Marathon Oil Q3 2022 Earnings Call Transcript

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Provided by Quartr
November 3, 2022

Key Takeaways

  • Marathon set a new Q3 shareholder distribution record of $1.2 billion (over 80% of CFO, ~100% of FCF) and repurchased $1.1 billion of stock at an average $24/share, cutting shares by 20% since last October.
  • Q3 delivered over $1 billion of free cash flow at a 29% reinvestment rate, with oil production up 17,600 bbl/d and standout extended‐lateral well performance in the Permian and Red Hills.
  • 2022 guidance was raised: EG equity income is now >$600 million (up $70 million), capex increased to $1.4 billion to protect early ’23 volumes, and metrics point to peer‐leading free cash flow yield and reinvestment rates.
  • The Eagle Ford Ensign acquisition adds 130,000 net acres (99% WI), over 600 high‐return undrilled locations (>15 years of inventory), and is modeled to boost 2023 operating cash flow by ~17% and FCF by ~15%.
  • The deal is funded with cash, revolver borrowings and pre‐payable debt while keeping net debt/EBITDA below 1x, preserving investment‐grade strength and supporting a minimum 40% CFO return plus an 11% dividend hike.
AI Generated. May Contain Errors.
Earnings Conference Call
Marathon Oil Q3 2022
00:00 / 00:00

There are 11 speakers on the call.

Operator

Welcome to Marathon Oil Third Quarter Earnings 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. As a reminder, the conference is being recorded.

Operator

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

Speaker 1

Thank you, Sheryl, and thank you

Speaker 2

as well to everyone for joining us on the call this morning. Yesterday, after the close, we issued a press release, A slide presentation and investor packet that address our Q3 2022 results. Alongside those standard earnings materials, we also issued a separate Press release and slide deck addressing our acquisition of Ensign Natural Resources Eagle Ford Assets. All Those documents can be found on our website at marathonoil.com. Joining me on today's call are Lee Tillman, our Chairman, President and CEO Dane Whitehead, Executive VP and CFO Pat Wagner, Executive VP of Corporate Development and Strategy and Mike Henderson, Executive VP of Operations.

Speaker 2

As a reminder, today's call will contain forward looking statements subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. I'll refer everyone to the cautionary language included in the press release and the presentation materials as well as to the risk factors described in our SEC filings. We'll also reference certain non GAAP terms in today's discussion, which have been reconciled and defined in our earnings materials. With that, I'll turn the call over to Lee and the

Speaker 1

rest of the team, who

Speaker 2

will provide prepared remarks. After the completion of the remarks, we'll move to a question and answer session. So in the interest of time, we ask that you limit yourself to one question with a follow-up.

Speaker 1

Thank you, Guy, and good morning to everyone listening to our call today. To start, as always, I want to first Thank our employees and contractors for their dedication and hard work as well as their commitment to our core values, especially Safety and Environmental Excellence. We are a results driven company, but we are equally focused on how we deliver those results. I'm proud of our entire organization. As Guy mentioned, in addition to our standard quarterly earnings materials, We're also very excited to discuss our acquisition of Ensign Natural Resources Eagle Ford Assets, a truly compelling opportunity for our company that furthers each and every one of our core strategic objectives.

Speaker 1

While there's no shortage of highlights from our 3rd Our financial and operational results. Our continued return of capital leadership is certainly near the top of the list. In fact, our Q3 shareholder distribution set a new record for our company. Dane will start there and provide a bit more context around our return of capital success and then Mike will walk us through our Q3 financial and operational results and outlook in more detail. We will then spend the balance of our opening remarks on our material expansion in the Eagle Ford.

Speaker 1

Needless to say, we have a lot of ground to cover today. So Let's get started. Over to Dan.

Speaker 3

Thank you, Lee, and good morning, everybody. Returning a significant amount of capital to our shareholders Through the cycle is a foundational element of our value proposition in the marketplace. As we've consistently highlighted, We believe our return of capital framework is differentiated in our peer space, uniquely calibrated to operating cash flow, Not free cash flow prioritizing our shareholders is the first call on our cash generation. This is especially important in a market by inflationary headwinds and represents a strong commitment to our shareholders. And during the Q3, I'm pleased to announce that we further built On a return of capital leadership, by setting a new quarterly shareholder distribution record for our company corresponding to over 80% of our CFO and essentially 100% of our free cash flow to equity holders.

Speaker 3

Total 3rd quarter shareholder distributions amounted to $1,200,000,000 Translating to an annual distribution yield of around 24%, a yield that's not just at the top of the E and P peer space, but at the very top of the S and P 500. While we had guided 3rd quarter return of capital to at least 50% of our CFO, Due to strong operating and financial performance, our financial strength, including a replenished cash balance and favorable market conditions, Including clear value in our stock price, we saw an opportunity to materially step up the pace of repurchases. We bought back $1,100,000,000 of stock during the Q3. The timing of our decision proved beneficial As 3rd quarter buybacks were executed at an average price of around $24 a share, well below current trading levels. While our commitment to an operating cash flow driven return of capital model remains differentiated, so does our commitment to significant ongoing share And the cumulative benefit of this approach has become pretty hard to ignore.

