Marathon Oil - Q4 Earnings Preview And Outlook For 2016

| About: Marathon Oil (MRO)

Summary

Marathon to release fourth quarter earnings.

Downgrade will likely see further cuts.

2016 outlook.

Marathon to release fourth quarter earnings

Marathon Oil (NYSE:MRO) is set to release its fourth quarter earnings on Wednesday as the energy industry continues to battle depressed prices with investment and cost cutting.

Analysts are currently expecting a loss of -0.48 per share for the Houston, Texas-based firm.

Downgrade will likely see further cuts

In a setback for Marathon, the company saw $7.8 billion of its debt downgraded by Fitch, to 'BBB' from 'BBB+'. The downgrade was issued with a base case for $45 per barrel in 2016 and $55 in 2017 and the main reason was a Marathon debt/EBITDA of 3.8x and a free cash flow of -$390 million.

First of all, the Q4 figures will likely highlight another revision in its 2015 capital investment program, which was 7% in the third quarter for a revised total of $3.1 billion. It's possible we could see this down another 10% at $2.5-2.7 billion.

Although the company was on course for a 7% total production increase and a 20% US increase, Marathon has a high exposure to liquids and at some point soon, depressed prices will catch up to this growth and other efficiency savings.

So the fourth quarter results or the first half of 2016 are likely to see this addressed in light of the recent downgrade.

First to go in November were producing acreage in the Ewing Bank and non-operated interests in the Gulf for $205 million. After divesting in other non-core assets in the US and East Africa, CEO Lee Tillman said the company was planning "meaningful cost reductions."

2016 outlook

With 3,300 employees, unfortunately, Marathon may follow the lead of companies like Devon Energy (NYSE:DVN) who just announced a 20% cut in their workforce to take place in the first quarter of 2016.

Shareholders have already been promised a reduced dividend of 0.05 per share with a yield of 2.87% and it's likely that an annual dividend of 0.30-0.40 would be the upper limit amidst the expectation for flat oil prices in the first half of 2016. The dividend cut puts it in line with the five-year average dividend yield of 2.5% into 2015.

Marathon will likely try to announce the bulk of its bad news for the fourth quarter of 2015 whilst the oil price is still stuck at $30. The company would benefit from a rise in oil prices as the company has cut significant costs in production and marketing and has a high exposure to liquids prices with the possibility of further savings in the fourth quarter announcement.

At present, I would stand aside as I'm not convinced about the OPEC situation. There is a possibility of a rally to $34 again initially which may see prices catch up to other commodity moves; however, the next moves are quite crucial to oil prices after recent new lows and a lack of follow-through in the bounce so far.

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