Marathon Oil Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 17, 2022

There are 13 speakers on the call.

Operator

Good morning, and welcome to the Marathon Oil 4th Quarter 2021 Earnings Call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note this conference is being recorded.

Operator

I will now turn it over to Guy Baber. And Guy, you may begin.

Speaker 1

Thank you, Brandon, and thank you to everyone for joining us this morning on our call. Yesterday, after the close, we issued a press release, a slide presentation presentation and an investor packet that address our Q4 2021 results and our 2022 outlook. Those call. Thank you, Brandon. I will now turn the call over to our operator for today's call.

Speaker 1

Thank you, Brandon. I will now turn the call over to 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 a reminder, today's call will contain forward looking statements subject to risks 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 our 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 us with some opening remarks.

Speaker 1

We'll also hear from Dane and from Mike today before we

Speaker 2

move to our question and answer session. Lee? Thank you, Guy, and good morning to everyone listening to our call today. I want to start by once again Thanking our employees and contractors for their dedication and hard work, their commitment to safety and environmental excellence, and their collective contributions to a truly remarkable year. I can best describe 2021 as a year but more importantly, superior to any other sector of the S and P 500.

Speaker 2

And we are carrying that momentum forward into 2022, Fully expecting another year of outstanding delivery. There are a few key messages I want to highlight today. 1st, After accelerating our balance sheet objectives through gross debt reduction, 4th quarter transitioned to a focus on returning a compelling amount of capital to our equity investors. Our cash flow driven return of capital framework uniquely prioritizes our shareholders as the first call on cash flow call. And our recent actions underscore both our commitment to prioritizing our shareholders and the power of our portfolio in a constructive price environment.

Speaker 2

The outcomes speak for themselves. During Q4, we returned over 70% of our cash from operations or more than $800,000,000 to our equity investors, significantly exceeding our minimum 40% commitment. To clarify, that's 70% of our cash flow from operations, not our free cash flow. That $800,000,000 actually equates to around 90% of our free cash flow during 4th quarter. In total, we have now executed $1,000,000,000 of share repurchases since October, driving an 8% reduction to our outstanding share in just 4.5 months.

Speaker 2

While others in our space may once again be focused on growing their production, We are focused on growing the per share financial metrics that matter most to our equity valuation, our cash flow per share and our free cash flow per share. Further, we continue to believe buybacks remain an excellent use of capital. Dane will discuss our perspective in more detail. But to summarize, we see good value in our shares. We are driving significant underlying per share growth and buybacks are highly synergistic with base dividend growth over time.

Speaker 2

Speaking of our base dividend, We recently raised our quarterly base dividend for the 4th consecutive quarter, fully consistent with our objective to pay a competitive and sustainable base dividend to our shareholders. My second key point today is that we are successfully executing on our mandate to deliver financial outcomes that are not only superior to our E and P peer group, but are superior to the broader S and P 500 as well. As I've said before, for our company and for our sector to attract a broader universe of investors, we must deliver competitive financial performance with other investment opportunities in the market, as measured by free cash flow generation and return of capital, even when commodity prices are much Lower than they are today, all the way down to $40 to $50 WTI range. We believe we have built that type of resilience into our business. And we must deliver truly outsized free cash flow and return of capital versus the S and P 500 when we experience constructive commodity price support, as we are seeing today.

Speaker 2

Our 2021 results are a strong testament to this mandate. Over $2,200,000,000 of free cash at a reinvestment rate of 32% in 2021, including over $900,000,000 of free cash flow at a 22% reinvestment rate during the Q4 alone, a peer leading return of capital profile driving significant per share growth, A tremendous balance sheet following $1,400,000,000 of gross debt reduction last year and a demonstrated capital efficiency advantage relative My third key message today is This peer leading financial and operational performance we have been delivering is sustainable. Our $1,200,000,000 2022 capital program It's fully consistent with our disciplined capital allocation framework that prioritizes sustainable free cash flow generation and per share accretion over production growth. We expect to deliver over $3,000,000,000 of free cash flow at a reinvestment rate of less than 30%, assuming $80 WTI $4 Henry Hub prices at a discount to the current board curve. These financial outcomes are sustainable for years to come and are underpinned by over a decade of high return, high confidence inventory.

Speaker 2

And it's further supported by our bottoms up 5 year benchmark maintenance scenario, which has now been extended out to 2026 and which delivers annualized financial outcomes similar to 2021 2022 on a price normalized basis. While our 5 year benchmark scenario is based on a well by well execution level model, Our longer term portfolio modeling extends the maintenance scenario out 10 years and shows that we can deliver the same peer leading financial outcomes for at least a decade. Importantly, we retain significant upside leverage to commodity prices that differentiates us versus our peers for 3 distinct reasons. First, we will remain disciplined and will not add production growth capital to our budget in 2022. Our focus will remain on free cash flow generation, return of capital and per share financial metrics.

Speaker 2

2nd, We have an attractive hedge book that preserves our cash flow upside. And third, we don't expect to pay U. S. Federal cash income taxes until the second half of the decade, an advantaged outlook versus most peers. My 4th and final key point today is that Marathon Oil is fully committed to meeting global energy demand while delivering comprehensive ESG excellence, focusing on each element of ESG.