Speaker 3

Since kicking off our share buyback program last October, We've repurchased $3,400,000,000 of our stock, driving a 20% reduction to our outstanding share count in just 13 months, contributing to significant underlying growth in all of our per share metrics. We continue to believe buying back stock is a good use of capital at current market conditions. And consistent with this belief, our Board has again topped up our outstanding buyback authorization to $2,500,000,000 Looking ahead to the Q4, we expect to execute around $300,000,000 of share repurchases and will ensure we fully meet our commitment to the market to return at Dialing back the pace of buybacks a bit at the end of the year will allow us to build some additional cash in the 4th quarter, enabling us to increase the cash funding portion of the Ensign acquisition, which as you'll hear in a minute, will contribute to a higher level of shareholder distributions In 2023 and beyond. In addition to increasing our buyback authorization, our Board has also approved another increase to our base dividend, demonstrating the important synergies that exist between our base dividends and accretive buybacks. The increase of the dividend was entirely funded through year to date To summarize, we've been clear about our commitment to return on to return significant capital to shareholders.

Speaker 3

We believe our operating cash flow driven framework is a strong commitment to our shareholders, protecting distributions from the impact of capital inflation. Our consistent execution of accretive buybacks has driven peer leading per share growth of 20%. We built one of the strongest return of capital track records in the entire S and P 500 over the trailing four quarters and we're fully committed to extending this leadership With our 2023 distribution profile further enhanced by the highly accretive Ensign acquisition. I'll now turn the call over to Mike, who'll briefly walk us through our Q3 performance

Speaker 4

and outlook. Mike? Thanks, Dave, and good morning to everyone. 3rd quarter was yet another strong financial and operational quarter, highlighted by over $1,000,000,000 of free cash flow generation at a reinvestment rate of just 29%. Our oil and oil equivalent production increased sequentially 176,000 barrels of oil per day and 352,000 barrels of oil equivalent per day, Outperforming our guidance provided in the last earnings call, driven by achieving the high end of our quarterly wells to sales guidance And new well outperformance in both the Eagle Ford and Permian.

Speaker 4

In the Permian specifically, We returned to our highest level of activity since 2019. We brought 13 wells to sales, including 8 2 mile laterals, Which are more representative of the go forward program for this asset. Productivity for those extended laterals was very strong, including 3 Red Hills wells, Deploying our latest completion design that delivered an average IP30 over 3,800 barrels oil equivalent per day. The future for our Permian asset is bright, amplified by our success in the Texas Delaware oil plate to develop both the Woodford and Meramec, With our initial four well pad expected to deliver 1st oil in early 2023. Stepping back a bit to the updated Full year 2022 financial and operational outcomes, our outlook remains compelling.

Speaker 4

We raised our EG equity income guidance By another $70,000,000 to over $600,000,000 EG equity income guidance is now more than double what it was at Beginning of the year due to strong operational performance and upside in pricing, especially for European natural gas, where our commodity exposure remains underappreciated. And while we are we already have differentiated European LNG price exposure that has contributed to stronger financial performance this year. We will see a significant increase to our global LNG price leverage in 2020 As our legacy Henry Hub linked LNG contract expires, which will potentially drive a step change increase DG's financial performance as we have more equity molecules exposed to the global LNG market. We also raised our 2022 capital spending guidance to $1,400,000,000 an increase of 100,000,000 We expect this additional capital to set us up for success next year, Protecting our production profile early in 2023, mitigating our execution risk and improving operational continuity. Despite this increase in our capital budget, we still expect to lead our peer group in 2022 free cash flow yield, Reinvestment rate and capital spending for barrel production as depicted in Slide 11 of our earnings deck.

Speaker 4

In other words, Our delivery against the metrics that matter remain intact. Looking ahead to 2023, while it is too early Our case to beat remains a maintenance program in order to deliver maximum free cash flow, significant return on capital and continued per share growth, while maintaining our investment grade balance sheet. Under this maintenance scenario and incorporating the targeted efforts We are already taking in 2022. We would expect to mitigate the year over year increase Our pre Ensign 2023 capital spending to the 10% to 15% range. I'll now turn it over to Lee to discuss the strategic rationale of the Ensign acquisition.

