Marathon Oil Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2021

There are 10 speakers on the call.

Operator

Welcome to the Marathon Oil Second Quarter Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session with your question, you can enter the queue by pressing star then 1.

Operator

Please note that this conference is being recorded. I will now turn the call over to Guy Baber, Vice President of Investor Relations.

Speaker 1

Thanks, Vanessa, and thank you to everyone for joining us this morning on the call. Yesterday, after the close, we issued a press release, A slide presentation and investor packet that address our Q2 2021 results. Those documents can be found on our website at marathonoil.com. Joining me on today's call are Lee Tillman, our Chairman, President and CEO Dane Whitehead, Executive VP and CFO Pat Wagner, Executive VP of Corporate Development and Strategy and Mike Henderson, Executive VP of Operations. As always, today's call will contain forward looking statements subject to risks and uncertainties that could cause actual results to differ materially From those expressed or implied by such statements, I'll refer everyone to the cautionary language included in the press release and presentation materials as well as to the risk factors described in our SEC filings.

Speaker 1

And with that, I'll turn the call over to Lee, who will provide his opening remarks. We'll also hear from Dane and Mike today before we get to our question and answer session. Lee?

Speaker 2

Thank you, Guy, And good morning to everyone listening to our call today. I want to begin by once again thanking our employees and contractors for Their continued dedication and hard work in putting together another quarter of outstanding execution. It is their hard work that makes all of the accomplishments that we will discuss today possible. The combination of our high quality multi basin portfolio, our differentiated execution and our commitment to capital discipline are driving truly exceptional results for our company. During Q2, we generated $420,000,000 of free cash flow, bringing free cash flow generation through the first half of the year to over $860,000,000 For our $1,000,000,000 full year 2021 capital budget, assuming $65 WTI and $3 Henry Hub, We now expect to generate $1,900,000,000 of free cash flow this year.

Speaker 2

This corresponds to a free cash flow yield north of 20% at a reinvestment rate of just 35% And the corporate free cash flow breakeven well below $35 per barrel WTI, a powerful combination of results We are successfully delivering on all of our financial, operational and ESG related objectives. We remain fully committed to capital discipline and our $1,000,000,000 capital program. As I've said many times, our budget is our budget, And we won't raise our spending levels with stronger commodity prices, but we'll simply generate more free cash flow. Supported by such strong performance, we have just raised our quarterly base dividend by 25%. This is the 2nd quarter in a row that we have We are also accelerating our balance sheet objectives, pulling forward achievement of our gross debt target, which will drive a shift in our return of capital focus toward equity holders.

Speaker 2

Further, We are enhancing our return of capital framework, now targeting at least 40% of our annual cash flow from operations to equity holders In a $60 per barrel WTI or higher price environment, while still retiring future debt at maturity. This is one of the most significant return of capital commitments to shareholders in our sector. Perhaps most importantly, Everything that we are doing is sustainable. The proof point for this sustainability is our 5 year benchmark maintenance scenario. We previously highlighted that this scenario can deliver around $5,000,000,000 of free cash flow from 2021 to 2025 In a flat $50 WTI price environment, with corporate free cash flow breakeven below $35 per barrel throughout the period.

Speaker 2

Updating our scenario for a flat $60 per barrel WTI price deck highlights the power of our balanced but oil weighted portfolio And the significant leverage we have to even modest commodity price support. At $60 flat WTI At an average reinvestment rate of 40%, we can deliver around $8,000,000,000 of cumulative free cash flow through 2025 Or more than 90% of our company's current market capitalization. Integrating our updated capital allocation framework with This maintenance capital scenario provides clear visibility to a leading return of capital profile. Over $1,000,000,000 of capital returned to equity holders per year in a $60 per barrel environment. And this consistent financial delivery is underpinned by well over a decade of high return inventory across 4 The most competitive U.

Speaker 2

S. Resource plays, complemented by our free cash flow generative EG Integrated Gas Business. Finally, the ongoing pursuit of ESG Excellence remains foundational to our strategy. Safety remains our top priority. Our first half twenty twenty one safety performance, as measured by total recordable incident rate, stands at 0.29 and follows on from 2 consecutive years of record setting company safety performance.

