Marathon Oil Corporation (MRO): Desperation Move Screams SELL!

Shareholders in Marathon Oil Corporation (MRO) couldn’t ditch MRO stock fast enough Tuesday morning.

Marathon Oil Corporation (MRO): Desperation Move Screams SELL!Indeed, shares fell sharply on stunning volume. As of 11 a.m., roughly 130 million shares had been traded versus an average of more than 30 million. Marathon Oil was the most active stock by far on the U.S. market soon after the opening bell.

The proximate cause for this stampede of selling is that MRO — as expected — said it would issue more stock. Investors hate such moves because it dilutes their stakes. They literally have to share the company’s profits with more owners.

And the dilutive effects on Marathon Oil stock are no joke. MRO is offering $1.23 billion in stock, or roughly a fifth of its market capitalization.

Of course, Marathon really has no choice in the matter.

Marathon Oil is an independent oil and gas producer during an epic rout in energy prices. Theoretically, MRO could have chosen to sell debt to raise cash, but the numbers make no sense.

Standard & Poor’s recently downgraded MRO to its lowest investment-grade credit rating. By being on the precipice of junk bond status, Marathon Oil could only get bondholders interested by adding yet more higher-yielding debt to its balance sheet. The company already carries $7.3 billion in long-term debt.

So the oil company went the equity route. Sure, it’s better than defaulting on extant debt or having to declare bankruptcy, but what happens if the cash crunch comes back sooner rather than later? It’s impossible to predict oil prices, but the current slump looks like it’s got plenty of room to run.

Will MRO have to dilute shareholders stakes even further?

Marathon Oil (MRO) Is Just Trying to Survive

That’s the big worry is on the market’s mind, no doubt. Just look at how fast and furious investors sold MRO on Tuesday morning. Marathon Oil stock lost more than 7% in the first 60 minutes of trading, and again, on outrageously high volume.

On the bullish side, the stock sale should bolster the idea that Marathon Oil will have enough cash to get through the oil-and-gas depression. It’s also not like MRO’s desperation moves stands out. Devon Energy Corp. (DVN), Pioneer Natural Resources (PXD) and Hess Corp. (HES) are also selling shares to raise cash.

On the downside, however, Marathon has already cut its dividend, slashed capital spending plans and sold assets. At some point, MRO will out of cash-saving bullets.

Marathon Oil stock has lost about three-quarters of its volume over the last 52 weeks, and you can bet that it has farther to fall. It’s walking a very fine line with this secondary offering. Heck, it cut capital spending and still needs some of the proceeds of the stock sale to fund those operations.

As noted above, Marathon Oil isn’t doing anything unusual in the oil and gas industry. It’s just trying to survive the worst slump in a generation. It’s right to address its liquidity concerns.

But not drowning isn’t the same as swimming. It’s too early to bet on a bottom in MRO or the rest of the sector just yet.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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