Speaker 1

Thank you, Mike. Hopefully, you've all had a chance to review our dedicated Eagle Ford acquisition press release and associated slide deck. I'm especially excited to talk to you today about the strategic rationale for this transaction as it satisfies each And every element of the exacting acquisition criteria that you've heard me and the rest of the team talk about on these very calls. While we've assessed each and every opportunity that has come to market in recent years in our core basins, We truly believe this asset offers a superior risk adjusted return profile, especially given our experience and knowledge in the Eagle Ford. While striking the right balance between immediate free cash flow accretion and future high quality development opportunities.

Speaker 1

This is a truly unique asset. Going back to our M and A framework, this transaction checks all the boxes, Immediate financial accretion, return of capital accretion, accretion to inventory life and quality and industrial logic with enhanced scale, all while maintaining our financial strength, conservative balance sheet and shareholder return commitments. I will quickly walk through each of these key points. First, this deal is immediately and Significantly accretive, expected to drive double digit accretion to all key financial metrics. More specifically, We are modeling an approximate 17% increase to our 2023 operating cash flow and a 15% increase to our 2023 free cash flow.

Speaker 1

Accretion is even stronger on a per share basis and will only improve as the additional cash flow generation We'll support a higher level of share repurchases, further reducing our share count and driving incremental per share growth. It's also accretive on a debt adjusted per share basis. The cash consideration paid for the asset is attractive at just 3.4 times 2023 EBITDA with a 17% 2023 free cash flow yield, Highly accretive relative to Marathon Oil's standalone metrics at the same price day. 2nd, This transaction is accretive to our return of capital profile as the additional cash flow generation will go straight to our shareholders. Consistent with our unique and transparent operating cash flow driven framework.

Speaker 1

Simply put, we remain committed to returning at least 40% of our CFO to shareholders in 2023 and beyond at prices above $60 WTI. But we will now be delivering this return of cash from a higher base of CFO. Therefore, The 17% cash flow accretion I just discussed will translate to an increase in our shareholder distribution by an equivalent 17%. Additionally, we plan to raise our quarterly base dividend by another 11% Post transaction close to $0.10 per share, taking full advantage of the cash flow accretive nature of the deal. 3rd, this transaction offers compelling industrial logic and is accretive to our inventory life with locations That immediately compete for capital, enhancing our cash flow sustainability.

Speaker 1

We're adding 130,000 high working interest Operator Ned Acres adjacent to our legacy position, fully leveraging our knowledge, experience and operating strengths in a high confidence Capital Efficient Basin, where we have a demonstrated track record of execution excellence. We're acquiring more than 600 undrilled locations, Representing an inventory life greater than 15 years with locations that immediately compete for capital in the Marathon Oil portfolio, Not an easy bar to clear by any means. Finally, we're executing this deal while maintaining our investment grade balance With our net debt to EBITDA expected to remain below 1 and our financial strength firmly intact. Importantly, our valuation was based on a nominal 1 rig maintenance program, no assumed synergy credits And no redevelopment refrac upside. With that overview of the strategic rationale, I will turn it over to Pat to discuss the inventory depth and quality of this asset, which we believe is an especially critical and differentiating element of this deal.

Speaker 5

Thanks, Lee. I will focus my comments on Slide 6 of our acquisition deck, speaking specifically to the inventory quality of this asset This is a differentiating factor compared to recent asset packages we've evaluated. As Lee mentioned, we've assessed every asset that has come to market in our core basins in recent years, Especially in the Eagle Ford and Bakken, we believe this asset is truly unique given its attractive combination of immediate cash flow accretion and future development opportunity. Due to the unique history of this asset, there has been limited drilling activity since 2015, effectively preserving the high quality Additionally, the Ensign team has done an excellent job of cleaning up some legacy midstream contracts and consolidating operatorship and ownership interest. The end result is a high margin, 99% operated, 97% working interest, 130,000 net acre position in the core of the Eagle Ford, significant high return undrilled inventory.

Speaker 5

Our technical teams have spent significant time and effort analyzing each and every DSU on this acreage, a Bottoms up effort to truly understand the quantity and quality of undrilled inventory. We came away from this process impressed, Signing value to over 600 undrilled locations, representing an inventory life in excess of 15 years using conservative spacing and development assumptions. We see value in this position across all three phase windows condensate, wet gas and dry gas with significant inventory that immediately competes for capital, especially in the condensate and wet gas phase windows. The undrawn condensate inventory has the potential to deliver some of the best returns And highest capital efficiency in the Eagle Ford and therefore the entire Lower forty eight. And the economic dry gas inventory enhances our longer term development A simple analysis of external third party data validates the quality of Ensign's inventory As shown in the charts on the right hand side of Slide 6 in our deck, screening all wells brought online since 2019, Ensign's 12 month Oil equivalent productivity on a 15:one value basis has been among the very best in the Eagle Ford.