Speaker 2

We have taken a leadership role in governance, particularly when it comes to reshaping executive compensation. We have reduced compensation for executives and the Board, while also optimizing our framework for better alignment with shareholders and the financial metrics that matter. This includes the elimination of all production and growth targets as well as the introduction of a cumulative free cash flow target in our long term incentive program. And last but not least, we remain hard at work to reduce our GHG We continue to make progress towards achieving our GHG intensity reduction target of 30% in 2021, A metric hardwired into our compensation scorecard as well as our goal for a 50% reduction by 2025, both of these relative to our 2019 baseline. With that brief overview, I would like to turn it over to Mike Henderson,

Speaker 3

Our Executive Vice President of Operations, who will provide an update on our 2021 performance. Thanks, Lee. 2nd quarter operational results were outstanding, demonstrating that we remain firmly on track To achieve or outperform all of the key 2021 financial and operational objectives that we established at the beginning of the year. 1st and foremost, our consistent operational execution is translating to strong financial outcomes. Dollars 1,900,000,000 of free cash flow generation Assuming $65 WTI and $3 Henry Hub, a reinvestment rate of approximately 35% And a corporate free cash flow breakeven well below $35 per barrel WTI.

Speaker 3

Operationally, We remain disciplined and focused on delivering on all of our commitments. As Lee mentioned, there is no change to our 1 dollar full year 2021 capital budget. Raising our spending levels is simply not a consideration. We are however raising our full year U. S.

Speaker 3

Oil equivalent production guidance by 5,000 barrels per day or approximately 2%. Our full year oil production guidance remains unchanged. While full year guidance for CapEx and for oil production remains unchanged, I would like to address The production profile for the second half of the year. We now expect 3rd quarter oil production to be relatively flat with the 2nd quarter oil production of 170,000 barrels per day before an increase during 4th quarter Towards the high end of our annual guidance range. The flat trend in Q3 is largely the result of deferred Bakken production.

Speaker 3

As a result, We are taking advantage of our multi basin model and moving up a few Oklahoma and Permian wells in our schedule. This action returns and free cash flow accretive especially in the current price environment will be accomplished within our $1,000,000,000 capital budget And contributes to the 5,000 barrel a day increase to our annual oil equivalent production guidance. Our second half capital spending will be heavily weighted to 3rd quarter. Our schedule shifts now make this quarter our peak quarter for completion activity, including our REX multi well pad in the Texas Delaware oil play. More specifically, we expect 3rd quarter CapEx to account for approximately 65% of our second half spending or around $340,000,000 Relative to peers, our 2021 capital program remains well positioned to continue delivering industry leading results.

Speaker 3

As the top left graphic on Slide 9 shows, for every dollar of capital we're spending this year, we are delivering more cash flow than any other company in our peer group, a testament to our peer leading capital and operating efficiency. We are also delivering top tier free cash flow As highlighted by a free cash flow yield of more than 20%, our 2021 CapEx per barrel of production on either an oil Our oil equivalent basis remains among the lowest in the sector, another indication of our capital efficiency advantage. Finally, the strength of our results is driving rapid improvement to our investment grade balance sheet, which is already one of the strongest in our peer space. I will now turn it over to our Executive VP and CFO, Dane Whitehead, who will talk more About our balance sheet as well as our enhanced return of capital framework.

Speaker 4

Thank you, Mike, and good morning, everybody. My key message today is that we're clearly delivering on our top financial priorities. We're generating significant free cash flow, bulletproofing our already investment grade balance sheet and returning significant capital to our shareholders. Starting with our balance sheet, Strong operational and financial performance are enabling us to accelerate all the objectives we previously highlighted. This includes our $4,000,000,000 gross debt target, Which will now be achieved in early September when we close the full $900,000,000 make whole redemption of the 2025 maturity.

Speaker 4

With this balance sheet improvement, we're shifting our return of capital focus toward equity holders. To be clear, we've already strong progress this year in returning capital to shareholders, while simultaneously reducing our gross debt. It really has not been an either or proposition. We've increased our base dividend in each of the past two quarters or by 67% over this period. The annualized cash interest saving from this year's $1,400,000,000 gross debt reduction will largely fund our last two base dividend increases, Allowing us to keep our low corporate free cash flow breakeven on a post dividend basis effectively unchanged at $35 a barrel.