Speaker 2

I hope all of you have had a chance to review the dedicated ESG press release that we issued in late January, which highlighted our key accomplishments in 2021 as well as our new environmental objectives. Suffice to say, I believe our employees We'll be just as proud of our ESG delivery in 2021 as they are of our peer leading financial and operational results. With that, I will turn it over to Dane, who will give you all an update on our return of capital initiatives.

Speaker 3

Thank you, Lee. Good morning, everybody. I'll speak to Slide 7 through 9 of our deck, largely focusing my comments on our return of capital accomplishments and outlook. Grounding our discussion, our return of capital framework is summarized on Slide 7 and that is unchanged. As a reminder, our framework calls for delivering a minimum of 40% of cash flow from operations to our equity holders WTI is at or above $60 This represents a return of capital commitment at the top of our E and P peer space and that is competitive with any sector in the S and P 500.

Speaker 3

Importantly, as Lee mentioned, our return Our shareholders will give the first call on cash generation. Additionally, it's consistent with our reinvestment rate driven approach to capital spending. By staying disciplined and by maintaining a low reinvestment rate, we protect a significant percentage of our CFO for shareholder distributions. While frameworks and commitments are important, we believe establishing a consistent track record of delivery quarter in and quarter out is ultimately key to building and maintaining trust and credibility with the marketplace. We have a multiyear track record returning significant capital to our shareholders and are especially proud of our accomplishments in 2021.

Speaker 3

We started 2021 with the top priority of balance sheet improvement, Accelerating $1,400,000,000 of gross debt reduction during the 1st 3 quarters of the year. After taking our net debt to EBITDA Comfortably below 1 times at strip and below 1.5 times at our conservative longer term planning basis of $50 WTI. We have no other need to accelerate additional debt reduction. So going forward, we plan to simply retire debt as it matures. Our balance sheet repositioning opened the door for us to begin returning a significant amount of capital to equity holders during the Q4 and that's returns beyond our base dividend.

Speaker 3

Thanks to stronger commodity prices, higher oil production, declining CapEx And an increase in EG Cash Distributions, 4Q was an exceptionally strong financial quarter, enabling us to return over 70% of CFO or More than $800,000,000 to our equity investors through our base dividend and share repurchases, dramatically exceeding our minimum 40% commitment. Stepping back and looking at full year 2021 demonstrates our commitment to allocating cash flow to shareholder friendly purposes. In total, we directed over 70% of our full year 2021 CFO, that's $2,300,000,000 to debt reduction, share repurchases and our base dividend. That's a pure leading track record of return of capital execution. Slide 9 highlights that we are well positioned to lead the market again and returning significant capital to shareholders in 2022.

Speaker 3

Since October, we've already executed $1,000,000,000 of share repurchases, reducing our outstanding share count by 8% in just 4.5 months and driving significant growth to our underlying per share metrics. Our current outstanding buyback authorization is $1,700,000,000 We continue to believe that buying back our stock in a disciplined manner is a good use of our capital. The efficiency of a disciplined and ratable share repurchase program It's really a function of free cash flow generation relative to market value. In other words, your free cash flow yield. And while our equity value has appreciated since we kicked off our buyback program in October, we continue to trade at free cash flow yield north of 20% And that's at $80 WTI, which is a discount to the current forward curve.

Speaker 3

That's roughly 4 times the free cash flow yield of the S and P five And even using a more conservative, say $60 WTI price assumption, our free cash The yield on our current equity value is around 10%, but still 2.5 times that of the S and P 500. So these are strong indicators that buybacks remain a very good use of cash. We also believe the disciplined share repurchases offer clear strategic advantages. They can drive strong underlying growth and per share metrics that are correlated with shareholder value, including cash flow per share and free cash flow per share. They also offer clear synergies with our base dividend as the reduction in shares outstanding creates capacity for incremental base dividend growth without And given the trend is downside resilience we've built into our business, we can continue to repurchase shares through the cycle, including when we experienced commodity price pullbacks and that's a very different dynamic than during past cycles.

Speaker 3

Paying a competitive and sustainable base dividend also remains a top priority for us as evidenced by the fact that we have now raised our base dividend 4 quarters in a row for a cumulative increase of 133%. With regard to the 2022 outlook, at an $80 WTI and $4 Henry Hub price deck, Our minimum return on capital commitment translates to $1,800,000,000 a number that stacks up well against our E and P peers and even better against the broader market. With no material debt maturities in 2022, constructive commodity price backdrop, our commitment to capital discipline and the expected We see potential to meaningfully outperform our minimum 40% of CFO commitment. We're on pace to return over 50% of our CFO to equity investors in the Q1.

Speaker 4

For the

Speaker 3

full year, Upside potential at the same $80 WTI and $4 Henry Hub deck could be as high as 70% of our CFO, The level at which we executed during the Q4. That would represent a return to equity investors of around $3,100,000,000 or close to 20% of our current market capitalization. With that, I'll turn the call over to Mike, who will discuss our 2022 capital program.

Speaker 5

Thanks, Dane. In 2022, we fully expect to once again deliver peer leading financial and operating results. Our $1,200,000,000 capital program with details summarized on Slide 13 is fully consistent with our disciplined capital framework that prioritizes corporate returns and free cash flow generation over production growth. 30%, assuming $80 WTI and $4 Henry Hub. As Dane just mentioned, We will continue our investment in reducing our GHG intensity, targeting a 40% reduction relative to our 2019 baseline, in addition to gas capture of 99% or better.