Speaker 5

And on a capital efficiency basis analyzing 12 month cumulative relative to total well costs, Ensign has proven to be one of the most capital efficient operators in the entire U. S, outperforming every large cap E and P in our peer group. It's worth highlighting that the Ensign acreage also includes 700 existing wells, many of which are pre-twenty 15 early generation Understimulated completions, which likely left substantial recoverable resource behind. We therefore see no side potential with redevelopment and or refracs on the acreage, especially considering our track record of high return successful development on our legacy position. Peers have been successful refracks on offsetting acreage to Ensign, and Ensign has recently brought online 3 refrac tests of their own with encouraging early results.

Speaker 5

Importantly, all of this represents pure upside for us as we assign no redevelopment or refrac I will now pass it over to Dane to discuss financing and our return of capital objectives.

Speaker 3

Thanks, Pat. I'll be short and sweet. My key point is that we're executing on this accretive transaction while maintaining our financial strength, Our investment grade balance sheet and conservative leverage profile are continuing to deliver on return of capital commitments to equity holders. Who says you can't have it all? We plan to fund this acquisition with a combination of cash on hand, our credit facility and new pre payable debt.

Speaker 3

The financing approach will give us the optionality to pay off the acquisition debt quickly without incurring additional costs. Importantly, with the incremental debt, we expect our net debt to EBITDA ratio to remain below 1x at the forward curve Even testing our leverage against more conservative price deck, dollars 50 to $60 per barrel WTI, we remain in the zip code of 1.5x leverage by the end of 2023. We've received constructive feedback about the deal from the ratings agencies, given the improvement to our scale and sustainability coupled with the limited impact to our leverage profile. We also believe that tangible assets acquired in this transaction are eligible for full expensing in 2022, contributing to our income tax optimization efforts, Another positive aspect of this deal that could defer our exposure to AMT. Bottom line, our balance sheet remains rock solid, Giving us the financial flexibility to do an attractive deal like this and pay down our acquisition debt in short order, while simultaneously enhancing Our return of capital to equity holders.

Speaker 3

Additionally, as we've already stated, our commitment to return of capital framework remains steadfast. In 2023 and beyond, our objective remains to return at least 40% of our CFO to equity holders And potentially more if market conditions are supportive, all driven by a higher base of cash flow consistent with the financial

Speaker 1

Thank you, Dane. Consistent with earlier remarks, it remains too early to offer up any detailed 2023 capital spending guidance as we are still working our plan optimizing the integration of an accretive new asset. Yet I can say that our strategic objectives will remain unchanged To continue delivering peer and market leading free cash flow generation and return of capital to shareholders, all of which is further strengthened by this Eagle Our case to be for 2023 is a maintenance program that efficiently and expeditiously integrates the inside Eagle Ford assets And that continues to focus on growing our Hertz share metrics. For years now, I've reiterated my view that for our company and for our As measured by corporate returns, free cash flow generation and return of capital, more S and P, less E and P. Today, we are successfully delivering just that kind of performance.

Speaker 1

Our challenge now is to prove that our results are sustainable Quarter in and quarter out, year in and year out, we're up for the challenge. Our compelling investment case is simple, Capital discipline, sustainable free cash flow, protecting commodity price upside, market leading return of capital to shareholders and per share growth. And we have a track record of delivery underscored by this quarter's record setting shareholder distribution. Our multi basin U. S.

Speaker 1

Portfolio has only been strengthened with the announced Eagle Ford acquisition and our complementary integrated gas business in EG Brings a growing and differentiated exposure to the global LNG market that is unique among our peers. To close our call today, I want to reiterate how proud I am of how we've positioned our company. We're delivering financial outcomes at the very top of the And just as important, we are doing so while adhering to our core values, supporting the continued responsible development of much needed oil and gas It is absolutely critical to furthering global economic progress, lifting billions out of energy poverty and protecting the standard of living We have all come to enjoy. With that, we can open up the line for Q and

Operator

A. Thank you. We will now begin the question and answer Our first question comes from Neal Dingmann from Churro Securities. Your line is now open.

Speaker 6

Good morning, guys. Congrats on the deal. It looks Good. My question is on the Ensign deal. You gave a lot of color around this guys, but I'm just wondering in sort of broad strokes, How are you thinking about it?

Speaker 6

Obviously, it comes with some great PDP, but also as you mentioned, Lee, some really nice undrilled inventory. I'm just wondering, number 1, how you Sort of think about value in between the 2 and then secondly, now with almost 300,000 in the Eagle Ford, will a good bit of this be You know, focused on drilling a new enzyme next year in your Eagle Ford activity?

Speaker 1

Yes. I think just on The value component, Neil, when we think about the valuation, I would say in general, We would kind of put it almost kind of fifty-fifty between PDP and future undrilled development opportunities. I think that was Yes. One of the unique aspects of this deal was that it really hit the sweet spot between immediate and significant cash flow accretion With inventory life accretion, with inventory that competes immediately for capital. So that really It stood out to us and made this feel quite unique.