Speaker 4

Importantly, we're now at a key inflection point where we can accelerate the return of additional capital to equity holders above and beyond our sustainable And competitive base dividend. Our commitment is underscored by our enhanced return of capital framework, which now features a target to return at least 40% of our cash flow from operations to equity holders assuming a $60 per barrel WTI or higher price environment while also retiring future debt as it matures. To put this commitment into perspective, at a $60 price and with a maintenance level capital program, this equates to a return of over $1,000,000,000 to equity holders per year, And equity return equivalent of more than 11% of our current market cap. Though it's premature to discuss the 2022 capital At consensus operating cash flow for Marathon in 'twenty two, our target return Capital to equity holders would be over $1,200,000,000 This equates to a 13% return of capital yield, Leading return of capital profile among E and Ps and indeed across the energy sector at large. I'd like to emphasize that 40% of cash flow from operations is a minimum equity return target and so there's upside potential.

Speaker 4

At $60 a barrel on a maintenance scenario, we'd still be building cash on our balance sheet given our low projected reinvestment rate. And importantly, we don't necessarily have to wait until 2022 to get started. With the progress we made in our balance sheet and assuming continued strong free cash flow generation, it's reasonable to expect that we can begin making incremental returns Regarding our commitment to deliver a peer leading percentage of cash flow from operations back to shareholders, we will retain flexibility regarding the exact mechanism. Market dynamics change over time, and this flexibility will ensure that we're returning capital in the most efficient And most valuable way possible for our shareholders. This specific return of cash mechanism is something we'll continue to discuss with our Board And with our shareholders, while both buybacks and variable dividends are on the table, we certainly believe that with the free cash flow Yield north of 20% and equity valuations disconnected from commodity prices, buybacks look like a very accretive option With the potential to significantly improve our per share metrics.

Speaker 4

As a reminder, we have $1,300,000,000 of share repurchase Authorization currently outstanding. I'll now turn it back to Lee, who will provide his closing remarks.

Speaker 2

Thank you, Dane. To close, I would like to briefly reiterate a few of the key takeaways from our Q2 year to date results. It should be clear that we have successfully positioned our company to deliver strong financial performance, not only relative to our E and P peers, but relative to the broader S and P 500 as well. And we can now deliver the strong performance at a wide range of commodity prices. We are price takers, not price predictors and must be prepared to not only survive but to thrive in a volatile commodity environment.

Speaker 2

We are proving this year we can deliver outsized financial performance versus the broader market when we experience commodity price support, highlighted by an expected $1,900,000,000 of free cash flow generation this year. Yet perhaps more importantly, We are positioned to deliver a competitive free cash flow yield with the S and P 500 at much lower prices than we see today, All the way down to $40 per barrel WTI oil price. Such is the power of our sustainable cost structure reductions, our capital and operating efficiency improvements, which combine to generate our sub-thirty $5 per barrel breakeven. To use Dane's term, we have further bulletproofed our investment grade balance sheet, accelerating both our gross debt and net debt leverage objectives. And with this balance sheet improvement, we are now at an inflection point for capital return to equity holders, Supported by an enhanced framework that provides clear visibility to a peer leading return of capital profile.

Speaker 2

And all of this is sustainable, highlighted by $8,000,000,000 of free cash flow through 2025 Our $60 per barrel maintenance scenario, with the majority of that free cash flow going back to our equity investors, consistent with our capital allocation priorities. To close, our company was among the first to recognize the need to move to a business model compensation to this new model and with investor expectations. We are positioned to deliver both financial outcomes and ESG Excellent that are competitive not just with our direct E and P peers, but also the broader market. With that, we can open up the line for Q and A.

Operator

Thank you. We will now begin our question and answer And I see we have our first question from Scott Hanold with RBC Capital Markets. Please go ahead.

Speaker 5

Thanks. Good morning all. I think the updated shareholder return plan is pretty interesting Frankly, if I'm an investor. And Dane, I think you had made mention of, look, it's something you all don't have to So I wait on until 2022. Can you give us a sense of like how you think about timing?

Speaker 5

Is this more likely like, look, once you guys get That debt reduction done in September that's when you'd look at it and just kind of curious on the go forward plan. Is this something Evaluate once a quarter is done what the prices were, what the cash flow is to make that determination. Just is there any kind of structure of just getting a sense of You know how we're connecting that, ultimately that return with the commodity price environment?

