in an operating cash to total debt ratio of 38.79%, meaning that MRO’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In MRO’s case, it is able to generate 0.39x cash from its debt capital.
Does MRO’s liquid assets cover its short-term commitments?
With current liabilities at US$1.97B, the company has been able to meet these obligations given the level of current assets of US$2.57B, with a current ratio of 1.3x. Usually, for Oil and Gas companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does MRO face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 46.93%, MRO can be considered as an above-average leveraged company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. Though, since MRO is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although MRO’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around MRO’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure MRO has company-specific issues impacting its capital structure decisions. I suggest you continue to research Marathon Oil to get a better picture of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for MRO’s future growth? Take a look at our free research report of analyst consensus for MRO’s outlook.
Valuation: What is MRO worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether MRO is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