Speaker 1

In terms of how we view it, I mean, obviously, We're still in the midst of going through our detailed budget for 2023. We've modeled this From a valuation perspective as a maintenance program that would layer on top of an enterprise maintenance program That we're thinking about for 2023, we believe that the bulk of these locations in Ensign compete Capital in today's portfolio and so that's just going to be part of the detailed allocation process that we're going through today. But For us, the case to be remains maintenance capital and Ensign would in essence be layering on top of the enterprise.

Speaker 6

Great, great details. And then maybe just a follow-up. Second one for Mike, maybe on the Delaware. I'm just like now with all the activity now that you've had recently The Delaware, I'm just wondering if you have any different sort of thoughts or expectations on that play than you had obviously earlier

Speaker 4

Yes, Neil. So I'm Take a run at that. I think the results that we've seen this year have been impressive, 13 wells to sales Obviously, in the quarter, another 5 or so coming on in the Q4. Most of Well, that we're bringing online this year, mile and a half, 2 milers, it was pretty exciting as we look forward to next year, 2023. We're probably only going to Bringing on 2 milers.

Speaker 4

So when you look at the Q3 2022, very strong well performance and execution from the From the team, I think we mentioned it in the deck, the 13 wells to sales, 8 were 2 mile laterals. I think that's I mentioned more represented the go forward program. Again, as we touched on those wells averaged over 2 2,700 barrels of oil equivalent per day over the 1st 30 days, that was a 72% oil cut. And then Probably most exciting were the 3 Lea County wells that we brought online. Those were latest design up space, Larger completions and look to be some of the best Delaware basins that have been brought on this year, IP30, 3,008 So I kind of share all of that and I think it's tees it up well for next year.

Speaker 4

We're probably going to be similar next year in terms of that seventy-thirty split on capital with 30% of the capital Going to the Permian, but I think it tees it up well for next year. The team got back, hit the ground running. So, yes, we're pretty excited about what the future brings in the Northern Delaware Forest.

Speaker 1

And I would just To that, Neal, the team continues to do some really good blocking and tackling to give us the ability to do extended laterals Through trade, etcetera, across our position. And that was always kind of our theory when we made the original acquisitions that over We would continue to build a more contiguous position, which would give us more access to extended lateral drilling and that's exactly what the team has delivered.

Speaker 6

Great details guys and again congrats on the deal, certainly looks positive.

Operator

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

Speaker 7

Yes, thanks. If we can touch base On the Ensign acquisition a little bit, obviously, you guys made a pretty good case that it's got very strong economics, Especially in the condensate window, but could you give us a little color on how you think about that acquisition holistically? It does Have a little bit more balanced hydrocarbon mix. I think traditionally Marathon has very had a very much higher oil Kind of cut focus. So how do you think about that as you layer on this within the Total Corporation?

Speaker 7

And When you talk about maintenance activity next year, I think you historically talked about it on a barrels of oil Kind of thought process, does that change a little bit because this asset again has a

Speaker 3

little bit more of a gas mix?

Speaker 1

Yes. No, all great questions, Scott. Let me start a little bit on, if you will, the product mix of 1st and foremost, we're driven by returns and economics. And the Ensign inventory is extremely Competitive within our portfolio in terms of delivering economic returns, which in essence then translate in to our sustainable free cash flow and return of cash model. So it's that's what that those locations will underpin for us.

Speaker 1

So I I wouldn't say we're agnostic to product mix, but we're much more focused on the economic returns and the competitiveness of these locations. So the If you will, the 1 third, 1 third, 1 third mix that we see at Ensign, that to us in and of itself It's a bit arbitrary and we're more focused again on returns. When we think about Maintenance going forward, certainly oil is still what we're flattening on. I mean, we still when we talk about maintenance, we're referring to oil production. And the positive there is that Ensign will contribute to continuing to hold that maintenance level of oil production, but now at a higher level.

Speaker 1

And just to maybe even step back, when you think about even Ensign coming into the enterprise portfolio, we still, masa and maintenance, are around 50% oil. I mean, we may Drop down a little bit with Ensign in the mix, but at an enterprise level, we still have balance between Nominally 50% oil, nominally 50% gas and NGLs. Now at Eagle Ford at a basin level, we will be getting A little bit more gassy, but the reality is that we're still 50% plus oil in the Eagle Ford even with bringing the Ensign asset and to play.

Speaker 7

I appreciate that context. And if we could pivot a little bit to shareholder returns, I mean, your buybacks This past quarter was pretty impressive, the level that you guys were able to accomplish. And Now thinking about this acquisition and obviously the debt you'll have to take on for this acquisition, should we think about at least in the near term until I guess, obviously, visibility on, I guess, commodity prices is a little bit better into next year. Will Obviously, you still hit your commitment, but maybe temper from existing your recent pace. And also does hedging your thoughts on hedging differ now since you've taken on a little bit more leverage?