Speaker 4

Yes. Thanks, Scott. So the short answer to the question I said in my opening comments is we feel like we can begin this enhanced return to equity holders in 2021. But let me give you a little more context than that, so You understand kind of where what I'm looking at as to when we start doing that and then I'll get on to your question about how do we execute it. So financial priorities are clear.

Speaker 4

We haven't changed those. Generate corporate returns with significant sustainable free cash flow, Bulletproof our investment grade balance sheet and return a significant amount of capital to shareholders well ahead of schedule on our balance sheet plan And assuming continued commodity price support and associated free cash flow, we think we can start Make incremental returns above our base dividend to equity holders in the second half of this year. On the base dividend, let me touch on that for a second. We've increased that twice now This year, the cumulative impact of that is a 67% increase year to date. At the same time, we've accelerated gross debt Reduction by $1,400,000,000 and there's a synergy there.

Speaker 4

The annualized interest savings from the gross debt reduction will essentially pay for the Dividend increases, so our post dividend enterprise breakeven is really holding flat at $35 a barrel as a result of that synergy. So getting the returns to equity holders and improving the balance sheet, I'd say walking and chewing gum mission accomplished, But more to come. So strong operational and financial performance year to date and commodity prices have allowed us to really accelerate the balance sheet to get What I laid out in our last quarterly call is my bogey, which is $4,000,000,000 gross debt target. We gave notice to the trustee on those 2025 bonds, the $900,000,000 maturity yesterday That we intend to exercise the make whole on the entire amount. It will close on September 3rd.

Speaker 4

And so after we do that make whole redemption on September 3rd, I would say it will take a bit of time to rebuild cash To a level where we can manage intra month sort of working capital swings without having to lean too heavily on our credit facility. But given the commodity price support we're getting right now, that should happen pretty quickly. And so with our balance sheet of goals achieved and continued Supportive commodity prices, we're right there at the inflection point where we can start moving ahead. And like I said, Once we get reasonable cash level, I think of like $400,000,000 is probably a reasonable amount, and then we can move forward. In terms of how do we execute on this thing, we've done share repurchases historically and have really approached it On sort of a ratable basis, thinking about it maybe a quarter at a time, set aside The amount of cash flow that generally that we've already generated that we want to use to purchase repurchase shares over that period was it 60 or 90 days, and then just execute it ratably sort of dollar cost averaging into it.

Speaker 4

And you can do that seamlessly. It allows you to manage your repurchase share repurchase limits More easily daily limits more easily when you do it that way as opposed to try and outsmart the market and buy in bulk on big In big chunks.

Speaker 5

Okay. And just I mean, part of that was too is like that You had different payout thresholds depending on the commodity price outlook. And I was just kind of just like how do you determine like this is a We're now looking at a 40% payout versus a 30% payout because obviously commodity prices right now Really point to more of a 40%, but obviously things can fluctuate. So is it on the quarter that was just accrued or the year that was accrued or just The dynamics that were that are kind of currently in the market and I think you all have a high class problem and sort of my second question is That when you look over each year, you've got $1,000,000,000 of cash that could come back to equity holders. Your buyback is $1,300,000,000 Your Dividend based dividend is $150,000,000 so like you've got to do a lot more in terms of like giving money back to shareholders.

Speaker 5

And so Obviously, there's a lot of different mechanisms you can look at, but like how do you think about what the best way to incrementally give back? And I know it's Probably a little premature for that, but if you can give us some structure, Leon, on how you think about that high class problem of like giving money back.

Speaker 4

Yes. So I think Scott, was your second question, is it share repurchases or variable dividends?

Speaker 5

Yes. I'm sorry, just to be clear, it's you've got like if you look over a 3 to 5 year period, you're Multiples in excess of what your buyback is right now and your base dividend. So there's a lot of room to do a lot more, Right. And so like as an investor and analyst, how should we think about like how you guys are thinking about the incremental ways of giving money back?

Speaker 4

Yes, okay. Well, let me talk about that first and then we can come back to Are we targeting 40% or 30% based on fluctuations in commodity price? So buybacks versus variable dividends, it's obviously something We have discussed frequently with our Board. We engage with shareholders about that on a regular basis. The bottom line is our clear commitment is to be delivering peer leading returns back to shareholders regardless of the vehicle.

