Marathon Oil Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2021

There are 12 speakers on the call.

Operator

Welcome to the Marathon Oil Third Quarter Earnings Conference Call. My name is Sheryl, 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. Please note that this conference call is being recorded.

Operator

I will now turn the call over to Guy Baber, Vice President, Investor Relations, you can begin, sir.

Speaker 1

Thank you, Sheryl, and thank you as well to everyone for joining us this morning on the call. Yesterday after the close, we issued a press release, a slide presentation and an investor packet that address our Q3 2021 results. These 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.

Speaker 1

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'll also hear from Mike, Dan and Pat before we get to our question and answer session.

Speaker 2

Thank you, Guy, and good morning to everyone listening to our call today. I want to start by once again thanking our employees and And for their contributions to another quarter of outstanding execution and financial delivery. While I get the privilege of talking about our company's impressive discipline in our differentiated execution, we are successfully delivering outsized financial outcomes for our shareholders, highlighted by more than $1,300,000,000 of free cash flow year to date. For our $1,000,000,000 So, free cash flow this year at a reinvestment rate below 35% and a free cash flow breakeven below $35 per barrel WTI. We are successfully delivering on all of our financial and operational objectives and achieving bottom line results that we head to head against any other energy company and against any other sector in the S and P 500.

Speaker 2

This strong financial performance has enabled us to pull forward our balance sheet targets. And this further improvement to our already investment grade balance sheet Has given us the confidence to dramatically accelerate the return of capital to equity holders. Under our unique return of capital framework, our shareholders get the first call on cash flow, a minimum of 40% of our total cash flow from operations Consistent with our commitment to shareholder returns and our objective to pay a competitive and sustainable base dividend, We have raised our base dividend by 20% this quarter. This is the 3rd quarter in a row that we have increased our base dividend representing a cumulative one 1% increase since the end of 2020, a sign of the increased confidence we have in our business. We are also targeting approximately $500,000,000 of share repurchases during Q4 with $200,000,000 already executed.

Speaker 2

At a free cash flow yield north of 20%, we believe our equity offers tremendous value. Additionally, there remains a dislocation between our equity and strengthening commodity prices coupled with a more mature business model The added potential of significantly reducing our share count, meaningfully improving all of our per share metrics even under a maintenance scenario And increasing our longer term capacity for continued per share base dividend increase. Looking ahead to Q4, including our base dividend and planned share repurchases, we expect to return approximately 50% of our total cash flow from operations to equity holders, fully consistent with our return of capital framework that prioritizes the shareholder first. Our financial flexibility and the power of our portfolio in the current commodity price environment provided I have the confidence for our Board to also increase our total share repurchase authorization to $2,500,000,000 To ensure we can continue executing on our return of capital plans as we progress through 2022. And perhaps most importantly, everything that we are doing is sustainable, backed by our 5 year benchmark maintenance scenario and our ongoing pursuit of ESG Excellence through top quartile safety performance, significant reductions to our GHG intensity and best in class corporate governance.

Speaker 2

With that brief overview, I will turn it over to Mike Henderson, our Executive VP of Operations, He will provide an update on our execution relative to our 2021 business plan.

Speaker 3

Thanks, Lee. 3rd quarter operations were again solid, Demonstrating that we remain on track to achieve or outperform all of the key 2021 financial, operational And ESG related objectives that we established at the beginning of the year. 1st and foremost, our consistent execution is translating to outside Financial outcomes highlighted by over $2,000,000,000 of expected free cash flow with a material sequential increase expected in the 4th quarter, A full year 2021 reinvestment rate below 35% and a full year corporate free cash flow breakeven below $35 per barrel WTI. Our gas capture during Q3 also exceeded 99% As we continue to reduce our GHG emissions intensity, there is no change to our $1,000,000,000 full year 2021 Capital Budget. Raising our spending levels this year has never been a consideration consistent with our commitment to capital discipline.