Speaker 3

Scott, this is Dan. I'll take the first cut at that. Thank you for acknowledging the fact that we blew the doors off Shares repurchases, 82%. CFO went to share repurchase In the quarter and that was certainly a high watermark for us historically, but I think really demonstrates our commitment to driving that I return when we have the capacity to do it. We also remoted the share repurchase authorization in the quarter the Board did $2,500,000,000 which should be a strong signal that post Ensign, we're going to continue with that kind of a Very aggressive share repurchase strategy.

Speaker 3

The acquisition itself is 17% accretive To our CFO, so the quantum of cash available to return to shareholders is greater. Think about it as So it's a significant increase in the quantum of cash that we can allocate to shareholders. We certainly are Going to be meeting our minimum 40% return to shareholder threshold. That's our minimum. We've Showing the ability to exceed that up to this point pretty consistently, and we would look to do that opportunistically going forward.

Speaker 3

The debt that we're going to be taking on is not Our leverage is going to be in pretty good shape post close. And I think our ability to service that debt is going to be we'll have lots Flexibility around that. And that's why we're using new prepayable debt and credit facilities, so that we can really have a lot of flexibility at the pace That we repay that. The priority, obviously, we're going to pay back the debt in an appropriate timeframe, but the priority in our framework Given our strong balance sheet, this can be returns to shareholders. So we're going to stay focused on that.

Speaker 3

You might have asked one other hedging question in there. Pat, did you want to take it?

Speaker 5

Yes, Sheryl. I would just say in general that our philosophy hasn't changed. Hedging is just one part of commodity Risk managing that. And so Dane talked about the balance sheet. Our balance sheet is still going to be strong,

Speaker 4

if you

Speaker 5

look at incremental debt. And I think it's important to focus on our really low free cash flow breakeven of $735 So we're in good shape And we'll see any range of commodity prices. So we don't see a need to just go into the market and hedge because we did this acquisition. That said, We'll be very opportunistic as we have been in the past. If we see some opportunities that would provide us a little downside protection, We'll take those, but we don't feel compelled to do that unless the market shows us something that is compelling.

Speaker 1

Yes. I think it's very important that Because of our leverage profile and where it sits that future debt retirement and achieving our capital Return to shareholders, those are not mutually exclusive. We're going to be doing both of those things. How we gauge Those will obviously be dependent a bit on commodity price, but the way we've modeled it is that we're doing both of those Over time. And as things stated, with the 17% uplift and CFO by virtue of the Ensign The 40% minimum is kind of now 50%.

Speaker 1

In other words, 40% is the new 50%, if you will. So we are seeing that accretion and our ability to get return back to shareholders.

Speaker 8

Appreciate that. Thanks.

Operator

Thank you. Our next question comes from Jeanine Wai from Barclays. Your line is now open.

Speaker 9

Hi, good morning everyone. Thanks for taking our questions. Good morning. Good morning. Dave, maybe just following up on a couple of your comments there.

Speaker 9

So buybacks are expected to be $300,000,000 in Q4, which will help rebuild the cash balances. In terms of how the deal impacts 23, can you provide a sense of the rough split envision between the cash revolver And the new debt for funding the deal and whether your view on cash levels has changed for 2023?

Speaker 3

Yes. So I think I would think about the cash versus debt split to be cash roughly 45% of the Funding and the balance from a mix of revolver borrowings and new pre payable debt, which should be term loans or Go to debt capital markets to get that. We're still assessing the most advantageous approach there.

Speaker 4

I'm sorry, what was this? Cash comp.

Speaker 3

Cash oh, the cash comp, yes. Sorry about that. So Obviously, we're going to dial back share repurchases toward the end of the year. We use a portion of the

Speaker 5

kind of 1,000,000,000 6 or

Speaker 3

so that we forecast at the end of the year for the acquisition. As we head through next year, I I still think this sort of $300,000,000 to $500,000,000 cash balance to enable us to manage for interim month working capital is a good number to work with. And within that quantum of cash that we're generating, we'll be able to service the debt and make the shareholder distributions Like we have historically, but at a higher quantum.

Speaker 9

Okay, great. Thank you for all that detail. Maybe pivoting to another asset in the Hello, here in EG. There's certainly upside to EG Income starting in 2024 relating to striking the new contract as You all mentioned in your prepared remarks, in terms of other upside, I think that LNG plant was originally meant to Have a footprint so that it could be twinned. And just wondering if that's on the horizon anywhere on your radar, maybe in the medium or longer term?

Speaker 9

Thank you.