Speaker 5

At basin level, consistent with prior indications around our capital allocation mix, We will be spending approximately 75% for capital budget in the Eagle Ford and Bakken with the balance going to the Permian and Oklahoma. Included within our Permian program is the continued disciplined progression of our emerging Texas Delaware oil plate with a planned four well appraisal path later in the year. I'm excited about the restart of a more steady activity level in both Permian and Oklahoma and the strong economics associated with these opportunities. We are not allocating any production growth in 2022 and expect our total company oil and oil equivalent production to be flat with the 2021 full year averages. Yet while we aren't growing absolute production levels, the 8% production Our share count we've already achieved is driving significant growth to our production per share, cash flow per share and free cash flow per share, Metrics we believe are highly correlated with shareholder volume.

Speaker 5

While we expect our full year 2022 average production For both oil and oil equivalent to be flat versus the prior year, there will be some natural variability from 1 quarter to the next, It is reasonable to expect a plus or minus 5% variance around the midpoint of our full year production guidance, Not similar from what you saw from us in 2021. Our focus will remain on maximizing our capital efficiency and free cash flow generation sustainably over time, not the production output of any single quarter in isolation. For Q1 2022, Due to the timing of our wells to sales and some typical winter weather downtime, we expect our total company oil production to be at the lower end of our annual guidance range at around 168,000 barrels of oil per day before improving into the Q2. Regarding our capital spending profile, Our full year capital will be slightly weighted to the first half of the year with approximately $350,000,000 of CapEx expected during 1Q 2021.

Speaker 6

I want

Speaker 5

to make clear that should commodity prices continue to surprise to the upside, We will remain disciplined and have no plans to allocate production growth capital. With our balanced exposure to oil, Natural Gas and NGLs, our company retains significant leverage to commodity price upside. With a $1 per barrel increase in oil price, translating to around $60,000,000 incremental free cash flow. We believe preserving this upside is important for our investors. The resilience of our 2022 program is underscored by a free cash flow breakeven well below $35 per barrel WTI, assuming conservative gas and NGL prices.

Speaker 5

A hedge book that preserves our upside commodity exposure and an advantaged U. S. Cash tax position with no U. S. Federal cash income taxes expected until the second half of the decade.

Speaker 5

I will now turn it over to Lee, who will provide an ESG update and will close out our prepared remarks.

Speaker 2

Thank you, Mike. As I've stated before, strong ESG performance is foundational to our framework for success and our long term value proposition in the marketplace. We believe that we have a clear and much needed role to play in the longer term energy landscape. Oil and gas are essential to a thoughtful and orderly transition to a lower part of the future and to protect the standard of living we have all come to enjoy and to which others around the world strive to attain. Access to responsible, reliable and affordable energy is the great social equalizer and is the foundation upon which the world's modern economy is built.

Speaker 2

We are proud to play our role in supporting U. S. Energy security, which protects the U. S. Consumer and serves as a powerful tool of foreign policy providing options for both the U.

Speaker 2

S. And our allies. We must take on the dual challenge of meeting the world's growing energy needs, while also prioritizing all elements of our ESG performance, including efforts to address climate change. This is not an either or proposition, and failure on either front is not acceptable. However, Our approach must be pragmatic and grounded in the free market, innovation and an all of the above energy approach.

Speaker 2

We are unfortunately experiencing firsthand the impacts of misguided energy policy and the dramatic role it can play on energy affordability as well as geopolitical stability. Slide 16 provides a comprehensive progress report across each of the elements of ESG. When viewed in totality, the progress our company has made is not only compelling, but is a point of pride for our entire organization. For us, it always starts with safety. I'm therefore especially proud that we delivered our 2nd best safety performance in our company's history in 2021, as measured by total recordable incident rate for employees and contractors.

Speaker 2

We realized significant Our core environmental objectives, achieving our GHG intensity reduction target of at least 30% relative to our 2019 baseline and improving our total company gas capture to 98.8% for the full year. During the 3rd and 4th quarters of 2021, we achieved a gas capture of approximately 99%, and we expect to perform at or above this level in 2022 and beyond. As we previously announced, we have also recently introduced new quantitative goals for the near, medium and long term horizon across our core environmental focus areas: GHG intensity, methane intensity and gas capture. These goals complement our existing 2025 GHG intensity reduction objective of 50% versus our 2019 baseline. They represent a pragmatic roadmap to realizing significant improvement and our environmental performance through the end of this decade, driving significant GHG intensity reductions, consistent with the trajectory called for by the Paris Climate Agreement.

Speaker 2

Our environmental objectives will promote transparency and accountability, while enhancing the internal alignment and innovation that will be necessary to deliver such strong performance. Importantly, our 2,030 GHG and methane intensity objectives represent industry leading improvement and will contribute to absolute performance that is competitive with the very best oil and gas producers globally. Moving from environmental to our social accomplishments, we invested thoughtfully and strategically in our local areas of operations to build healthier, safer and stronger communities in alignment with core UN Sustainable Development objectives. And we continue to promote equality, diversity Inclusion is core values, which has helped contribute to a notable increase in the representation of both females and people of color within our workforce over the last 5 years. On governance, we believe we have taken a leadership role in aligning executive compensation presentation with the most important drivers of shareholder value.