Speaker 4

Both options are on the table, and there are pros and cons to each. And here's how we think about them. In the case of buybacks, With energy equity valuations so disconnected from commodity prices and our free cash flow yield at north of 20%, Buybacks certainly look like a very accretive option for shareholders in the current environment. If executed consistently over time, They have the potential to significantly reduce share count and meaningfully improve all our per share metrics. And We're kind of in a new paradigm, which I think makes share repurchases feel a little different maybe than they have historically

Speaker 5

In the new E and P model, where capital

Speaker 4

discipline through commodity cycles provides a platform for ratable repurchases over time whereas previously in a price improving price environment, the call for Growth would have sent the capital to the drill bit or to acquisitions as opposed to back to shareholders. And the other point is our corporate breakeven has been driven so low that we could continue to generate free cash flow and execute buybacks at much lower prices And be more countercyclical than we were in the past. And of course buybacks are more tax efficient from an investor's perspective compared to dividends. We do, I noted in my comments, have a $1,300,000,000 share repurchase authorization outstanding currently. So that's readily available to us.

Speaker 4

In the case of variable dividends, they're interesting. They make conceptual sense in a cyclical industry, Kind of new, unproven concepts in the I guess you'd say across the U. S. And certainly within our sector. The jury is out in our minds on whether the stock price will adjust reflect a higher implied yield In a variable dividend structure, but we do have a couple of pure examples to watch and we are watching that to see How that works?

Speaker 4

So we have flexibility to employ either or both models over time. And I would say there certainly is the potential For that to change depending on market conditions and what looks like the best value for our investors, I think the share repurchase in the near term seems like a clear winner From a value perspective. And then we also have the flexibility within the base dividend Scott to increase that. That's Our target there is to have sort of a 10% of operating cash flow in a pro form a $45 to $50 Oil price environment in our base dividend and today we're probably more like 7% to 8%. So we have some upside on that as well and We'll continue to think about that.

Speaker 4

Is it a $60 World and we're returning 40% or is it a $50 world and returning 30% question. Obviously, we're going to have to take a view. We will have Quarter is behind us when we've generated cash flow in a certain commodity price environment and they'll have a view forward, we'll have a forward curve and also our And I think all of that will inform the levels at which we're planning to distribute cash flow. And in one quarter we decide we're going to dial it back a tad, we can always catch that up later. This year we've been Well above our target distribution levels, a combination of debt reduction and base dividend.

Speaker 4

And I did want to emphasize that point in my opening comments. What we're talking about here are minimum targets, not maximums.

Speaker 5

That's all great. Appreciate the color. Thank you.

Speaker 6

You bet.

Speaker 2

And Scott, maybe if I could just add a couple of just really Quick comments here. Obviously, if we have that excess free cash flow, we can re up obviously our share repurchase authorization With approval from our Board and we've obviously done that in the past. Additionally, as Dane mentioned, there still is that headroom that resides Within our base dividend and on the 40% versus 30% question, that's something that's going to be naturally governed By the free cash flow generation in a given month or a given quarter and we're going to drive that free cash flow back to our shareholders. And And that the 30%, 40% is kind of a natural outcome from that. And as Dane stated, that's a minimum objective.

Speaker 2

And if you look at The combination of our gross debt reduction of $1,400,000,000 $100,000,000 or so in base dividend this year, We're obviously well beyond that 40%. So anyway, it's a framework. It's one that we're committed to. I think what we're trying to think give investors is a strong commitment on the quantum we're going to get back to our equity holders, good transparency On timing around that, while also preserving flexibility to get that back in the most efficient manner possible, Which as Dane said today, when we look at the facts and the market, certainly that would appear to be a leaning toward share repurchase.

Operator

And we have our next question from Neal Dingmann with Drew Securities.

Speaker 7

Good morning. I'll cut my great details on the last Question by the way. Dave, my question is really just on the reinvestment rate. Can you talk a little bit about that it continues just to impress? And I'm trying to think, When you go forward for next year, is this sort of an outcome of just based on the plan?

Speaker 7

Or is this reinvestment rate Something that you're focused on, I'm just wondering how you're thinking about that.

Speaker 2

Yes. Hi, this is Lee, Neil. Certainly, the reinvestment rate is something that we as an input into our planning process and really does reflect Not only our commitment to capital discipline and driving corporate returns, but ensuring that we do in fact have that incremental cash flow available for distribution To our shareholders. So that really is a key input. And then of course that drives both the financial metrics as well It's quite frankly the production output that comes from our financial modeling.