Speaker 1

Yes, Jenny, yes, there is a tremendous value proposition for us at EG. We've talked about it in really Two areas. 1, of course, is the Alba gas condensate field or equity production there. And then there's this World class infrastructure that we have there in Punta Europa, the LNG plant storage offloading as well as The gas plant and the methanol plant, our number one objective right now is to continue to load the existing LNG And one of the first steps in that was to bring in some third party gas, which was by virtue of the Alen Development, basically the LM partners brought that gas to our flange essentially. They invested in the infrastructure, built the pipeline And we've been able to take advantage of those 3rd party molecules through both, if you will, tariffing through the facility, but also percentage of proceeds hence Our exposure to global LNG pricing.

Speaker 1

And so our vision is that there will continue to be Opportunities that are not dissimilar to a win, where we'll be able to drive more molecules and continue to at least base load The current LNG trend, we're sitting in one of the most gas prone areas of West Africa, both in terms of indigenous gas But also cross border opportunities including Cameroon as well as Nigeria as they look for an accretive home to their gas molecules You are correct in that the facility was designed for expansion beyond the base load. But today, our number one priority is ensuring that we have the gas that can help us load the current train Really through the next decade.

Speaker 9

Great. Thank you.

Operator

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

Speaker 8

Thanks, everyone. Thanks for getting me on. Dane, I wonder if I could ask you a question on cash tax. There is an interesting footnote or comment on the acquisition slide deck But the I'm going to I'm not going to get this description exactly right, but it looks like some of the acquisition costs can help your cash tax position. So I wonder if you could just walk us through how has that evolved with the AMT and how does Ensign help you?

Speaker 8

How should we think about cash tax?

Speaker 3

Yes. Sure, Doug.

Speaker 4

Thank you

Speaker 3

for teeing up our cap to tax question more than that, my favorite. So prior to the Inflation Reduction Act, we were not going to be cash taxpayers for a couple of years under the traditional tax system. With the IRA, there's an alternative minimum tax structure that's 15%. And So we could be subject to that. If we hit a certain threshold, the threshold is $1,000,000,000 of pretax income on average for the 3 years 2020 through 2022.

Speaker 3

So we're still in that measurement Living through the end of that measurement period, when we do our forecasting, we're pretty close to that $1,000,000,000 threshold for that 3 year average as a kind of a coin flip. And so you look at that and go too close to call, what else can move the needle for us? And there are a couple of things We have line of sight to one of which relates to Ensign, but just to give you a little more color on the whole playing field. There is a question about whether we can deduct foreign tax credits for that threshold calculation. We think if we get favorable Treasury interpretation on that will be which would be very consistent with precedent that we will be able to and that will Apple Plus with that threshold calculation.

Speaker 3

There's also the possibility of favorable new legislation On the deductibility of intangible drilling costs, that's a big part of our capital program. That's got to be a legislative change, so kind of harder to predict at this point, but a significant needle mover if it does happen. And then the third one that directly relates to this EnsignTrax Transaction is the acquired tangible asset, not the intangible asset, the tangible asset portion of the acquisition price, which is a fairly significant number. And if that's we will be eligible for expensing in 2022 For purposes of this threshold calculation, assuming we close the deal as we plan this year. So without really kind of Quantifying all those for you today, Doug.

Speaker 3

They're all moving sort of in the right direction and on the margin certainly this unsigned deal could help us For paying AMT taxes until 2024, which would be nice.

Speaker 8

That's really helpful. I guess That's kind of what I was trying to get at, is how much you can shield your tax from this transaction. So thank you for that. I guess my follow-up, There's so many things that we could try and address today, but I want to try and hit the comment about the Shell Marketing Agreement on LNG. Obviously, there's been a lot of moving parts when you go from Equity Gas to Alen Gas.

Speaker 8

And then this transaction, I guess, of the legacy contract rolls over at the end of 2023, how should we think about the delta? If all things were equal On LNG pricing, let's say, flat, no change in the commodity, how would your exposure shift On January 1, 'twenty four versus where it is today, given the mix of all of those things? And I'll leave it there. Thanks.

Speaker 1

Yes. Doug, yes. First of all, just a little bit just for clarity on kind of how things Today, through the facility, in fact, we included a chart just because it gets a little complex through all the equity companies there. But today, of course, a win is 3rd party molecules, not equity molecules that flow Through the gas plant, the LNG plant, their toll through there and then on the back end, we receive a percentage of proceeds from that contract. That will not change post 2024.

Speaker 1

That runs the term of the Alen production. Relative to what we refer to as Alba tails, which are the remaining Alba production post the current Shale contract, which runs its course at the end of 2023, those molecules are open for negotiation into the current Marketplace. So, we would move from essentially a Henry Hub linked contract to more of a global LNG linked contract on those equity molecules that would be flowing post 2024. Based on today's market conditions and obviously the arbitrage between something like a TTF to Henry Hub, we would expect to see A material uplift there despite the fact of course that we are on a decline in the Alba field. We would expect to see a financial uplift as we make that shift from more of a Henry Hub link to more of a global LNG basis.

