Marathon Oil Q2 2021 Earnings Call Transcript

Participants

Corporate Executives

• Guy Baber, Vice President, Investor Relations
• Lee Tillman, Chairman, President and Chief Executive Officer
• Mike Henderson, Executive Vice President, Operations
• Dane Whitehead, Executive Vice President and Chief Financial Officer

Analysts

• Scott Hanold, RBC Capital Markets
• Neal Dingmann, Truist Securities
• Doug Leggate, Bank of America Co.
• David Heikkinen, Pickering Energy Partners
• Paul Cheng, Scotiabank

Presentation

[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 one. Please note that this conference is being recorded.

I will now turn the call over to Guy Baber, Vice President of Investor Relations.

[Guy Baber, Vice President, Investor Relations at Marathon Oil]

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 second quarter 2020 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.

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

[Lee Tillman, Chairman, President and Chief Executive Officer at Marathon Oil]

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 the accomplishments 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 second quarter, we generated $420 million of free cash flow, bringing free cash flow generation through the first half of the year to over $860 million. For our $1 billion full year 2021 capital budget, assuming $65 WTI and $3 Henry Hub, we now expect to generate $1.9 billion of free cash flow this year. This corresponds to a free cash flow yield north of 20% at a reinvestment rate of just 35% and a corporate free cash flow breakeven well below $35 per barrel WTI, a powerful combination of results that we believe differentiates us against any company in our sector, as well as the broader market.

We are successfully delivering on all of our financial, operational and ESG related objectives. We remain fully committed to capital discipline and our $1 billion 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 will simply generate more free cash flow. Supported by such strong performance, we have just raised our quarterly base dividend by 25%. This is the second quarter in a row that we have increased our base dividend. 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. 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 the sustainability is our five-year benchmark maintenance scenario. We previously highlighted that this scenario can deliver around $5 billion 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. 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 and an average reinvestment rate of 40%, we can deliver around $8 billion 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 billion of capital returned to equity holders per year in a $60 per barrel environment, and this consistent financial deliver is underpinned by well over a decade of high return inventory across four of the most competitive U.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 2021 safety performance as measured by total recordable incident rate stands at 0.29 and follows on from two consecutive years of record-setting company safety performance. 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. Last but not least, we remain hard at work to reduce our GHG emissions. 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, our Executive Vice President of Operations, who will provide an update on our 2021 performance.

[Mike Henderson, Executive Vice President, Operations at Marathon Oil]

Thanks Lee. Second 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. First and foremost, our consistent operational execution is translating to strong financial outcomes: $1.9 billion 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. Operationally, we remain disciplined and focused on delivering on all of our commitments. As we mentioned, there is no change to our $1 billion full year 2021 capital budget. Raising our spending levels is simply not a consideration. We are, however, raising our full year U.S. 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 opex. and for oil production remains unchanged, I would like to address the production profile for the second half of the year. We now expect third quarter oil production to be relatively flat with the second quarter oil production of 170,000 barrels per day before an increase during fourth quarter towards the high end of our annual guidance range.

The flat trend in third quarter is largely the result of deferred Bakken production; 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 is returns and free cash flow accretive especially in the current price environment, will be accomplished within our $1 billion 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 third 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 third quarter capex to account for approximately 65% of our second half spending or around $340 million. Relative to peers, our 2021 capital program remains well positioned to continue delivering industry-leading results.

As the top left graphic on slide nine shows, for every dollar of capital we are 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 or 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.