Speaker 2

I've covered the comprehensive changes we made for the 2021 compensation cycle previously, including quantum reductions and redesign short term and long term incentive programs. So I won't revisit all of those details today. However, I will remind everyone that we've eliminated production metrics from all scorecards and have included unique free cash flow performance stock units in our executive long term incentive design. Finally, we have also taken a leadership role in ensuring strong Board of Director oversight, refreshment, independence and diversity, highlighted by the addition of 2 new directors and the appointment of a new lead director in 2021. Before we move to our question and answer session, I want to wrap up with the compelling investment case for Marathon Oil.

Speaker 2

We fully recognize that investors have options. So why MRO? First, we have instituted a transparent capital framework that uniquely prioritizes Our shareholders as the first call on cash flow generation. Our shareholder friendly framework is complemented by a track record of delivery, and it is my expectation that we will lead our peer space in returning capital to shareholders in 2022. 2nd, we are committed to capital discipline.

Speaker 2

If commodity prices continue to outperform, we won't introduce production growth capital into our budget. We will remain focused on free cash flow generation and return of capital. When it comes to growth, our focus is not on growing production, It's on growing the per share metrics that matter most. And $1,000,000,000 of buybacks in just the last 4.5 months, Driving 8% underlying per share growth is a strong statement of our commitment. 3rd, due to our balanced production mix, We will now be conducting a differentiated upside leverage to commodity outperformance, and we will protect this upside for our investors.

Speaker 2

And finally, we believe the peer leading financial and operating results we are delivering today are sustainable, underpinned by over a decade of high quality, high return inventory, by our 5 10 year benchmark maintenance scenarios and by our commitment to comprehensive longer term ESG excellence. With that, we can open up the line for Q and A.

Operator

Thank you. And we will now begin the question and answer And from JPMorgan Chase, we have Arun Jayaram. Please go ahead.

Speaker 7

Hey, Lee and team, good morning. Lee, if we're sitting here in a year and oil and gas prices indeed averaged 80.4 For better, should we expect you to return $3,000,000,000 plus of free cash flow to shareholders? That's The buy side question of the morning.

Speaker 2

Yes. Good morning, Arun. Thanks for the question. First of all, I think we are already on a pace in Q1 room to return 50% or more of our CFO back to investors. And as we demonstrated in 2021, Whether you look at 4th quarter in isolation where we got hit that 70% kind of milestone back to equity investors or even look at the full year, Including our gross debt reduction, which also would be 70%, we know that we have that potential for delivery.

Speaker 2

I think what it might be helpful for Dane to talk a little bit about the mechanics of how we approach The share repurchase program, because I think it will give you a little bit more insight and how the year will likely play out. So I'll kick over to Dane.

Speaker 3

All right. Good morning, Arun. Thanks for the question. Yes, with regard to share repurchase, obviously, we just spent 30 minutes talking about the fact that we've been aggressively buying back shares and we think that's good value. We really moved the needle by buying back 8% of the stock.

Speaker 3

And so We expect us to continue with that kind of program. In terms of how we execute on that, we use a couple of tools When executing the share repurchases and I think of it sort of as a base program and that's sort of a top up program. The base program we established Simple 10b5-1 programs most recently we've sized those around $250,000,000 And we set those in motion to be purchased ratably over a period a set period of time, typically 30 to 45 days. We established those 10b5-1s when we're not in a blackout period, of course. And then They can execute daily through blackout periods.

Speaker 3

So for example, we're buying back stock today under a 10b5-1 and Sorry, I'm getting a little feedback here. The readability of that daily program really helps when you're in a period of volatility, you're not And if we get To the end of a period and our cash flow is sufficient to top up on top of what we've done with these 10b5-1s, We can go in with daily purchases under what's called an NBA team and we can do those in fairly significant size. We can really move a lot of stock in a short period of time under that mechanism if we have the capacity to do it. So I would expect you should probably expect us to continue to execute like this with the base load and then we have the ability

Speaker 2

And maybe if I could just wrap up for Brandon. I think 4th quarter was A great example of that model, we had signaled that kind of at least the 50% of CFO getting back to shareholders. But as the quarter progressed and as we implemented the structure programs, we saw an opportunity with price support and the cash flow generation that we were seeing to go above and beyond that and that's in fact how we got to that 70% marker. Great, great. Appreciate that color.

Speaker 2

And my follow-up is with Mike. I was wondering if you could provide maybe a little bit more

Speaker 7

Asset level color on the 2022 program, specifically maybe in the Bakken, I'd love to hear about maybe The well mix between Hector and Myrmidon and maybe some thoughts within the Permian as well as in the Mid Continent some of the areas that you're targeting as you increase activity from last year's levels.

Speaker 5

Yes. Good morning, Arun. We can certainly take you through that. I'll start with the Bakken, and then I'll probably jump on to Eagle Ford. But In the Bakken, we're as we included in the presentation, looking at 50 to 60 wells to sales.

Speaker 5

What I would say is probably more weighted towards the first half of the year. It is a higher working interest program This year, which also works in our favor. What I would say is largely focused in hectare. Eagle Ford, again, as we mentioned in the presentation, 120 wells to sales. Activity is going to be across our core areas.

Speaker 5

So we're looking at about 45% of the activity in Karnes, 35% And the remainder up in Gonzales. We are looking at longer laterals on average in Eagle Ford this year, so That should enhance our efficiencies. We're also going to be continuing the redevelopment testing that I think it was this time last year you asked the question. So we'll probably make a date for this time next year. We'll give you another update.