Speaker 2

So that is the essence of our framework. In fact, that's one of the reasons why We tend to look at that return back to shareholders as a percent of cash from operations because that of course It's very consistent with our reinvestment rate framework as opposed to say taking a percent of free cash flow for example.

Speaker 7

Absolutely. That's a very notable on the continued improvement. And then just last one quick one. Just you guys continue to be very steadfast Obviously, your spend not going up. Does that include what do you just any continued comments you can make about any sort of cost, Whether that's steel and stuff that we've already seen, whether that's other type of inflation all the way to LOE, anything you could talk about Cost and if that's already baked into that under that spend.

Speaker 3

Hi, Neil. It's Mike here. I'll answer that one. What I'd say at a high level, we are seeing inflation. I think it's real, but maybe as you were alluding to there, it is understood And it's factored into our 2021 guidance.

Speaker 3

Maybe looking a little bit further afield, when we think about 2022, I'd say it's Fair to say we still got a lot of work to do before we prepare to talk about it. Maybe coming back to 2021, I think it is a similar Message to what we've conveyed in the past. We're seeing kind of low single digit inflation this year and it has been driven primarily by OCTG. So steel, the raw material availability and even capacity constraints are kicking in. I think the positive from our perspective is we have pretty much pre committed to the majority of our We have pretty much pre committed to the majority of our requirements for the remainder of this year.

Speaker 3

So not really anticipating Any further significant pressure in that area. We have seen a little bit of pressure in other areas like fuels, chemicals, Transportation related services tied to WTI. We're seeing some labor challenges rear its head from time to time. What I would say is We are managing to manage all of those, and we're doing that through probably a couple of areas, just increased competitiveness And tendering, so kind of leveraging more competitive tendering and just manage competition. I'd also say we're delivering offsetting efficiency improvements in other areas of the business that's helping us.

Speaker 3

And I think Ultimately, it's showing up in our metrics. So for example, our completed well cost per foot performance, we're on track to deliver our targets in Eagle Ford and Bakken this year. And Then the other one would be no change to our capital guidance. I just think it talks to great job that all of the teams are doing in managing this.

Speaker 7

No, great comments and very noticeable. Nice job, guys.

Operator

And thank you. We have our next question from Doug Leggate with Bank of America.

Speaker 8

Thanks. Good morning, everyone. I appreciate you getting me on, Lee. Well, you've given plenty of detail on the cash return idea, but if you don't mind, I'm going to

Speaker 3

be on this just a little bit more. And it really gets to

Speaker 8

the issue of the current fashion of variable dividends Is that still, I guess, part of your consideration? I just wonder if you could kind of frame for us how you think about How that creates sustainable value in terms of what the market might be prepared to price in as repeatable, because obviously it's Highly subjective versus the obvious disconnect between where your stock is trading and the cash flow you're generating right now. So Clearly, it's a buyback question, but I'm just wondering if you could be more definitive about why one and not the other. This seems pretty obvious to us.

Speaker 2

Yes. Well, yes, thanks for the question, Doug. It's a dialogue that we continue But certainly when we looked at the facts as presented today, when we look at A stock that's generating a greater than 20% free cash flow yield, when we look at the fundamental disconnect between the equity and the commodities, when we examine, I think, a more capital When we examine, I think, a more capital disciplined business model, coupled with extremely low breakevens, which kind of take some of the Pro cyclicality risk out of share repurchases, certainly that would look like the case to beat right now. Variable dividend as Dane stated is something that's relatively new. Conceptually, yes, it may make sense for a cyclical industry.

Speaker 2

But as we focus on financial metrics, particularly per share metrics, there is a natural synergy there obviously By going after share repurchase, particularly when those shares are fundamentally undervalued, whether that be on an internal NAV basis Just on macro indicators from the market side. And so that's what we're really focused on is In a more maintenance type world, how do we continue to improve our free cash flow yield and our per share Cash flow and we think the strongest mechanism for doing that and something that the market can bake in is a very

Speaker 8

I appreciate it. I know it's Beaten pretty hard on this call, Lee, so I appreciate the answer. If I could offer just a very quick perspective, because think it is a valid debate what's going on right now. If your equity value is your unlevered free cash flow minus your net debt, Seems to me that when you take cash off the balance sheet on a backward looking basis, it actually reduces your equity value. Just something to think about.