[Dane Whitehead, Executive Vice President and Chief Financial Officer at Marathon Oil]

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, bullet-proofing 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 billion gross debt target, which will now be achieved in early September when we close the full $900 million make-whole redemption of the 2025 maturity. With this balance sheet improvement, we're shifting our return of capital focus towards equity holders. To be clear, we've already made strong progress this year in returning capital to shareholder while simultaneously reducing our gross debt, since it has really 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 expense saving from this year's $1.4 billion 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. 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 billion to equity holders per year, an equity return equivalent of more than 11% of our current market cap. Though it's premature to discuss a 2022 capital program, at consensus operating cash flow for Marathon in '22 our target return of capital to equity holders would be over $1.2 billion. This equates to a 13% return of capital yield, a leading return of capital profile among E&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. 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 on our balance sheet and assuming continued strong free cash flow generation, it's reasonable to expect that we can begin making incremental returns of capital to our equity holders during the second half of this year in 2021. While we want to be clear and transparent 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 a 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. As a reminder, we have $1.3 billion of share repurchase authorization currently outstanding.

I'll now turn it back to Lee, who will provide his closing remarks.

[Lee Tillman, Chairman, President and Chief Executive Officer at Marathon Oil]

Thank you Dane. To close, I would like to briefly reiterate a few of the key takeaways from our second quarter and 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&P peers but relative to the broader S&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. 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 $1.9 billion 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&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-$35 per barrel breakeven.

To use Dane's term, we have further bullet proofed 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. All of this is sustainable, highlighted by $8 billion of free cash flow through 2025 and 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 that prioritizes returns, sustainable free cash flow, balance sheet improvement, and return of capital. We have also led the way in better aligning executive compensation to this new model and with investor expectations. We are positioned to deliver both financial outcomes and ESG excellence that are competitive not just with our direct E&P peers but also the broader market.

With that, we can open up the line for Q&A.

Questions and Answers

[Operator]

[Operator Instructions] We have our first question from Scott Hanold with RBC Capital Markets. Please go ahead.

[Scott Hanold, Analyst at RBC Capital Markets]

Thanks, good morning all.

[Lee Tillman, Chairman, President and Chief Executive Officer at Marathon Oil]

Hey Scott.

[Scott Hanold, Analyst at RBC Capital Markets]

Hey. The updated shareholder return plan is pretty interesting and exciting, frankly, if I'm an investor. Dane, I think you had mention of it's something you all don't have to necessarily wait on until 2022. Can you give us a sense of how you think about timing - is this more likely once you guys get that debt reduction done in September, that that's when you'd look at it? Just curious on the go-forward plan, is this something you evaluate once a quarter is done, what the prices were, what the cash flow is to make that determination? Is there any kind of structure of just getting a sense of how we're connecting ultimately that return with the commodity price environment?

[Dane Whitehead, Executive Vice President and Chief Financial Officer at Marathon Oil]

Yes, thanks Scott. The short answer to the question, as I said in my opening comments, 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. You understand what I'm looking at as to when we start doing that, and then I'll get onto your question about how do we execute it. Financial priorities are clear - we haven't changed those: generate corporate returns with significant, sustainable free cash flow, bullet proof our already 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 to make incremental returns above our base dividend to equity holders in the second half of this year.

On the base divided, 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 $1.4 billion, and there's a synergy there. 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. Getting the returns to equity holders and improving the balance sheet, I'd say walking and chewing gum, mission accomplished, but more to come. Strong operational and financial performance year to date and commodity prices have allowed us to really accelerate the balance sheet to get to what I laid out in our last quarterly call as my bogey, which is $4 billion gross debt target. We gave notice to the trustee on those 2025 bonds, the $900 million maturity, yesterday that we intend to exercise the make-whole on the entire amount. It will close on September 3.

After we do that make-whole redemption on September 3, I would say it will take a bit of time to rebuild cash to a level where we can manage intra-month 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. With our balance sheet goals achieved and continued support of 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 levels, I think of like $400 million as 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 an amount of cash flow generally that we've already generated that we want to use to repurchase shares over that period, was it 60 or 90 days, and then just execute it ratably sort of dollar cost averaging into it, and you can do that seamlessly. It allows you to manage your share repurchase limits more easily, daily limits more easily when you do it that was as opposed to try and outsmart the market and buy in bulk in big chunks.

