Marathon Oil (MRO) shares fell more than 5% in after-hours trading Monday after the company unveiled a 135,000,000 share public offering. At MRO's current price of just under $8 per share, the offering would raise about $1.05 billion.
It's a sign of the times in the energy industry. High-yield and near-high-yield bond prices are so low, that it is easier and more economical for large E&Ps like Marathon -- which was recently downgraded by S&P to BBB-, the lowest investment-grade rating -- to issue equity rather than debt.
The offering represents about 20% dilution to Marathon's equity shareholders -- the company had 678 million shares outstanding on average in the fourth quarter -- and is, I'm sure, a bitter pill for Marathon management, given that MRO shares were trading in the $30s last April.
But they're doing what they need to do from a balance sheet perspective. Marathon touted its $1.2 billion in cash at year-end and $3 billion undrawn amount available on its revolving credit facility, but its balance sheet at the end of last year also showed $7.3 billion in long-term debt.
Marathon management budgeted 2016 capital expenditures at $1.4 billion, down more than 50% from 2015's level and more than 75% from 2014's level. The ability to finance the majority of that capital spend with equity rather than debt separates MRO from many of its more highly-leveraged E&P peers, and I believe they chose wisely to issue stock at this time.
At the other extreme is Exxon (XOM). The integrated giant launched a $12 billion bond offering after the close Monday. Exxon still sports S&P's very rare AAA rating, and it's taking advantage of it in a way that managements at companies like Marathon could only dream of. Exxon's downstream and chemicals operations cushion the blow from the impact of low oil prices on the company's upstream division.
Ultimately, Exxon's shareholders will benefit. Some of the proceeds from the debt offering, even if not specifically earmarked for this purpose, will be used to pay the company's $2.92 per share annual dividend. Never forget that cash is fungible; Exxon shareholders will benefit more from receiving the cash (albeit after double taxation is applied) than they would if it were used to drill shale wells in the United States or to support some of Exxon's far-flung projects in parts of the globe that you have probably never heard of.
That's what's most frustrating to me about 2016-vintage stock market analysis. It's all sound bites and 140-charcter blurbs. "Avoid energy! They are all going bankrupt! Shale drilling is a Ponzi scheme!"
When you are buying shares in a company, you are buying a piece -- however small -- of the company's balance sheet. With oil hovering below $34 per barrel, the most important figures for any energy company are cash and debt. Forget about EPS, EBITDA and revenues. Seriously. Just look for some good balance sheets, and hang in there.
Exxon's shares have hung in remarkably well in this oil rout, but a look at the safe 3.64% yield -- which the company just yet again proved they will borrow to protect -- and the AAA-rating makes the stock's ability to hold $80 somewhat less remarkable, actually. It's a buy-and-hold forever.
So, put your Exxon shares in a locked trunk somewhere, and use stocks like Marathon to try and time the oil recovery.