Speaker 8

My follow-up is hopefully a quick one. Dan, the balance sheet is obviously moving into terrific shape. How does that change your thinking about the need for policy or philosophy around hedging going forward? I'll leave it there. Thanks.

Speaker 4

Yes, that's a great question. It definitely factors into our thinking on hedging. Really hedging is One element of sort of overall enterprise risk management and the less stress your balance sheet can get in a lower commodity price environment, it kind of takes the real strong impetus out of being heavily hedged. It's still a tool in the toolkit for us. We've been fairly circumspect about entering into New hedges in 2022, we've just kind of dipped our toe into the water there.

Speaker 4

Given the shape of the curve, We just haven't wanted to go in whole hog and I think that's been it's borne out to be a good judgment so far. But expect us to be hedgers but not heavy hedgers going forward and we'll be very methodical about it.

Speaker 2

Yes. I would just maybe add to that. Doug, that there are some structural things that allow us to approach our hedge book A little bit differently and ensure that we can take advantage of upside performance in the commodity. I mean Dane mentioned obviously our balance sheet, Our cost structure, the fact that we do have a peer leading free cash flow breakeven, but I'd also mention our diversified portfolio, Not just the multi basin nature of it, but the fact that it's an oil weighted but very balanced portfolio. It's pretty much 50% oil, 50% gas and NGLs.

Speaker 2

And so that gives us a very good balance from a market facing standpoint. And all those things combined Give us a little bit different approach to commodity risk management that does allow us to take a bit more Risk on the commodity given our torque to oil.

Speaker 8

Appreciate the answers fellas. Thank you.

Speaker 1

Thanks, Doug. Thanks, Doug.

Operator

And thank you. We have our next question from David Heckyan with Pickering Energy.

Speaker 9

Still getting used to that. Thanks guys for taking the question. The As I was thinking through this interplay between your buybacks and your dividends, let's say you buy back 10% of your stock, You're trying to balance the 10% of cash flow into dividends. Should we think about As shares go down, your base dividend basically goes up to keep the total dollars in that kind of 8% to 10% Those operating cash flows, you really are kind of getting a double benefit if you balance that through each year as you go forward.

Speaker 4

Yes, David, that makes sense. Just as you stated it, the synergy that we got From paying down debt and cutting interest expense and being able to redeploy that to base dividend, you get sort of a similar synergy when you're buying back shares. You're taking shares out of the system, the remaining shares can get sort of a higher dividend allocated to them. So it all works Pretty well, once you get it rolling.

Speaker 2

Yes. And importantly, David, and you described it very, very well. That kind of virtuous cycle you described allows us to keep our enterprise breakeven even including the dividend Well below $40 which is critical again as we just kind of talked about commodity risk management and volatility. We want to make absolutely sure that we continue to protect that enterprise breakeven. And like you said, as we reduce the share count, The absolute cost of our dividend load goes down, which provides us more headroom for those existing shareholders to consider incremental Base dividend increases.

Speaker 3

Yes.

Speaker 9

Yes. It keeps the burden of the dividend that some of the larger companies had to cut in the past off. That Totally makes sense. I was just making sure I was thinking about that right on an annual basis. I like the model.

Speaker 6

Yes.

Operator

Anything further, sir, before I release your line?

Speaker 9

No. Thank you. That was all. Appreciate it.

Operator

Thank you.

Speaker 1

Thanks, David.

Operator

We will take our next question from Paul Chung with Scotiabank.

Speaker 6

Good morning, gentlemen. Two questions, please. First, on the Texas Delaware resource pay, How many wells you're going to bring on stream in the second half? And also that given the much stronger balance sheet, What is the spending for the exploration program on that, the RXD going to be over the next couple of years? The second question is, Lee, you guys are one of the best operator in Bakken and Eagle Ford.

Speaker 6

And but there's a limited running room or maybe that you think that that's still sufficient. Do you think that it makes sense For the industry, including you guys, to join force with other people in some large scale joint venture to Put all the acre together in those basins, so that the best operator, like you guys in Bakken and Eagle Ford, We'll be wondering that that would drive significant cost efficiency. Would that be the future for the Shell 4.0 for the industry? Thank you.