Speaker 5

But we're continuing the redevelopment testing We have 15 wells planned in 2022. Had some good success in 2021. We've added a little over About 100 high return redevelopment locations to inventory there. So it seems pretty logical To continue that activity into 2022, Permian, getting 20 to 25 wells to sales. That's probably going to be more focused on the second half of the year, targeting the Upper Wolfcamp and what I'd say is split Pretty much fifty-fifty between Red Hills and Malaga.

Speaker 5

And then wrapping up, Oklahoma, again, 20 to 25 Welles to sales, what I'd say there is heavy scope, Woodford focus. And similar to maybe what we're seeing in the Eagle Ford, we're going to benefit there from Some longer average lateral lengths, I think, were 30% up from when we had our last full year of activity in Oklahoma.

Speaker 2

Great. Thanks a lot.

Operator

From Barclays, we have Jeanine Wai. Please go ahead.

Speaker 8

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

Speaker 3

Good morning.

Speaker 8

Our first question, we noticed You reported $47,000,000 of acquisitions during the quarter on the cash flow statement after not doing any for several quarters. Can you just provide a little bit of color on what that acquisition capital was spent on and maybe a little bit on your perspective on the A and D market for Marathon?

Speaker 5

Good morning, Janine. It's Mike here. I'll give you a little bit of detail on the acquisition, and then I'll kick it over to Lee to provide a little bit of that broader perspective. So the acquisition, it was a small Eagle Ford bolt on in the core. It added a few sticks, but I think more importantly for us, it allowed Just to drill some extended laterals down in Karnes County there.

Speaker 5

Maybe on the broader question, I'll

Speaker 2

That's great Mike. Thanks. From a broader A and D perspective, Janine, I think 1st and foremost, we're going to view All opportunities, inorganic opportunities through the lens of really our high confidence organic case, which we obviously have spent a lot of time describing today and the types of financial metrics that that's delivering. So needless to say, it sets a relatively high bar for any opportunity that's inorganic in nature. And of course, to pursue something, we're going to have to see it as accretive to that organic case.

Speaker 2

And again, that's going to be a challenge. We will continue to assess and evaluate those things The marketplace, particularly those that are around our core areas, but we're going to be very disciplined. The same discipline that you see us applying In our organic business, you should expect that when we look at A and D activities as well. I think the opportunity that Mike described It's a great example of an accretive opportunity to offer a little bit of PDP, but generally allowed us to build on a core area and extend our lateral lengths and improve our capital efficiency. And so those are the type of kind of hand in glove fits that we'll be looking for.

Speaker 8

Okay, great. Thank you for all that color. Our second question is maybe just revisiting the method of the cash payout. If the strip hold and the 70% of cash flow comes to fruition, there's a lot of cash to be allocated, which is a very nice high class problem. In this upside case, does your preference between buybacks, variables and base dividends change on that allocation split?

Speaker 8

I know so far you've had a very strong preference for buybacks, which you've described very nicely in the prepared remarks about per share growth. But we've just been noticing we've been getting a little bit more pushback and questions from investors on procyclical buybacks. Thank you.

Speaker 5

Yes. Hey, Janine, this

Speaker 3

is Dane. Let me take a cut at that. So really we've got 3 choices for returning cash to shareholders, the base dividend, Share repurchases or some sort of a variable cash return people often describe as variable dividends. And kind of here's how we think of each. The base dividend so our objective there with the base dividend is to have a competitive yield When compared to peer average and the S and P 500 and also in addition to competitive, we need it to be sustainable.

Speaker 3

And we think of that in the context of a pretty conservative planning basis price deck sort of in a $45 to $50 world, We know investors can count on that base dividend in virtually any circumstance. With Our recent 4th consecutive increase to base dividend yields competitive with peer average and a little bit better than the S and P 500. So check that box. From a sustainability perspective, we really think about 10% of cash flow from operations has been Where we want to target that dividend again in that $45 to $50 world, what keeps the enterprise breakeven, Free cash flow breakeven after dividend below $0.40 we're well below that. So we're in good shape there.

Speaker 3

The $0.07 again is about right in line with the 10% at that stated price deck. And then keep in mind there are synergies between the base dividend and share repurchases. As we reduce outstanding shares, we can increase the base dividend further and still stay within that 10%. CFO threshold, so we really like that Share repurchases, we just went through that in quite a bit of detail, but we still The value proposition is so strong there. It's just hard to take your eyes off that as the largest Attractor of return of cash to shareholders.

Speaker 3

We certainly from a variable dividend perspective have considered And it remains a potential tool for us to use in the future to supplement the base dividend and share repurchases. I wouldn't want to do The detriment of either the base dividend or share repurchases, especially when the implied free cash flow yield is so high on those repurchases and the program so efficient. But we're not closing the door on any techniques. I do think on your pro cyclicality question, just keep in mind, when the free cash flow yield is that high, it doesn't feel pro cyclical to me at all. And because we've really bulletproofed our company for down price cycles, we can keep buying through pretty much in price cycle.

Speaker 3

So and that's really kind of our intention.

Speaker 8

Great. Thank you very much.

Operator

From Wolfe Research, we have Josh Silverstein. Please go ahead.

Speaker 9

Yes. Thanks. Good morning, guys. Just sticking on the capital return plans, you still do have some small maturities coming up over the next kind of year Thoughts that maybe keep more cash going back to shareholders?

