Marathon oil (NYSE: MRO) is one of many oil and gas producers to feel the impact of falling crude prices. The company reports first quarter loss that falling prices were eroding its margins. These low prices forced him to cut bare spending – including the suspension of his dividend and his share buyback program – so that he could survive this recession.
However, one of the main themes of the business first quarter conference call was that Marathon doesn’t just expect to survive; he expects to thrive when conditions improve.
CEO Lee Tillman said that “if we’re really in uncharted waters,” Marathon is “determined and confident that we will come out of this fix, a healthier business with an improved cost structure and great financial flexibility.”
Here is an overview of what drives this view.
Lower the break-even point
Marathon has cut spending considerably this year. the fuel company reduced its investment budget by $ 1.1 billion from its initial level, reducing it to $ 1.3 billion, 50% less than last year. While this drop in spending and the associated reduction in drilling activity will decrease production in the short term, Marathon expects volumes to begin improving by the fourth quarter.
The company also plans to reduce its cash costs by about $ 350 million, or 20%, from its original budget. While some of these cost savings are only temporary, Tillman noted that “about 40% of these cash cost savings are attributable to our fixed cost structure, savings that will be sustained even in the event of recovery with material prices higher raw materials and increased production volumes. “
These actions will have a significant positive impact on cash flow while prices remain low as well as in the early stages of a recovery in oil prices. Tillman said: “To put these cost efforts into perspective, the total annual reductions taken directly from the bottom line will result in a $ 5 to $ 6 per barrel improvement in our oil price break even. will improve our ability to generate free cash flow in any recovery scenario. “Tillman estimates that” in the second half of this year, we expect oil breakeven to be low at $ 30 per barrel “and adds : “Our collective actions are positioning our business well, not only for today’s reality, but for the possible recovery of raw material prices. “
Strengthening an already solid financial base
Marathon’s cost reductions, which included the suspension of its dividend and share buyback plan, allow it to “prioritize the financial strength of the company [and] protect our balance sheet, liquidity and generation of cash flow. “This will allow the company to maintain its financial flexibility, which included a considerable cash position of $ 800 million and borrowing capacity of $ 3 billion on its unused credit facility. Because of this cushion and the measures taken by the company to lower its break-even point, Marathon was able to maintain its premium credit rating, which improves the company’s access to lower-cost credit, which will prove useful when it needs it. refinance its debt, even if it is not the case, have a maturity until November 2022.
With its finances stabilized, Marathon will have the flexibility to reward its investors once market conditions improve. Tillman said that “the return of capital to our shareholders remains a basic strategic objective for our business.” While the company made the prudent decision to suspend distributions to shareholders during this downturn, Tillman made it clear that “we have called our suspension temporary.” He further stated: “We plan to resume the return of capital to our shareholders by improving visibility on the normalization of macroeconomic conditions and, ultimately, for a sustainable generation of free cash flow”.
Take action for a stronger future
Tillman said that the actions taken by Marathon have made the company feel “very good in the way we have positioned our business.” He has the financial flexibility to weather this storm. At the same time, the measures taken to reduce costs and strengthen its balance sheet should make it emerge even more, as it will be able to generate more liquidity at lower oil prices. This is expected to increase its cash flow and ability to return capital to investors once market conditions improve. It is one of the best positioned oil stocks for the possible market rebound.