Speaker 2

Yes. Paul, I just want to make sure that we get all your questions and I'll kind of parse them out maybe around the table. But I think your first question was around kind of the wells to sales profile as we go into the second half of this year and I'll let Yes. And I'll let Mike address that. I think your second question was more around just Our balance sheet giving us the ability to look at also more organic enhancement resource capture opportunities and how is that kind of folded And then finally, are there kind of consolidation options within the Bakken and The Eagle Ford and does that make sense from an efficiency standpoint?

Speaker 6

Sorry. Lee, on the last question, it's not so much about M and A, but just like, just a joint venture that you're not losing ownership. You just Pull the asset together because I

Speaker 2

mean a lot of

Speaker 6

people don't want to lose their ownership of the asset. But does it make sense that to pull the asset together As a partner, so that each one still owns the asset, just that you have the best operator to one each of the basin And with a much bigger asset base.

Speaker 2

Okay. Got it. Well, let's start with maybe the wells to sales question.

Speaker 3

Hey, Paul. It's Mike here. I think you maybe had a Texas, Delaware question in there on the wells to sales. So I'll answer that one, and then I'll give you a little bit of color on the general Well, the sales cadence in the second half of the year. So we've got 3 Texas, Delaware wells that we're going to be bringing to sales in the second half of this year.

Speaker 3

More broadly speaking, prior full year guidance, as you probably recall, we were given 165 to 15 was the range of wells to sales that we were looking at, so midpoint of 190. We do expect that now to be a little bit closer to the 200 range. We're expecting 50 wells to sales in both Eagle Ford and Bakken over the second half of the year. As I Deluded to my prepared remarks, that is going to be weighted to the Q3 for both assets and with Bakken probably weighted a little bit more to the Q3. And then with the production deferment that we're seeing in Bakken, that is creating an opportunity in Oklahoma and Northern Delaware, so we're bringing a few wells online there as well in the second half of the year.

Speaker 3

Hopefully, that answers the question.

Speaker 2

Okay. Thanks Mike. On the kind of the balance sheet and resource capture spend, I guess the way that I would think about that is that we continue to reinvest back in the business and Even within, for instance, our $1,000,000,000 capital program this year, embedded in that, of course, is the Texas Delaware oil play activity That Mike just highlighted, but also within basin, we continue to do to chase opportunities that we refer to as organic enhancement opportunities That have the ability to either add incremental sticks and or enhance the economics of existing inventory that we have in play. And generally We try to allocate something on the order of about 10% of our capital program towards Those type of resource capture, inventory life type activities. And that's also even embedded In our kind of 5 year maintenance type scenario that same type of approach.

Speaker 2

And again, as you say, the balance sheet gives us the platform To take some of that incremental risk on some of those resource capture opportunities. On the last one just around the JV structure, JVs have typically particularly large scale JVs, Certainly in U. S. Onshore, we don't have a lot of really strong positive benchmarks there. They tend to really escalate the We tend to look at JVs or DrillCos as maybe a smaller scope opportunity to look at acreage that That likely is much longer dated for us and that we likely won't get to from a value perspective in the near term.

Speaker 2

Large scale, I think we want to make sure that we're doing just what you asked, which is we want to protect the operational excellence We generate in places like the Bakken and the Eagle Ford and certainly would not want to see that diluted somehow And a JV structure where some of that control may be rest away from us. So not saying that all JVs are bad, it's just that we just can't point to a lot of large scale JVs in the onshore U. S. That have made a lot of sense for both partners. So anyway, something that obviously we'll always consider all options, anything that allows us to continue to leverage Our operational expertise, we certainly want to consider that.

Speaker 2

But today, I would say that's pretty far down our list.

Speaker 6

Thank you.

Operator

And thank you. We have no further questions in queue. I will now turn the call over to Lee Tillman for closing remarks.

Speaker 2

Thank you for your interest in Marathon Oil and I'd like to close By again thanking all of our dedicated employees and contractors for their commitment to safely deliver the energy the world needs each and every day. And that concludes our call.

Operator

And thank you, ladies and gentlemen. This concludes our conference. We thank you for your participation. You may now disconnect.

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Earnings Conference Call
Marathon Oil Q2 2021
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