Speaker 3

Yes. My base case is Pay them off with cash. They're really kind of small bite sized maturities. There's the we've got like $38,000,000 of U. S.

Speaker 3

Old U. S. Ex debt, if you can believe that, with an average coupon, it's about close to 10%, it will be nice to get that out of the system. The following year or so, there's another $200,000,000 of USX debt like that. And then we get into a couple of maturities that are The muni bond debt that's pretty unique to us.

Speaker 3

We like that one because we can buy it back and put it into treasury, if you will, and keep it as capacity to reissue into the future and it's relatively low cost debt compared to taxable debt. So short answer to your question, base case, pay it off with cash. I think there's some good synergies with interest production, especially on that Higher coupon debt. And as we pay off those munis, we'll kind of retain the optionality. And if we need those going forward to tackle a larger maturity tower or for any other circumstance, it's nice to have those.

Speaker 2

Yes. And just as a reminder, the $1,400,000,000 of gross debt that we took out last year also brought with it 50 $1,000,000 of annualized interest rate savings. And so when we think about our overall enterprise free cash flow breakeven, That's cost structure that's coming out of the business. So it is good to continue to keep Tiring that debt as it matures, but we don't see the need to accelerate any of that.

Speaker 9

All right. Thanks guys. And then, the activity is still heavily weighted with this 70 five-twenty 5 split from the Eagle Ford and Bakken. When do you see that the shift kind of slowly going towards Oklahoma and Delaware? And how does the capital efficiency change as you guys start to do that?

Speaker 2

Yes. Maybe I'll just refer you to our kind of 5 year benchmark scenario that we just updated to include From 2022 to 2026, so essentially we've added a year, we've incorporated kind of what we've seen from an inflation standpoint, etcetera. And what I would say is that, that relative capital allocation weighting stays essentially in that same range Throughout that 5 year view, Josh, so no radical movements. You'll see some capital move in between basins, But kind of that 20% to 30% going to Delaware and Oklahoma, that's pretty consistent across that 5 year benchmark maintenance scenario, just to kind of give you a little bit of a benchmark.

Speaker 10

Got it. Thanks guys.

Operator

From RBC Capital Markets, we have Scott Hanold. Please go ahead.

Speaker 9

Thanks, thanks, Alhay. Just to maybe follow-up on that question a little bit and it looks like the Eagle Ford is getting A little bit higher allocation say this year and I guess last year relative to say the Bakken, but can you give us a sense of like where You see the runway in the Eagle Ford is I know a lot of conversations with investors kind of discusses what type of core runway still is left In the Bakken and the Eagle Ford. And if you can just give us a little bit of color on your perspective on the confidence in that drilling program through that 5 year time frame in the Eagle Ford.

Speaker 2

Yes. I think you're seeing a little bit of natural variability as we So there's not much more of a read through, I think, than that. But in terms of inventory life, We obviously talk at a corporate level about having more than a decade of high quality inventory. You need only look at the INVERIS data, which will, of course, be included within the appendix of the deck. But beyond that, when you look at each of our individual basins, They each independently also have over a decade of inventory for inventory to exploit.

Speaker 2

So we feel very Good about the outlook of the 5 year benchmark case and even the portfolio model work We've done on the 10 year benchmark continues to show us delivering annualized financial outcomes that look very similar what we're delivering this year on a price normalized basis. And from a capital efficiency standpoint, we've been the leader of the pack there for quite some time. We've included, again, a little bit more public available data on that point, but there is no real Drop off per se in that capital efficiency, as we move amongst the plays, these are still very economic opportunities across the board, both within both Eagle Ford and Bakken, but also within Oklahoma and Delaware with, obviously, Oklahoma benefiting somewhat from some of The strength in NGL and gas pricing, but quite frankly, that uplifts all of the portfolio. So from our perspective, We feel very confident in both the 5 and the 10 year view.

Speaker 9

Great. Thanks for that. And then as And I think you've been pretty clear on your views on growth, especially where we are at right now. But I know there is some, I guess, I'd call flexibility to upwards of 5% if the market needs barrels or you think it's the right decision. And As you start thinking about 2023 and beyond, can you give us your thoughts on looking what would get you to move toward Something closer to 5% growth case?

Speaker 2

Yes. I believe right now, Our focus, Scott, is really again on per share accretion, whether that be free cash flow, cash flow or even production on a per share basis. We're going to be informed by the macro, but at the end of the day, We're price takers, not price predictors. And there's a wide range of potential outcomes that are going to be driven clearly by Events as well as supply and demand fundamentals, but our strategy is predicated on really generating outsized free cash flow when we are in a constructive pricing environment. And I don't really see that mantra changing as we move out in time.

Speaker 2

I think the growth in per share metrics for us is the right approach, I think, for a mature business that is trying to attract more of a broad investor universe.

Speaker 9

I appreciate that. Thank you.

Operator

Wells Fargo, we have Nadeem Kumar. Please go ahead.

Speaker 11

Hi, good morning and thanks for taking my questions. Lee, you've covered this a bit this morning, but looking at your Slide 8 and the allocation of cash So you stand out in terms of the buyback, but when I look at the base dividend against your peers, the allocation of The base dividend is a little bit lower. So you talked a little bit earlier about mid cycle pricing stuff, but What is where is the room for that to grow? Or what is the appetite to grow that to be a little bit more competitive with your peers, if not the S and P 500?