[Scott Hanold, Analyst at RBC Capital Markets]

Okay, and part of that too was you had different payout thresholds depending on the commodity price outlook. How do you determine this is a--you know, 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 are currently in the market? I think you all have a high class problem, and my second question is that when you look over each year, you've got a billion dollars of cash that could come back to equity holders. Your buyback's $1.3 billion, your base dividend is 150, so you've got to do a lot more in terms of giving money back to shareholders, so obviously there's a lot of different mechanisms you can look at, but how do you think about what's the best way to incrementally give back? I know it's probably a little premature for that, but if you can give us some structurally on how you think about that high class problem of giving money back.

[Dane Whitehead, Executive Vice President and Chief Financial Officer at Marathon Oil]

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

[Scott Hanold, Analyst at RBC Capital Markets]

Yes, and I'm sorry, just to be clear, you've got--if you look over a three to five-year period, your multiple's 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. As an investor or an analyst, how should we think about how you guys are thinking about the incremental ways of giving money back?

[Dane Whitehead, Executive Vice President and Chief Financial Officer at Marathon Oil]

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. 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. 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 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.

We're kind of in a new paradigm which I think makes share repurchases feel a little different maybe than they have historically. In the new E&P model where capital discipline through commodity cycles provides a platform for ratable repurchases over time, whereas previously in an 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. 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 $1.3 billion share repurchase authorization outstanding currently, so that's readily available to us. In the case of variable dividends, they're interesting. They make conceptual sense in a cyclical industry. Kind of new, unproven concept, I guess you'd say across the U.S. and certainly within our sector. The jury's out in our minds on whether the stock price will adjust to reflect the higher implied yield in a variable dividend structure, but we do have a couple of peer examples to watch and we are watching that to see how that works. 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.

We also have the flexibility within the base dividend, Scott, to increase that. Our target there is to have sort of a 10% of operating cash flow in a pro forma $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. On the is it a $60 world and we're returning 40%, or is it a $50 world and we're returning 30% question, obviously we're going to have take a view. We will have quarters behind us when we're generated cash flow in a certain commodity price environment and then we'll have a view forward, we'll have a forward curve and also our outlook, and I think all of that will inform the levels at which we're planning to distribute cash flow. You know, if 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, and I did want to emphasize that point in my opening comments, what we're talking about here are minimum targets, not maximums.

[Scott Hanold, Analyst at RBC Capital Markets]

That's all great. Appreciate the color, thank you.

[Dane Whitehead, Executive Vice President and Chief Financial Officer at Marathon Oil]

You bet.

[Lee Tillman, Chairman, President and Chief Executive Officer at Marathon Oil]

And Scott, maybe if I could just add a couple 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. 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. The 30%, 40% is kind of a natural outcome from that, and as Dane stated, that's a minimum objective. If you look at the combination of our gross debt reduction of $1.4 billion and $100 million or so in base dividend this year, we're obviously well beyond that 40%. Anyway, it's a framework, it's one that we're committed to. I think what we're trying to 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 leaning towards share repurchase.

[Scott Hanold, Analyst at RBC Capital Markets]

Thanks again.

[Operator]

We have our next question from Neal Dingmann with Truist Securities.

[Neal Dingmann, Analyst at Truist Securities]

Morning all. Great details on the last question, by the way. Dane, my question is really just on the reinvestment rate. Can you talk a little bit about that - it continues to impress, and I'm trying to think when you go forward for next year, is this an outcome based on the plan, or is this reinvestment rate something that you're focused on? I'm just wondering how you're thinking about that.

[Lee Tillman, Chairman, President and Chief Executive Officer at Marathon Oil]

Hi, this is Lee, Neal. Certainly the reinvestment rate is something that is 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. Then of course, that drives both the financial metrics as well as, quite frankly, the production output that comes from our financial modeling. 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 is very consistent with a reinvestment rate framework as opposed to, say, taking a percent of free cash flow, for example.

