Marathon Oil (NYSE:MRO) recently upped its ante in the STACK play in western Oklahoma, purchasing approximately 61,000 acres from PayRock Holdings. As oil prices continue to hover around $50 per barrel, Marathon is looking to increase its positions in areas where it can find good value, which it thinks it can find in the STACK.
However, while Marathon has taken a bullish view of the STACK, I do not yet feel the same away about the company. Here's why.
Looking for value
Marathon has been on a crusade in recent months to divest assets not considered core to its business. Since late last year, it has sold off more than $1.3 billion in assets, including all of its positions in the Big Horn and Wind River plays in Wyoming, and the 570-mile Red Butte pipeline.
This all fits into Marathon Oil President and CEO Lee Tillman's strategic plan. As he puts it, "Ongoing portfolio management continues to drive the simplification and concentration of our portfolio to lower risk, higher return U.S. resource plays and support our 2016 objective of balance sheet protection."
So, it shouldn't have come as a surprise that Marathon looked to expand its position in the STACK, short for Sooner Trend Anadarko Basin Canadian and Kingfisher Counties. The STACK, still early in its production stages, is generating well returns of 10% to 30% with oil at $45, and Morgan Stanley analysts recently wrote about its potential for "capital efficient production growth."
The 61,000-acre purchase in the STACK brings Marathon's total acreage in the region to over 200,000. PayRock had been producing 9,000 barrels of oil equivalent per day (boe/d) in the area, and Marathon will add that to its current production capacity from the Oklahoma basins of 27,000 boe/d. Further, Marathon expects to add four rigs to the area after the purchase officially closes in the third quarter of 2016.
Shoring up its balance sheet
Marathon felt it could invest in future growth because of the steps it had taken to clean up its balance sheet. Selling off the $1.3 billion in assets contributed to its current $2.1 billion in cash on hand. Add in a $3.3 billion revolving credit facility, and Marathon finally appears to have some legitimate buying power.
With that said, I think Marathon has some additional work to do. The company has been rocked by quarterly losses -- most recently a $407 million net loss in the first quarter, which actually looks meager when compared to the $793 million net loss of the preceding quarter. The losses, of course, can be attributed to the devastating drop in oil prices as well as asset and Goodwill impairments, but Marathon needs to prove that it can weather future shocks to the market.
Its divestments of non-core assets and its investments in low-risk U.S. resource plays are the makings of a great trend -- particularly if the STACK pans out as expected. I also find it encouraging that Marathon isn't the only company seeking out acreage in the region. Devon Energy (NYSE:DVN) recently agreed to buy 80,000 acres in the STACK for $1.9 billion, while Newfield Exploration (NYSE: NFX) agreed to buy 42,000 acres for $470 million.
Marathon, though, still has a long way to go in working on its balance sheet. As of the end of the first quarter, the company had $7.3 billion in long-term debt and a total debt-to-capital ratio of 25%. While there's no long-term debt due within a year and the 25% ratio is fairly reasonable, the company will have to continue to raise capital. If oil prices don't continue to rise, particularly if oil begins to flood the market as companies expand production, then Marathon will need to seek out alternate avenues of cash flow. This year, it focused on divestments. At some point, it seems possible it will have to rely on share issuances and dilution.
The general opinion of the STACK purchase seems to be positive, and along with the divestments, Marathon has made good strides to clean up its balance sheet and make low-risk investments for future growth. Good strides, though, do not yet make it a great play. As an investor, you should watch this company closely to see if it continues to improve its balance sheet and invest in low-cost, low-risk oil plays before adding it to your portfolio.