Speaker 3

There is also no change to the midpoint of our full year total company oil or total company oil equivalent production guidance. We're also raising our full year 2021 EG Equity method income guidance for the 2nd consecutive quarter to a new range $235,000,000 to $255,000,000 due to stronger commodity prices. This is a 30% increase from the guidance we provided last quarter and a 120% increase relative to our initial guidance at the beginning of the year. Our full year production and EG Equity Method income guidance truly contemplate an unplanned outage we experienced in EG Looking ahead to 4th quarter, we expect to finish the year strong with our total company oil production increasing Between 176,180,000 barrels of oil per day in comparison to 168,000 barrels

Speaker 4

of oil per day

Speaker 3

Our quarterly production volumes are always subject to some normal variability associated with well timing, But this more significant sequential increase is due largely to deferred Bakken production associated with 3rd party midstream outages, Strongly well performance and solid base production management. We also expect Our Q4 total company oil equivalent production to be similar to the 3rd quarter at 345,000 Barls of oil equivalent per day. With the sequential increase in the U. S. Offsetting a sequential decrease in Equatorial Guinea I will now turn it over to Dane Whitehead, EVP and CFO, We will discuss how our strong operations are contributing to an improved balance sheet and an acceleration in return of capital to equity holders.

Speaker 5

Thank you, Mike. As I noted last quarter, our financial priorities are clear and unchanged, generate strong corporate returns With significant sustainable free cash flow, bulletproof our already investment grade balance sheet and return significant capital to shareholders. Early in the Q3, we retired $900,000,000 in debt, bringing total 2021 gross debt reduction to $1,400,000,000 And achieving our targeted $4,000,000,000 gross debt level. With this milestone, we no longer feel the need to accelerate additional debt reduction And going forward, we plan to simply retire debt as it matures. And please note that we have no significant maturities in 2022.

Speaker 5

This balance sheet repositioning was achieved well ahead of our original schedule, which opened the door to begin returning a significant amount of capital to To be clear, these are returns beyond our base dividends, which we just increased for the 3rd consecutive quarter. Our base dividend is actually up 100% over that time period, now at $0.06 a share per quarter and the $50,000,000 of annual interest savings were Realized due to lower gross debt will help fund a significant portion of this base dividend increase. Our equity return framework calls for delivering a minimum of 40% of cash from operations to shareholders when WTI is at or above $60 a barrel. This is a peer leading return of capital commitment. It is also competitive with any sector in the S and P 500.

Speaker 5

Our Q4 is shaping up to be an exceptionally strong free cash flow quarter due to a combination of higher commodity prices and oil volumes quite a bit stronger than the 3rd quarter. At recent strip pricing, this could take our operating cash flow to approximately $1,100,000,000 or about a 25% sequential increase versus the Q3. Add to that an expected increase in dividend distributions from EG And lower CapEx relative to the 3rd quarter peak and 4th quarter free cash flow could almost double to north of $850,000,000 So in Q4, we expect to have lots of flexibility to exceed our 40% of operating cash flow minimum threshold In fact, through our base dividend and approximately $500,000,000 of share repurchases, We expect to return approximately 50% of our operating cash flow to investors during the Q4, while further improving our cash balance and net debt position. As we also mentioned, we believe that buying back our stock in a disciplined fashion makes tremendous sense. There are many opportunities in the market Right now, that provide a sustainable free cash flow yield north of 20%.

Speaker 5

Stepping back, the full year 2021 financial delivery is exceptional, dollars 140,000,000 in base dividends, dollars 1,400,000,000 in debt reduction And $500,000,000 of share repurchases, representing a total return to investors, combined debt and equity Of over $2,000,000,000 or over 60% of our expected full year operating cash flow at scrip commodity prices. Our actions in 2021 have successfully repositioned the balance sheet and kicked off a strong track record of equity returns. Going forward, we're going to stay laser focused on our financial priorities and our return of capital framework, taking into account Our cash flow outlook when making return decisions. Because our framework is based on a minimum percentage of cash flow from operations and not free cash flow, The equity investor will have the first call on cash, not the drill bit. I'll now turn the call over to Pat Wagner, EVP of Corporate Development Strategy, for an

Speaker 4

Thanks Dane. We recently completed our 2021 drilling program, which is focused on the continued delineation of our contiguous 50,000 net acre position in our Texas Delaware oil play. As a reminder, this is a new play concept for both the Woodford and Meramec that was secured through grassroots leasing at a very low cost of entry and This is essentially an exploration bulldog that is complementary to our already established position We brought online our 1st multi well pad during the Q3 and while it is still very early, Initial production rates in both Woodford and Meramec are exceeding our pre drill expectations. More specifically, 1 of the Woodford wells achieved an IP30 of almost 2,100 barrels of oil per day at an oil cut of 66%. This appears to be the strongest Woodford oil well ever drilled in any basin.

