Yahoo Finance What You Must Know About Marathon Oil Corporation’s (NYSE:MRO) Financial Strength
Marathon Oil Corporation (NYSE:MRO), a large-cap worth US$19.5b, comes to mind for investors seeking a strong and reliable stock investment. 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 their continued success lies in its financial health. This article will examine Marathon Oil’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into MRO here.
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Does MRO produce enough cash relative to debt?
Over the past year, MRO has reduced its debt from US$7.3b to US$5.5b , which is made up of current and long term debt. With this debt payback, MRO’s cash and short-term investments stands at US$1.7b for investing into the business. Moreover, MRO has produced cash from operations of US$2.5b during the same period of time, resulting in an operating cash to total debt ratio of 45%, meaning that MRO’s operating cash is sufficient to cover its 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 0.45x cash from its debt capital.
Can MRO meet its short-term obligations with the cash in hand?
At the current liabilities level of US$2.0b liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$3.1b, with a current ratio of 1.51x. Generally, for Oil and Gas companies, this is a reasonable ratio since there’s a 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 debt reaching 45% of equity, MRO may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. But since MRO is currently loss-making, sustainability of its current state of operations becomes a concern. 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. I admit this is a fairly basic analysis for MRO’s financial health. Other important fundamentals need to be considered alongside. You should 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
