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Marathon Oil's Earnings Slammed by Lower Crude Prices

By Matthew DiLallo – May 7, 2020 at 8:09AM

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The oil and gas producer continues to take actions to protect its balance sheet amid the oil market's current storm.

Marathon Oil (MRO -0.96%) was one of many oil producers to feel the pressure of falling oil prices during the first quarter. The company had to take swift action to combat that crash in crude pricing so it could maintain its financial strength and flexibility during this downturn.

Drilling down into Marathon Oil's first-quarter earnings

Metric

Q3 2019

Guidance or Expectations

Total production

422,000 BOE/D

410,000 to 420,000 BOE/D

Production from U.S. shale

340,000 BOE/D

330,000 to 340,000 BOE/D

Earnings per share

($0.16)

($0.15)

Data source: Marathon Oil. BOE/D=barrels of oil equivalent per day. 

On a positive note, Marathon Oil's production came in above the high end of its guidance range during the quarter. Its U.S. production was right at the top of its forecast thanks to a gusher of oil output from its four main resource plays in the country. Overall, it produced 207,000 barrels of oil per day (BPD), which came in above its 192,000-202,000 BPD guidance range. The primary fuel sources, however, were its positions in the Eagle Ford and Bakken, where it delivered strong drilling results. The company's international operations in Equatorial Guinea, meanwhile, chipped in with 82,000 BPD of production, which came in above the top end of its forecast.

Despite those high-end results, Marathon Oil lost money during the quarter. Overall, the company tallied an adjusted net loss of $125 million, or $0.16 per share, which was a bit worse than analysts anticipated. While the company kept its production costs low -- including a record $4.63 per BOE in the U.S. -- it couldn't overcome the impact of tumbling oil prices.  

Two oil pumps with a bright sun in the background.

Image source: Getty Images.

A look at what's ahead for Marathon Oil

Cratering crude prices during the quarter forced Marathon to make several adjustments to its strategy. The company cut its capital spending plan by $1.1 billion, bringing it down to $1.3 billion for the year, which is about 50% less than 2019's total. It will invest 95% of that capital into developing its resources in the Eagle Ford and Bakken, though the company doesn't plan to complete any new wells during the second quarter because of lower oil prices. As a result of the spending and activity reduction, as well as its plan to shut in unprofitable wells during the second quarter because of low prices, Marathon expects its U.S. production to decline by 8% this year.

Marathon is also working to reduce other cash costs by about $350 million this year, which would be 20% below its initial budget. The company also plans to temporarily suspend its dividend as well as its share repurchase plan to bolster its financial flexibility.

Those moves will help shore up an already solid balance sheet, which included an investment-grade credit rating, $817 million in cash, and $3 billion of available credit. Marathon also took steps to protect its cash flow by layering in additional oil hedges. Overall, it has contracts in place to cover 117,000 BPD during the second quarter (roughly half of its daily average in the first quarter) that lock in an oil price of at least $30.33 per barrel.

Hunkering down while the storm passes

Marathon made several adjustments to its 2020 operating plan to put it in an even stronger position to navigate through the current challenging market conditions. It will press pause on its drilling program, dividend, and stock buyback until the environment improves. Those are all prudent moves as they increase the probability that Marathon can survive the industry's latest rough patch so that it can ride the rebound, which it hopes will happen during the second half of this year.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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