Speaker 4

And while we don't yet have 30 day rates for the other 2 wells, Early indicators, including IP24s are all very positive. A primary objective of this three well pad was to execute our 1st spacing test in the play. To date, we are seeing no evidence of interference between the Woodford and Meramec, consistent with our expectations due to over 700 feet of vertical As I stated, it's still early and we need more production history to draw stronger conclusions, We are certainly encouraged by the initial results from this first spacing test, including the record Woodford productivity. The second objective was to continue to progress our learnings and cost improvements in completed well costs. We expect to ultimately deliver well costs comparable to

Speaker 3

those achieved in the SCOOP

Speaker 4

and are aggressively leveraging our substantial experience in Oklahoma to that end. In total, we have now brought online 9 wells since play entry that have successfully delineated our positions. Six wells with longer dated production have collectively demonstrated strong long term oil productivity, oil cuts greater than 60%, Low water oil ratio is below 1 and shallow declines. Looking ahead to 2022, you should expect us to continue to integrate our learnings and progress our understanding of this promising play. However, we will do so in a disciplined manner within our strict reinvestment rate capital allocation framework.

Speaker 4

I will now turn the call over to Lee, who will wrap this up.

Speaker 2

Thank you, Pat. I will close with a quick summary of how we have positioned our company for success and a preview of what to expect from us in Spoiler alert, there will be no surprises in 2022 and no compromise with respect to our capital return framework. If we focus on the financial benchmarks that matter, we are delivering top tier capital efficiency, Our 2020 As measured by CapEx per barrel of production are both the lowest in our independent E and P peer group, A strong validation of our leading capital and operating efficiency. We are also one of the few E and Ps expecting to deliver a 2021 reinvestment at or below the S and P 500 average. We're also delivering top quartile free cash flow yield this year among our peer group And well above the S and P 500 average.

Speaker 2

And we are doing all of this with an investment grade balance sheet at sub one time net debt to EBITDA, A 2021 leverage profile also well below both our peer group and the S and P 500 average. In short, we are successfully delivering outsized financial performance versus our

Speaker 4

peer group

Speaker 2

and the broader market with the commodity price support we are experiencing this year. Yet perhaps more importantly, we are well Yes, perhaps more importantly, we are well positioned to deliver competitive free cash flow and financial performance versus the broader market At much lower prices than we see today, all the way down to the $40 per barrel WTI range. This is the power of our sustainable cost structure reductions, our capital and operating efficiency improvements and our commitment to capital discipline, All contributing to a sub $35 per barrel breakeven. Looking ahead to 2022, our differentiated capital allocation framework Recall that we introduced a unique 5 year maintenance scenario earlier this year that featured $1,000,000,000 to $1,100,000,000 of annual spending, $1,000,000,000 of annual free cash flow at $50 WTI and a 50% reinvestment rate. Given we are no longer living in a $50 per barrel environment and that prices are currently north of $80 per barrel, It is both prudent and reasonable to consider some level of limited inflation up to about 10% that would yield modest pressure on the maintenance scenario capital Yet importantly, this modest level of inflation pales in comparison to the uplift to our financial performance in the current environment.

Speaker 2

With a 2022 maintenance scenario, free cash flow potentially on the order of $3,000,000,000 at recent strip pricing Or nominally 3 times the $50 benchmark outcome. And under such a maintenance scenario, we are positioned to lead the peers once again with 2022 free cash flow yield above 20%, far in excess of the S and P 500 free cash flow yield of approximately 4%. Our minimum 40% of cash flow target translates to about $1,600,000,000 of equity holder returns next year. But that is a minimum and we see significant headroom to drive that number higher. At the expected 4Q run rate of 50% of CFO, 2022 equity holder returns would increase to approximately $2,000,000,000 while still improving our cash balance and net debt position.

Speaker 2

Even at a more conservative $60 per barrel oil price environment, our minimum 40% of cash flow target still translates The confidence in this outsized delivery is further supported by recent Board action to increase our share repurchase authorization to $2,500,000,000 to ensure we have sufficient runway to continue delivering on our return of capital commitments next year. 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 We are successfully executing on our model Today, delivering both financial outcomes and ESG excellence 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 the Our first question comes from Jeanine Wai from Barclays. Your line is now open.

Speaker 6

Hi, good morning everyone. Thanks for taking our questions.

Speaker 5

Good morning.