Speaker 3

Andy, I'll take a shot at that. As I mentioned earlier in an earlier answer, We really are focused on maintaining a competitive yield with that base dividend and we're right on top of the average for the peer group Today, I'm a little bit ahead of the S and P 500. And we have raised that base dividend 4th quarters up consecutively To the point now, we're paying $50,000,000 a quarter to shareholders. We do want to make sure that it passes the sustainability test. So 10% of cash flow from operations in a Pretty conservative $45 to $50 planning basis price environment.

Speaker 3

And we want to keep the enterprise free cash flow breakeven below 40%, and it's well below 40% at this point. It's probably 35 or less after dividend. The other synergies that I keep pointing to because they're real is as we We continue to buy back shares as we create more capacity for that dividend, for that base dividend. And frankly, as As we pay down some of that high

Speaker 6

coupon debt, we're having

Speaker 3

more capacity for the base dividend as well. So we're very focused on Keeping that competitive, but we also want to be sustainable. We think we've got a flywheel effect going here that's going to feed that base dividend

Speaker 11

Great, great. I appreciate that. I guess the other question I have is you've highlighted The lack of hedges as one of your competitive advantages, but it's a you're presenting a financial Model, right? It's a cash generation, cash return model. At what point do hedges or at least taking some of that Downside risk in commodity prices become important.

Speaker 11

If you could answer like head the thought around hedging going forward in the long term.

Speaker 10

Hi, Dantene. This is Pat. I'll take that one. Lee covered it in his opening remarks and you just Reiterated that we have significant leverage even to further commodity price strength and we think it's really important to preserve that strength for our shareholders. That's why we showed the slide on 14, showing what our current book looks like in a couple of different prices.

Speaker 10

We have intentionally structured our crude hedges such that they tie to our return of cash framework. So we've set our floors at $60 and we have high calls so that we can share that upside and that Helps preserve our ability to return that minimum 40% of cash flow from operations to investors. And hedging is just one dimension of our Commodity risk management approach. I think we hit on these before, but other dimensions include our strong balance sheet, Our low cost structure, our low corporate free cash flow breakeven as Dane mentioned, below $35 a barrel and then of course our diversified portfolio. With our significant balance sheet improvement in 2021 and those breakevens, we can be patient and take Our time in assessing hedging opportunities so that we make sure we preserve the upside.

Speaker 10

And then lastly, I'd just say that we have a good product diversity mix with 50% oil. And so we feel comfortable with

Speaker 5

what we see today.

Speaker 11

Great. Appreciate the answers.

Operator

From Truist Securities, we have Neal Dingmann. Please go ahead.

Speaker 6

Good morning. Thanks for the time. First question is just on the ops plans. I really like that Slide 21 that you go over inventory depth and hopefully some of the other analysts have seen the same slides. My question around that Given the sample acreage, we all look to drill and complete even longer laterals and very extended wells in order to And to boost returns, can you just maybe talk about the operational plans given this?

Speaker 2

Yes. I think what you're asking there is, are Kind of leveraging longer laterals in the portfolio this year. I think Mike hit upon a few of those points. But Mike, maybe you want to just talk broadly not only about extended lateral, Some of the other things that we're doing from an efficiency standpoint as we look to mitigate some of the inflationary pressures.

Speaker 5

Yes. Just touching on the laterals. I think I maybe mentioned in previous comments, but we're looking at a 10% increase in the Eagle Ford year over year. Mentioned Oklahoma, we're going back in there. I think it's a 30% increase in Oklahoma from the last time we were operating there.

Speaker 5

And then in Permian, it's So all of those things are obviously going to benefit capital efficiency. The other thing that I the other things I'd mention, and this is something that we've touched on in the past, we've got a bit of a track record in terms of Just improving capital efficiency and it isn't just down to lateral lengths. I think we continually look at our well design And we're always looking to optimize there and really try to maximize volume. And the second area is just execution efficiency. What I'd say is we've got a Pretty relentless focus there just on how we drill and how we improve and quite honestly how we operate our wells.

Speaker 5

And then The third element is maybe supply chain optimization. I think we've got to we're continually looking at our cost models, really trying to determine what So while we're seeing a little bit of inflation at the moment, we do try to offset by all the things that I've just mentioned.

Speaker 6

Great, great added details. I appreciate that. And then just a quick follow-up, really like that Slide 14 that shows your leverage commodity prices. My question is Around that, really just kind of looking at that bottom quarter, does your advantage and when you touched on this earlier, having no upcoming cash tax for quite some time Unlike most of your peers, does that maybe change how you think about some of your operational plans or is it still what capital discipline sort of weighs out and that Even though you have that benefit, there's really no change because of that.

Speaker 2

No, I don't think there is any Certainly, no undue influence of that fact on our business plan and our capital allocation from that standpoint, Neil. But clearly, as you pointed out on It does put us in an advantage position in terms of the cash flow generation over kind of over this mid term period. And of course, we battle tested this to make sure that between our NOLs and our foreign tax credits This is the right zip code for us from a cash tax standpoint, but it doesn't influence us directly from A capital allocation standpoint, we're still going to be returns and NPV driven on the opportunities we select to invest in.

Speaker 6

Welcome. Thanks, Lee.

Operator

From Bank of America, we have Doug Leggate. Please go ahead.

Speaker 12

Thanks. Good morning everyone. Lee, you led the market on this cash return model, so congratulations to you on that. It's obviously working. My question is about the pro cyclicality.

