Oil prices have been in the toilet for months now, but it was still something of a surprise when Marathon Oil announced that the company had sustained massive losses in the fourth quarter of 2015.
On Wednesday the company reported a $793 million loss for its fourth quarter, and is registering a $2.2 billion loss for the entire year, including a $ 1.2 billion loss of property and goodwill impairments. This is pretty much exactly what Houston energy industry analysts predicted would soon start happening, as companies begin to reckon with the full impact of oil prices being so low for so long, as we've recently noted.
It's particularly interesting to see Marathon grappling with the realities of the oil market, since it was one of the companies that really doubled down on the Eagle Ford Shale, one of the many plays that fueled the U.S. oil renaissance of the past few years.
Back in 2011, activity in the oil-rich Eagle Ford Shale play was just starting to really hum when Marathon Oil swung into action and started buying up drilling rights in South Texas shale play. Not only did the Houston-based oil company buy into the Eagle Ford hype, the firm belief espoused by many in the oil industry who claimed that, despite the long history of boom-to-bust cycles, this time oil was going to stay sky-high forever and this boom was never going to end. Marathon bought into the play itself in a huge way. It went all in on shale, to the point that when oil prices started to drop in the summer of 2014, Marathon had 180,000 net acres locked down in the Eagle Ford. (The company also had significant holdings in the Bakken Shale in North Dakota.)
It was a gamble, despite the sanguine predictions that Marathon would be using slant drilling and hydraulic fracturing to unlock shale formations in South Texas for years to come, and it was a gamble that a lot of U.S. oil companies made.
However, Marathon went in big, and it is now clear that it has lost on a grand scale as well. This is the company's first reported loss in 20 years, according to the Wall Street Journal.
In the face of this heavy blow, Marathon executives still tried to put a positive spin on things. They noted that they were able to increase production by about 8 percent over the course of 2015, once they'd adjusted for asset sales. It was also pointed out that Marathon had managed to cut its production costs so that the North American cost for exploration and production per barrel of oil was down 28 percent.
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"Through this cycle of sustained low oil prices and market volatility, Marathon Oil will continue to focus on balance sheet protection and operational flexibility," Marathon Oil President and CEO Lee Tillman stated in a release. Tillman talked up how responsible the company is being about handling all of this.
Marathon laid off 20 percent of its workforce in 2015, saving about $160 million. The company is also slashing its capital expenditures more than 50 percent, cutting back its budget from $3 billion in 2015 to $1.4 billion in 2016. In short, Marathon is trying to make it clear that it's doing the things that analysts have said will make oil companies look good to investors — i.e., making it clear that the company is focused on being efficient and profitable, not being daring risk takers who are eager to be on the forefront of exploration and innovation.
That caution extends even to the Eagle Ford. Marathon isn't pulling out of the play, even though it's often more expensive to get oil out of shale plays. Nope, the Eagle Ford has oil in the ground that Marathon is sure it can get at, so the company is putting about $600 million from its $1.4 billion budget into drilling wells and producing in the shale play. And that makes sense, since Marathon owns so much of it.
It's also worth remembering that while Marathon invested a lot in the Eagle Ford, it wasn't alone in that. The company isn't alone in the massive losses either, so we can expect more bad news from oil companies as we continue to roll through 2016.