Speaker 6

Good morning. Our first question maybe for Dane. Can you walk us through the mechanics of How you're determining the buyback tranches? It looks like it could be on a concurrent quarterly basis, but we just wanted to kind of get some more detail on that. And how did you decide on the 50% level of returns for 4Q 'twenty one other than it meets the criteria of more than 40%?

Speaker 6

And I guess what would make you change that number quarter to quarter?

Speaker 5

Yes, great question, Jeanine. I think there's kind of a couple of different aspects to it. One is a little more tactical about how we execute the share repurchases. So briefly on that, We execute under short sort of 30 to 60 day 10b5-1 program. So we can Set those in motion and execute them over a short period of time.

Speaker 5

And that because of that short duration, allows us to really calibrate return percentages more on a real time basis based on what we're seeing in the business, whether it's capital spend levels, commodity prices, Other aspects of what's going on, it also gives you the advantage in the 10b5-1er right into blackout periods. And so we do that. Sort of stepping back a little more context for the decision process about When do you exceed the minimum? Our decisions are always grounded in our financial priorities, which we talk about on a regular basis. Generate corporate returns, significant sustainable free cash flow, bulletproof balance sheet And then return significant capital to shareholders.

Speaker 5

We just talked about what we've done year to date Generated significant operating and free cash flow. Q4 looks like by far the best quarter yet from a financial perspective. The balance sheet is really strong and we've retired $900,000,000 of debt in September, a $1,000,000,000 for year to date. So we're at our $4,000,000,000 Gross debt target ahead of schedule and that really opens the door for much more substantial returns to equity holders if the conditions warrant. We also bumped the base dividend for the 3rd time this year.

Speaker 5

It's up 100% over that period. And it feels competitively positioned right now and also very sustainable through cycles at the current level. So we turn to the capital return framework that calls for returning a minimum of 40% of operating cash flow to shareholders When WTI is above $60 we look at Q4, not only is WTI well above $60 All the commodity complex is high. Oil volumes should be quite a bit stronger than they were in Q3. We expect an uptick in dividend distributions from EG and lower CapEx versus Q3, which was sort of the high point of our burn rate for the year on the capital side.

Speaker 5

So we expect to have lots of flexibility to exceed 40%. We also have a desire to continue to add some level of cash to the balance sheet. As we go through the year, ultimately, our plans are to Pay off debt, future debt maturities as they mature and they aren't significant in the future, but we'd say to have that level of flexibility And in the process reduce our net debt. So all of this, I think it's a great example of our shareholder return framework in action. It's based on a minimum percentage of operating cash flow, but we have the ability and latitude to make real time decisions To exceed those minimums when conditions are right, they sure appear to be in Q4.

Speaker 5

So there's a little bit of judgment involved, Is it 50% or 55% or whatever that is, but we just need to make a call and over time we'll have the ability to modulate that accordingly.

Speaker 6

Okay, great. Thank you for the detailed answer. We appreciate it.

Speaker 7

You bet.

Speaker 6

Maybe my second question maybe for Mike. The well cost per foot, it decreased quarter over quarter in the Eagle Ford and the Bakken. And would you characterize those decreases as sustainable for 2022? And Any color just on current inflation and your outlook for 2022 would be helpful. For example, one of your peers mentioned earlier this week that They would adjust 22 activity if inflation warranted it.

Speaker 6

And I believe we said just now in his prepared remarks that 10% cost inflation would put pressure on the maintenance scenario. And I didn't catch whether that meant on the 1.1 CapEx or if that meant on activity? Thank you.

Speaker 3

Yes, Jeanine, I'll take I'll start with the expectation on the well costs for 2022. What I'd say is we're still working up our bottoms up planning and obviously as we know that the macro environment is pretty dynamic at the moment. Kind of highlighted Q3 being the lowest quarter of the year. In terms of CWC per foot cost in both Eagle Ford and Bakken, we're actually year to date Down 12% from where we were in the 2020 average. So what I'd say is while that's Probably going to be our starting point for 2022.

Speaker 3

And similar to what you've seen in 2021, we'll continue to Progress opportunities to improve our cost structure. I think as we noted, we could and probably should start to see some inflation in 2022. On the inflation question, maybe a little bit more color there. Let me start with 'twenty one. How would I characterize that?

Speaker 3

Inflation is very much And check for 2021. It's been largely confined to steel and OCTG. We have fully accounted for that in our capital, Our $1,000,000,000 capital budget, as noted, we're working through 2022 at the moment and seems reasonable to see modest inflation.