Speaker 12

I think we all know that oil prices are suffering a number of issues right now, whether it's geopolitics or Gas in Europe or whatever is going on, and we know that there's a forward curve substantially below the spot. So why not build cash and wait on what will inevitably be an opportunity to buy back your stock at a

Speaker 6

lower level?

Speaker 2

Yes. I think, Doug, the way I would kind of phrase that is we're not going to try to convince ourselves that we're price predictors. We believe that a more ratable dollar average type approach where we can look through the cycle. Just to give you an example, Doug, if you look at that $1,000,000,000 of share repurchases that we did, that was done below a $17 share price. And of course, today, I don't know where we are trading in the market this morning, but certainly north of 2020.

Speaker 2

So I think that the opportunity that presents When you have a model where you are resilient across a broad range of commodity price outcomes, That kind of pro cyclicality argument starts fading away and I think it's indicative of a new more mature model that we're deploying now at least at our company in the E and P space. And so I think Dane said it well. I think with this new model, It does give us that ability to really invest in our shares through the cycle. And again, assuming we continue to see The types of yields that we're seeing, free cash flow yields down to even down to 60%, we're at 10%. We feel very strongly that, That is a great option for us.

Speaker 2

And when we look at the suite of investment options, certainly investing in our own company and the confidence that that shows and the return that it's generating makes the most sense for us. So I would not expect us to try to Say for the rainy day and try to predict when that's actually going to occur.

Speaker 12

Yes. No, that's fair. I think it's really more about Well, the market is prepared to discount and if the curve rolls higher then you're absolutely right. My follow on is on the inventory question and You've given a lot of color this morning, so thank you for that. But you've also shown a little bit of sensitivity on the oil price, which is substantially below The high end is still $50 on your slide deck.

Speaker 12

What does the inventory depth look like at today's curve?

Speaker 2

Yes. Well, I think if you do look even at just the 3rd party data, clearly, it does shift In terms of kind of where that higher return inventory lies as that price deck moves up. I mean, we test All of our opportunities at a very conservative price deck. So when I talk about over a decade of inventory, We typically are testing that inventory at a $50 WTI. So it goes without saying that Some of that Tier 3 and Tier 4 inventory, if we continue to see constructive pricing, will allow us to Economically grow that inventory just from a price perspective.

Speaker 2

But I do think the inverse data is broadly indicative Of that effect, as you look at the breakeven cutoffs that they have shown, clearly, as prices move higher, it's Going to enhance that inventory depth over time. So we try to speak pretty conservatively is the way I would put it and really not only conservative in terms of our inventory life, But make sure that we show transparency on what that inventory can generate from a financial outcome standpoint. Because It's not just inventory, it's the quality of inventory. And I think the balance of data that we've shown on capital efficiency, The level of reinvestment rate that we can deliver are all indicative of the capital efficiency embedded in that well over a decade of inventory life.

Speaker 12

Appreciate the color. Thanks, guys.

Operator

And from Citigroup, we have Scott Gruber. Please go ahead.

Speaker 4

Yes, good morning. Thanks for squeezing me in here. So looking at the Bakken activity, your production popped in 4Q, but The 22 TILs are going to be down 10 to 20 wells. At that level of activity, should we expect Bakken production to start To trend lower on a year over year basis in the second half and is the expectation that we made up for the second half by the completions in the Permian And then thinking out into next year, is that the direction of travel we should be thinking about into 2023?

Speaker 5

Yes, Scott. It's Mike here. Maybe how I think about Bakken. On an annual kind of year to year basis, it's going to be pretty flat It's how I think about it. We're going to see quarterly variability as I mentioned in my prepared remarks.

Speaker 5

I mean That's just to be expected. But yes, as you say, I think about it on an annual basis, it's pretty flat.

Speaker 4

Okay. So it's flat in the 5 year plan is the way to think about it?

Speaker 5

Again, you're going to see a little bit of variability there, but I think it's going to be pretty close to that.

Speaker 4

Okay. Okay. And then the redevelopment opportunity in the Eagle Ford is interesting. What's the rough breakeven On those redevelopment wells and at strip, how should we think about the redevelopment cadence over the next couple of years?

Speaker 5

I don't Scott, it's Mike again. I don't think we've disclosed anything on breakevens. I We had 14, 15 redevelopment tests last year. And as I mentioned a little bit earlier, we've added A little over 106. We've got another 15 wells planned this year to potentially de risk Some additional areas and potentially look to add some further locations.

Speaker 5

And I think we look at this on an annual basis. We've got a number of these we call it Oyo opportunities and Yes. We'll continue to look at that on an annual basis, and we may have some more in the future. I think a lot of it is dependent on the results that we

Speaker 2

see. Yes. But if I could just add in, Scott, the bottom line is that the redevelopment wells compete head to head with the rest of the portfolio. They have to compete on a heads up basis for capital allocation with the rest of the portfolio. So breakevens per se will be not dissimilar to what we see across the rest of portfolio.

Speaker 4

Got it. Appreciate the color. Thank you.

Operator

Thank you. We are in our overtime and we'll now turn it back to Lee Tilton for closing comments.

Speaker 2

Thank you for your interest in Marathon Oil, and I'd like to close by again thanking all of our dedicated Thank you, ladies and gentlemen. This concludes today's conference.

Operator

Thank you. And ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.

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Earnings Conference Call
Marathon Oil Q4 2021
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