[Neal Dingmann, Analyst at Truist Securities]

Absolutely, very notable on the continued improvement. Just last, one quick one, you guys continue to be very steadfast on your spend not going up. Does that include--just any comments you could make about any sort of costs, whether that's steel and the stuff that we're already seen, whether that's other types of inflation all the way to LOE, anything you could talk about cost and if that's already baked into that under that spend.

[Mike Henderson, Executive Vice President, Operations at Marathon Oil]

Hi Neal, 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. Maybe looking a little bit further afield, when we think about '22, I'd say it's fair to say we've still got a lot of work to do before we're prepared to talk about it. Maybe coming back to '21, I think it is a similar message to what we conveyed in the past. We're seeing kind of low single digit inflation this year and it is being 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 requirements for the remainder of this year, 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, as we have said 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 in tendering, so 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, and I think ultimately it's showing up in our metrics. 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 the great job that all of the teams are doing in managing this.

[Neal Dingmann, Analyst at Truist Securities]

Great comments and very noticeable. Nice job, guys.

[Operator]

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

[Doug Leggate, Analyst at Bank of America]

Thanks, good morning everyone. Appreciate you getting me on, Lee. Lee, you've given plenty of detail on the cash return idea, but if you don't mind, I'm going to be on this just a little bit more. It really gets to the issue of the current fashion of variable dividends, because that's still, I guess, part of your consideration. I just wonder if you can 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. Clearly it's a buyback question, but I'm just wondering if you could be more definitive about why one and not the other, that seems pretty obvious to us.

[Lee Tillman, Chairman, President and Chief Executive Officer at Marathon Oil]

Yes, thanks for the question, Doug. It' a dialog that we continue to have, 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 disciplined business model coupled with extremely low breakevens, which kind of takes 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, 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 or just on macro indicators from the market side. 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 ratable and consistent approach to thoughtful share repurchases.

[Doug Leggate, Analyst at Bank of America]

I appreciate that. I know it's been beaten pretty hard on this call, Lee, so I appreciate the answer. If I could offer just a very quick perspective, because I think it is a valid debate that's going on right now, if your equity value is your unlevered free cash flow minus your net debt, it seems to me that when you take cash off the balance sheet on a backward looking basis, that actually reduces your equity value. Just something to think about. My follow-up is hopefully a quick one. Dane, the balance sheet is obviously moving into terrific shape. How does that change your thinking about the need for policy and philosophy around hedging going forward? I'll leave it there, thanks.

[Dane Whitehead, Executive Vice President and Chief Financial Officer at Marathon Oil]

Yes, that's a great question. It definitely factors into our thinking on hedging. Hedging is one element of overall enterprise risk management, and the less stressed your balance sheet can get in a lower commodity price environment, it 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. Given the shape of the curve, we just haven't wanted to go in whole hog, and I think that's been borne out to be a good judgment so far. Expect us to be hedgers, but not heavy hedgers going forward, and we'll be very methodical about it.

[Lee Tillman, Chairman, President and Chief Executive Officer at Marathon Oil]

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. Dane mentioned our balance sheet, our cost structure, the fact that we do have a peer-leading free cash flow breakeven, but I would 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, so that gives us a very good balance from a market-facing standpoint. 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.

[Doug Leggate, Analyst at Bank of America]

Appreciate the answers, fellows. Thank you.

[Lee Tillman, Chairman, President and Chief Executive Officer at Marathon Oil]

Thanks Doug.

[Operator]

Thank you. We have our next question from David Heikkinen with Pickering Energy.

[David Heikkinen, Analyst at Pickering Energy Partners]

Still getting used to that. Thanks guys for taking the questions. 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 share go down, your base dividend basically goes up to keep the total dollars in that kind of 8% to 10% of operating cash flows, so you really are getting a double benefit if you balance that through each year as you go forward?