Speaker 8

Think I

Speaker 3

would highlight that we are looking to take some actions. So for example, we secured some of our REG frac sand And OCTG requirements for next year. I think maybe the area where there's quite a bit of uncertainty is labor, But that's probably a broader issue economy wide. So as we noted, could see up to 10% Inflation, I think that will depend on activity levels. But again, similar to 2021, we're going to be working hard to mitigate and offset And it was cost pressures.

Speaker 2

Yes, I think Janine maybe just to round out too just for clarity. As I mentioned in my remarks, when you think about the benchmark case being predicated on really $50 WTI and that capital range that we provided that 1% to 1 point One, I think kind of applying that kind of up to 10% to that range is would at least kind of get you in the correct zip code Under a maintenance scenario for 2022.

Speaker 6

Perfect. Thank you.

Speaker 2

Thank you, Janine.

Operator

Thank you. Our next question comes from Arun Jayaram from JPMorgan. Your line is now open.

Speaker 9

Yes. Good morning. Mike and perhaps Lee, I wanted to get your thoughts on how you plan to lean On some of the basins outside of the Bakken and Eagle Ford, obviously, in a lower commodity price environment, you guys have really focused on your core to core inventory And both those plays, but how should we think about in a much better environment for oil gas and NGLs kind of the capital allocation To play such as Oklahoma and the Permian.

Speaker 2

Yes. Arun, this is Lee. I think consistent with how we've talked about in the past, we do expect to be increasing our Oklahoma and Permian allocation up to Kind of that 20% to 30% range under again a maintenance scenario. For reference, those two basins accounted for more like 10% Of our allocation in 2021 this year. Clearly, all of the commodity Prices are moving in a very constructive direction, which really has the net effect of really lifting all boats even in Our black oil plays of the Bakken and the Eagle Ford.

Speaker 2

And I think where we're really seeing the benefit Of having that strength across the commodity complex is the fact that we have this very balanced portfolio already With about a 50% exposure to oil and a 50% exposure to natural gas and NGL. So, There's no our thinking hasn't changed. We believe there are extremely strong and competitive opportunities And both Permian and Oklahoma, the strengthening in NGL and gas has only served to elevate those further, But oil has also elevated the returns in our other basins as well. So we feel the strength of the balanced portfolio Gives us that great exposure across the commodity complex.

Speaker 9

Great, great. And Lee, my follow-up Is maybe just to get some a bigger picker question for you on just U. S. Resource Basins, 2 of your larger peers in the Bakken, Ryan and Harold have announced large multi $1,000,000,000 transactions in the Permian.

Speaker 2

And I want to get your

Speaker 9

thoughts on what this says And I want to get your thoughts on what this says about the Bakken there to the larger operators in the basin in Pat Basin, pardon me. And just how you're thinking about portfolio renewal? Pat gave us an update on the REX program, but you do have some other expansion opportunities within your existing basin. So I wanted to see how you're thinking about portfolio renewal and some of the moves of some of your key It appears in the basin.

Speaker 2

Yes. Arun, first of all, I would just start off by saying Any transaction, any M and A work, whether it be large or small, we're always going to view that through the lens of our very compelling organic Our peer leading financial delivery and really a strict criteria that's predicated on financial accretion. And so that's really the filter that we're going to view any type of opportunity. The same discipline that we apply to our organic Opportunities, we certainly are going to apply in the inorganic space. We believe, obviously, that the Bakken continues to offer Exceptional returns.

Speaker 2

If you look at some of the material within our earnings deck, you will see that certainly in some of the appendix slides just how Competitive, Bakken is relative to the other plays here, in the U. S. But for us, it really anything that we would look at Organically would have to offer significant value. It would have to come in and move our full cycle returns in the Right direction. And that quite frankly is a very high bar today.

Speaker 2

You could argue that the M and A market has Become a little bit more of a seller's market today with the commodity prices that we're experiencing. And with Over 10 years of extremely strong inventory, we simply don't see the need to do anything Dramatic in the market, certainly not do anything that would be dilutive to our exceptional financial delivery. But however, having said that on portfolio renewal, what we have talked about in the past is that embedded in That capital budget that we talk about each and every year, we have kind of up to about 10% of that dedicated So what we consider to be organic enhancement opportunities that could be things like redevelopment opportunities in It could be things like the Texas Delaware oil play that Pat addressed in the opening remarks. And we want to make sure that we continue those programs on a consistent and sustainable basis As we look out in those out years and make best attempts to continue to replace and replenish our inventory, I think the Texas Delaware oil play is a great example of something that we were able to get into for very low entry cost.