Speaker 1

And Those negotiations will be going on really starting next year to finalize those new contracts post 2023.

Speaker 8

Presumably, you'll quantify it at that time, Lee. Would that be fair?

Speaker 1

Yes. No, I think just like we've done, I think we've tried to give a lot more visibility and transparency on EG by Providing equity income guidance, etcetera. As we get and understand what those new commercial terms are going to be like, we absolutely intend to share that with the market so that there's clarity on what that will do to the EG Financials.

Speaker 8

That's terrific. Thanks, fellas. Appreciate it.

Speaker 5

Thank you, Doug. Thank

Operator

you. Our next question comes from Paul Cheng from Scotiabank. Your line is now open.

Speaker 10

Hey guys, good morning. Two questions. One is for Tien. I have to apologize first. In terms of the new debt that you take on or We're looking at the RMB3 1,000,000,000.

Speaker 10

In a perfect external environment, how quickly you want to or you Feel, yes, the optimum pace of paying that back or that you get the net debt back, You reduced that $3,000,000,000 So that's the first question. You know, I do work. So if the commodity price is as good as you hope, then how quickly The second question on the 600 N Si inventory. Do you have a split Between the condensate window wet gas and dry gas? Thank you.

Speaker 3

I'll take a cut at the pace of the debt reduction. Our sort of our base case, If we model this out and just use the sort of backwardated forward curve, we think it's very comfortable for us to pay this off over a Say a 24 month period, that would be an incremental bet. If we get a tailwind on commodity prices It's going to give us much more flexibility to both deal with the debt in a more Expeditions fashion if we want to or increase shareholder distributions and in a perfect world both. So there's quite a bit of flexibility with revolver borrowings. I guess technically they aren't due until 2027.

Speaker 3

That's when the revolver has been extended to, so we have a lot of flexibility in there. But my bias I guess my personal bias is to get the debt and the interest

Speaker 5

This is Pat. I'll take the question on the inventory. Without going into too much specific, I would just say that The vast majority of the locations that we described value to are in the condensate and wet gas window. And as Lee and I mentioned, those compete Very favorably in our inventory today and those will be the ones that we attack in the 1st few years.

Speaker 1

Yes. And if I could, Pat, just to maybe amplify that, I want to emphasize again that we've taken no credit in that inventory count The potential upside that exists in redevelopment and refracing the 700 existing wells and I think I think it was probably Janine that also pointed out that the teaser that had come out on Ensign originally had quoted 1200 wells. And so we're taking a very conservative approach and really putting our own technical view on that inventory. So we feel very confident And the 600 over 600 undrilled locations that we are quoting, we believe that to be conservative. It was a strong basis for The valuation that continues to protect potential upside for us as well in the future.

Speaker 10

And can I ask that whether you guys have any preliminary I know you're certainly on, but preliminary Potential cost synergy benefit from this deal and what is the OpEx cost for Ensign operation?

Speaker 1

Yes. I'll maybe say a couple of things and let Mike jump in. Right now, we included none of that, Paul, into The valuation equation, but our expectation is that our excellent Eagle Ford asset team is going to find ways to drive Even more value out of this acquisition is so contiguous to our legacy position. We believe those savings And Mike, you may want to just talk a little bit about kind of the unit kind of cash cost We think we're bringing in with Ensign and how that looks relative to the Eagle Ford and quite frankly the rest of the enterprise.

Speaker 4

Yes, I mean, A fairly short answer on that one, Paul. The OpEx that we're bringing in is actually it's lower than Eagle Ford and it's lower than the company total at the moment. So So that should be a net positive. Maybe a little bit in terms of just some of the synergies. Well, The fact that it doubles our footprint, increases our size and scale, I think that's a positive.

Speaker 4

Shout out to the Ensign team. They've done a great job with some of these recent wells that You brought online. I do think just given our expertise and our scale that we can continue to optimize both on Prescale and basin as well is going to help us with the supply chain side of things. It's still a tight market out there. So I think any leverage that We can bring there as a positive and then the other one is obviously the potential positive implications With regards to AMT that Dave mentioned a while ago.

Speaker 4

Again, I think the positive thing is that we've not baked Any of that and that's potential upside for us as we get into the asset proper.

Speaker 1

So stay tuned on that one, Paul. I'm sure we'll be talking more about that in the future.

Speaker 10

Thank you.

Operator

Thank you. We have no further questions at this time. I'd like to turn the call back to Lee Tillman for closing comments.

Speaker 1

Thank you for your interest in Marathon Oil and I'd like to close by again thanking all of our dedicated employees and contractors Thank you very much.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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