[Dane Whitehead, Executive Vice President and Chief Financial Officer at Marathon Oil]

Yes David, that makes sense just as you stated it. You know, 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 as when you're buying back shares. You're taking shares out of the system, remaining shares can get sort of a higher dividend allocated to them, so it all works pretty well once you get it rolling.

[Lee Tillman, Chairman, President and Chief Executive Officer at Marathon Oil]

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 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.

[David Heikkinen, Analyst at Pickering Energy Partners]

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

[Lee Tillman, Chairman, President and Chief Executive Officer at Marathon Oil]

Yes.

[Operator]

Anything further, sir, before I release your line?

[David Heikkinen, Analyst at Pickering Energy Partners]

No, thank you. That was all. Appreciate it.

[Operator]

Thank you. [Operator Instructions] We will take our next question from Paul Cheng with Scotiabank.

[Paul Cheng, Analyst at Scotiabank]

Good morning gentlemen. Two questions, please. First on the Texas Delaware resource play, how many wells are you going to bring on-stream in the second half, and also given the much stronger balance sheet, what is the spending for the exploration program on that, the [Indecipherable] going to be over the next couple years? The second question, Lee, you guys are one of the best operators in the Bakken and Eagle Ford, and--but there's 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 forces with other people in some large scale joint venture to put all the acres together in those basins, so that the best operator, now you guys in Bakken and Eagle Ford, would be running that, that would drive significant cost efficiency, would that be the future for the shale 4.0 for the industry? Thank you.

[Lee Tillman, Chairman, President and Chief Executive Officer at Marathon Oil]

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. I think your first question was just around the wells to sales profile as we go into the second half of this year, 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 into the business. Then finally, are there consolidation options within the Bakken and the Eagle Ford, and does that make sense from an efficiency standpoint.

[Paul Cheng, Analyst at Scotiabank]

Sorry Lee, on the last question, it's not so much about M&A [Indecipherable] just a joint venture, that you're not losing ownership, you're just pool the assets together, because a lot of people don't want to lose their ownership of the assets. But does it make sense to pool assets together as a partner so that each one still owns the assets, it's just that you have the best operator to one niche of the basin and with a much bigger asset base.

[Lee Tillman, Chairman, President and Chief Executive Officer at Marathon Oil]

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

[Mike Henderson, Executive Vice President, Operations at Marathon Oil]

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 wells to sales cadence in the second half of the year. We've got three Texas Delaware wells that we're going to be bringing to sales in the second half of this year. More broadly speaking, prior full year guidance, as you probably recall, we were giving 165 to 215 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 alluded to in my prepared remarks, that is going to be weighted to the third quarter for both assets, and with Bakken probably weighted a little bit more to the third quarter. 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. Hopefully that answers the question.

[Paul Cheng, Analyst at Scotiabank]

Thank you.

[Lee Tillman, Chairman, President and Chief Executive Officer at Marathon Oil]

Thanks Mike. On 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 billion 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 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 speaking we try to allocate something on the order of about 10% of our capital program towards those types of resource capture inventory life type activities. That's also even embedded in our five-year maintenance type scenario, that same type of approach. 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 complexity. We tend to look at JVs or drillcos as maybe a smaller scope opportunity to look at acreage that likely is much longer dated for us and that we likely won't get to from a value perspective in the near term.

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 that we generate in places like the Bakken and Eagle Ford, and certainly would not want to see that diluted somehow in a JV structure where some of that control may be wrest away from us. 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. Anyway, obviously we'll always consider all options. Anything that allows us to continue to leverage our operational expertise, we certainly want to consider that, but today I would say that's pretty far down our list.

[Paul Cheng, Analyst at Scotiabank]

Thank you.

[Operator]

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

[Lee Tillman, Chairman, President and Chief Executive Officer at Marathon Oil]

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. That concludes our call.

[Operator]

[Operator Closing Remarks]