Speaker 2

And now, certainly, we see today a very clear path for that to compete for capital allocation. And we still have some work to do in terms of getting some longer dated production information from the spacing test and we want to drive some learnings End of the D and C program, but there's definitely a path there for that asset now to compete head to head with some of the best in our current portfolio. So hopefully I addressed all of your questions. Arun, did I miss anything?

Speaker 9

Well, just maybe a quick follow-up. Lee, in terms of the Texas Delaware just on this Topic of portfolio renewal. Are you aware of any of your peers which are testing the play at this point?

Speaker 4

Hi, Arun. This is Pat. There have been some other tests, specifically

Speaker 5

to the south There's been

Speaker 4

some Woodford test, but that area is a little bit lower pressure and not as thick. And then on the eastern side of the platform, there's been some Meramec test as well, but some of them have been okay. But again, not as good a pressure as ours. We think we absolutely have the best Sweetest spot on the play where we have both Woodford and Meramec stacked with good separation between them and we've had good results to date obviously.

Speaker 9

Great. Thanks a lot.

Operator

Thank you. Our next question comes from Scott Hanold of RBC Capital Markets. Your line is now open.

Speaker 10

Thanks. Good morning all. I was wondering if you provided some good framework for 2020 And just to clarify a couple of things. One, obviously you're having a big uplift in oil production here in 4Q. Should we think of the baseline maintenance Your average 21 oil production or should we look more to the exit rate of where you might be this year?

Speaker 10

And then on the capital spending concept, can you remind me within that circa $1,000,000,000 to $1,100,000,000 in CapEx, Where does REX capital fall within that? Is that included in that or would that be in addition?

Speaker 2

Yes. First of all, on your first question, Scott, yes, you should think about our maintenance scenario in 2022 Being calibrated to our average 2021 oil production, all of us experienced some variability quarter to quarter In our production numbers, it's natural and the short cycle investments that you see that natural variability. But again, we'd be looking in a maintenance scenario To drive toward that notional 172,000 barrels of oil per day. Your second question, Scott, around our capital Spending number, even in the benchmark case of 1 for 11, that number is all inclusive. It includes, all of our Investments, including REX as well as any other organic enhancement opportunity, just as the $1,000,000,000 budget did this year.

Speaker 2

I mean one of the reasons that we saw a little bit of peak CapEx in the 3rd quarter was the impact of bringing the 3 well pad in the Texas Delaware oil play. So that is should be looked at as an all in number. There's nothing carved out and put on the side.

Speaker 10

Okay. That's great. Appreciate that. And kind of pivoting back to shareholder returns, I mean, you guys obviously have a very robust buyback sitting in front of us. And it seems like that plus, cruising up that fixed dividend over time As a plan, I know the answer is probably going to be, let's wait until we actually harvest some of this free cash flow.

Speaker 10

But As we look forward, even with the increased buyback authorization, I mean, it looks like you're going to eat through that pretty quickly Next year, if these commodity prices hold out. And as you kind of continue to look forward, is the buyback still going to be your likely dividends in the mix as you look kind of longer term bigger picture?

Speaker 5

Yes, Scott, this is Dane. Let me take a First kind of that at least. I think where we sit today, it's kind of a no brainer. When you look at the valuation of our stock and the fact that it's yielding in 20% free cash flow that that's the place to go with the excess Distribution to shareholders, it gets great value and if that persists then that will still be the first call on incremental cash above the Space dividend, but we haven't said that's the only thing we'll ever do. Obviously, over time, we have to keep our options open as you Managed through this process.

Speaker 5

The $2,500,000,000 authorization, there's really no magic to that number. It was clear to us As of yesterday when that authorization went into place, we had $1,100,000,000 of remaining authorized capacity And we would chew through a chunk of that getting through this 4th quarter, dollars 500,000,000 that we talked about going to the year pretty light. So we just Ask the Board to top that up $2,500,000,000 as of today and that will give us good running room into next year. And If we need to update authorization over time, we can certainly do that.

Speaker 2

I do think though, Scott, clearly, when you look at

Speaker 5

the potential financial delivery in 2022, we have a unique

Speaker 2

We have a unique opportunity just as we did in 4th quarter To not only deliver against the minimum of 40% back to equity holders, but to actually exceed that. But again, that's going to be Calibrated to real time cash flow from operations and that will be something that we'll watch closely. I think Dane did a great job I'm laying out the mechanics, but I also wanted to stress one thing we've been really clear on. We developed our framework to really Give the investor confidence in the quantum, the quantum of cash we were going to get back to shareholders. And we knew that, that would be a competitive and sustainable bank dividend plus something else.

Speaker 2

That something else clearly today share repurchases, but we didn't we purposefully and intentionally didn't limit ourselves to a potential delivery mechanism. We wanted to keep that flexibility going forward. But as Dane said, in the current environment, the impact of a Steady ratable share repurchase program going forward makes the absolute most sense today.

Speaker 10

Okay. I agree. Thanks for that color.

Operator

Thank you. Our next question comes from Doug Leggate from Bank of America. Your line is now open.

Speaker 11

Good morning, guys. Thanks for getting me on the call this morning. Fellas, I want to ask you about How the inventory view has changed given the backdrop in the commodity? What I'm thinking is given gas in particular, Mid Continent, does that compete better? Does it change the view of capital allocation?

Speaker 11

And what I'm really trying to get to is going back to your comments Lee at the beginning of the year, I think it was Mike actually that talked about in the maintenance scenario, You would drill half your high quality inventory in 5 years because at the end of the day that's ultimately what's going to dictate how the market perceives your free cash flow yield.

Speaker 2

Yes. Well, I think stepping back from the inventory, when we have talked about the greater than a decade of capital efficient I return inventory, Doug. It's really been based on kind of nominally our $50 WTI kind of mid cycle view. As actual prices move around that planning basis, clearly, that has an impact On the tiering of those opportunities and may in fact even bring additional opportunities into The economic window. So it is a very dynamic thing, but we set that planning basis on conservatively, so We can deliver in a more modest pricing environment.

Speaker 2

To your question around how does the Commodity strengthening, particularly in the secondary products of gas and NGL, alter our investment decision. Look, we're a return driven company. As we look at individual opportunities, we're going to be driven by economics. I won't say we're completely agnostic to the product mix, but at the end of the day, it's not about barrels, it's about dollars. And we're going to be driven by Selecting the most economic opportunities across all of our core plays and then putting those into our business plan and executing Additionally against them.

Speaker 2

So it's strictly an economic decision and although I'm thrilled that the gas and NGL has recovered, I'm equally as thrilled that oil is sitting at above the $80 mark as well because that tends to uplift really all of our portfolio. Because although we have an oil weighted portfolio, it is a very balanced portfolio. And so we are, in essence, Taking advantage of those secondary product pricing at a portfolio level, but our individual capital allocation decisions are going to be driven by economics.

Speaker 11

I appreciate that. Maybe just as a quick footnote to that Lee for Guy perhaps. I think a dynamic inventory, Some visibility on that would be really, really helpful because it would get a lot of folks away from the idea that there's an inventory challenge, if you can show how that changes with the commodity deck, just maybe a footnote. But my follow-up real quick is on Slide 7. And I you've been early and very clear about your views on the business model.

Speaker 11

And again, I congratulate you on leading the market on that, probably with your peers. But nevertheless, on Slide 7, you still talk about in a greater than $60 WTI environment, a production growth cap That underscores the commitment to discipline. The issue is that 5% growth is not part of your rhetoric today. So when do you decide is the right time Let's go back to growing production.

Speaker 2

Yes. I think that that was simply as you stated a way for us to I've set a bright line on the framework that there is a very, very high hurdle for growth. I mean, We will always be informed by the macro, but at the end of the day, it's all about Delivering outsized financial metrics when we're above $60 To the extent that we see that Some moderate growth would fit into that financial framework. It would become a consideration, but It still remains more of an output of our financial model as opposed to an input. And I think given I think The past history of the sector, it's very important for us to demonstrate clearly That in a very constructive oil price environment that we can deliver outsized financial outcomes relative to alternative investments because The reality is that we know there will be future volatility and we have to be able to within that volatility offer competitive returns When prices are lower.

Speaker 2

So it's really just set there to really put it in the framework, acknowledge it. I think today we would say The need to drive to a number even in that 5% range, we just don't see that today and it's hard to see it even in the near future.

Speaker 11

Thanks so much, Lee.

Speaker 7

Thank you, Doug.

Operator

Thank you. Our next question comes from Neal Dingmann from Curtis, your line is now open.

Speaker 4

Good morning, all. My question

Speaker 8

has kind of been asked, so I want to ask about just on the plan for next year. Does that basically assume as far as total activity about the same percentage of Eagle Ford and Bakken activity? I You've kind of run those 2 consistent here for the last few quarters and I'm wondering if that's still kind of

Speaker 4

the plans for next year.

Speaker 2

Yes. Neil, obviously, we have not released our budget for next year. I mean, we're kind of Still speaking in hypothetical terms around a maintenance budget, but when you consider the fact That we will have incremental capital flowing to Oklahoma and Permian. We would expect, obviously, that some of that Capital would be coming out of Eagle Ford and the Bakken to make room for that. But I would just say stay tuned.

Speaker 2

We'll get into a lot more detail At an asset level of allocation, when we get out to the budget release in February.

Speaker 8

Okay. No, I did assume that. And then Just a follow-up, we've really encouraged and I like the comments on that Slide 14 about the resource play. I'm just wondering, maybe could you comment For you, one of the guys, as far as how much further do you think you could push this in terms of pad size, completions, some other things, obviously the results Early results here are very encouraging, especially as you all pointed out when you compare them to some of the Delaware. I'm just wondering sort of where we go from here.

Speaker 4

Hi, Neil. This is Pat. Primary objective of this pad test was spacing. So right now, we drilled this in a spacing of 4 wells per zone. We drilled 2 in the Woodford and 1 in the Meramec.

Speaker 4

So far we're seeing no interference at all between those because of the 700 foot thickness between the two. So we're going to get some more longer term production on this pad and see how these wells perform. And if so, then we'll 4 by 4 will probably be the development scenario. However, I think we have some opportunities to test that even further. We've obviously drilled 9 wells now, so

Speaker 1

we've had a lot of

Speaker 4

learnings on the drilling and completion side. I'm not giving any details on that, but we continue to refine our approach to that. I think we'll continue to drive our cost down, as I mentioned in our prepared remarks. So as we go into 2022, we'll continue to progress our learning there and see what else we need to do to take this thing

Speaker 8

Very good. Thanks, Pat. Thanks, Lee.

Operator

Thank you. And our final question comes from Scott Gruber from Citigroup. Your line is now open.

Speaker 7

Yes, good morning. Good morning. The ET Equity Income was raised, which is great to see, It's so good to see. Cash dividends from EG were $47,000,000 but I believe those lag the booking of income. Can you speak how we should think about cash going back to Marathon from your equity interest in EG in the quarters ahead in terms of For both pace and magnitude?

Speaker 5

Yes. Hey, Scott, this is Dane. Yes, so for our EG Investments that are accounted for on the equity method. Excuse me. I think over time, it's fair to expect that cash dividends Match equity income.

Speaker 5

Quarter to quarter, they don't always match. The timing can vary, especially in periods where you have significant changes Like a big run up in prices that we saw in Q3. And so in this case, dividends lagged earnings fairly significant Significantly in Q3, we expect that to catch up in the reasonable near future. So I think when you're modeling it's probably just they're going to be equal pretty much Well over time, but you can expect to see some variability quarter to quarter.

Speaker 7

Got you. Got you. Will it be to your point where cash dividend at least In the near term exceed equity income or is it just kind of on a lag basis? Is there a catch up for it?

Speaker 5

Yes, yes. We certainly can see a catch up where the dividends exceed equity earnings in the next period.

Speaker 7

Got you. And then just thinking about cash taxes, you guys have a large NOL. Can you remind us, do you have U. S. Cash taxes ramping up within your 5 year outlook?

Speaker 7

And given better earnings now at the front end, And does the 5 year outlook for cash taxes change materially?

Speaker 5

Yes, it's a good question. I'm glad you asked it. So we do have significant And then foreign tax credits as well, Both of which, of course, will be used to offset future taxes. Our outlook, even at forward pricing, doesn't have us paying federal income taxes until the latter And that really hasn't changed. The outlook is durable.

Speaker 5

We tested against commodity prices, higher corporate tax rates, Changes to the IDC tax treatment really don't have a meaningful impact on accelerating cash taxability. So I think that answer hasn't changed over the past few quarters.

Speaker 7

Got it. Appreciate the color.

Operator

Thank you. That concludes our question and answer session. I will now turn the call back to Lee Tillman for final comments.

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

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Marathon Oil Q3 2021
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