Marathon Oil Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 16, 2023

There are 11 speakers on the call.

Operator

Morning, and welcome to the Marathon Oil 4th Quarter and Full Year 2022 Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Guy Baber, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Anita, and thank you as well to everyone for joining us on Yesterday, after the close, we issued a press release, a slide presentation and investor packet that address our Q4 and full year 2022 results

Speaker 2

as well as

Speaker 1

our 2023 outlook. These documents can be

Speaker 3

found on our website marathonoil.com.

Speaker 1

Joining me on today's call are Lee Tillman, our Chairman, President and CEO Dane Whitehead, Our Executive VP and CFO Pat Wagner, our Executive VP of Corporate Development and Strategy and Mike Henderson, our Executive VP of Operations. 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. As always, I'll refer everyone to the cautionary language included in the press release Presentation materials as well as 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 rest of the team, who will provide prepared remarks.

Speaker 1

After the completion of these remarks, we'll move

Speaker 3

to a question and answer session. Lee? Thank you, Guy, and good morning to everyone listening to our call today. First, I want to thank our employees and contractors for their collective contributions to another remarkable year, A year that can only be described as comprehensive delivery against all dimensions of our well established framework for success. Your dedication and hard work as well as your steadfast commitment to our core values, including safety and environmental excellence, Have made possible the exceptional results I get to talk about today.

Speaker 3

So thank you. 2022 truly was an exceptional year, but our outlook for 2023 and beyond is equally compelling. While the team and I will cover a lot of ground today, I'll start by highlighting a few key themes. First, We're successfully executing on the more S

Speaker 4

and P less E and

Speaker 3

P mandate I've championed for the last few years. We are delivering financial and operational outcomes not just at the top of our high performing E and P peer group, but at the very top of the S and P 500. The results in 2022 really do speak for themselves. Dollars 4,000,000,000 of adjusted free cash The strongest free cash flow yield in our peer group and one of the top 5 free cash flow yields in the entire S and P 500, the lowest reinvestment rate in our peer group, a full 10 percentage points below the S and P 500 average And one of the lowest capital intensities, all indicators of a now well established capital and operating efficiency advantage relative to a high performing peer group. 2nd, we're returning significant capital back to our shareholders through our cash flow driven return of capital framework.

Speaker 3

Our framework is transparent, it's differentiated, It prioritizes our investors as the first call on capital and it uniquely protects shareholder distributions from capital inflation. During 2022, we returned 55 percent of our adjusted free cash flow from operations or $3,000,000,000 to shareholders. And for those keeping score relative to the free cash flow based models of our peers, that equates to about 75% of free cash flow. That also translates to a 17% shareholder distribution yield, the highest distribution yield in our E and P peer space and one of the top 10 distribution yields in the entire S and P 500. We remain steadfast in our commitment to the powerful combination of a competitive and sustainable based dividend in addition to consistent share repurchases.

Speaker 3

That consistency paid off with $2,800,000,000 of accretive share repurchases that reduced our share count by 15%, driving significant growth on a per share basis. Rewinding all the way back to the start of this most recent share repurchase program in October of 2020 One, we have reduced our share count by 20%, again leading the peer group. And we raised our base dividend 3 times during 2022, bringing our track record to 7 increases in the last 8 quarters. 3rd, we successfully closed on the Ensign acquisition before year end, materially strengthening our portfolio and enhancing our Eagle Ford scale. The Ensign acquisition makes us a stronger company, checking every box of our disciplined acquisition criteria.

Speaker 3

It's accretive to key financial metrics, it's accretive to our return of capital framework, it's accretive to our high quality inventory life And it offers compelling industrial logic in the core of a basin we know well. Pat will provide additional details later in the call, but in short, Integration efforts are progressing well and initial 2023 results have outperformed our expectations. Finally, while 2022 was certainly a banner year, I'm just as excited about our potential in 2023 And beyond. Fully consistent with our disciplined capital allocation framework, our 2023 budget prioritizes significant free cash flow generation And return of capital to shareholders. At reference commodity prices of $80 WTI, dollars 3 Henry Hub and $20 TTF, We expect to generate $2,600,000,000 of adjusted free cash flow and we expect to return a minimum of $1,800,000,000 to our shareholders, providing clear visibility to a double digit shareholder distribution yield And recognizing the ongoing volatility in commodity prices, particularly natural gas, it is important to note that $0.50 per MMBtu change at Henry Hub only impacts our annual cash flow by just over $100,000,000 Only dollar change in WTI moves cash flow by about $70,000,000 reflecting continued leverage to oil pricing and our balance Once again, we fully expect to lead our peer group and the broader S and P 500 when it comes to the financial and operation metrics that matter most: free cash flow generation, capital and operating efficiency and shareholder distributions.

Speaker 3

And while our 2023 outlook is compelling, we're even better positioned for 2024 as our unique Integrated Gas Business in Equatorial Guinea will benefit from an increase to global LNG price exposure. Just as a reminder, the current Henry Hub index contract for our Equity Alba Gas through EG LNG expires at the end of 2023 And we will move to a market based global LNG linkage. With the current and significant arbitrage between Henry Hub and global LNG prices, We expect this to translate into an uplift to 2024 EBITDA of $500,000,000 to potentially more than 1,000,000,000 relative to 2023. With that, I'll turn it over to Dane, who will provide more detail around our return of capital performance And now, Dang?

Speaker 5

Thank you, Lee. Good morning, all. Lee hit the return

Speaker 4

of capital high points, but given the importance of the topic, I'll further elaborate on our framework, our execution and our outlook. As we stated before, returning a significant amount of capital to shareholders Through the cycle remains foundational to our value proposition in the marketplace. And when it comes to shareholder distributions, Track record matters. We're building a track record we're really proud of and that investors can trust. During 2022, we returned 55% of our CFO to shareholders, significantly exceeding our 40% of CFO framework commitment.

Speaker 4

Total shareholder distributions amounted to $3,000,000,000 good for a total shareholder distribution yield of 17%. That's the highest in our peer space and one of the top distribution yields in the S and P 500. That includes 2,800,000,000 dollars of accretive share repurchases during the year. We continue to believe that buying back our stock is an excellent use of capital Due to the value we see with our shares trading at a free cash flow yield in the upper teens, repurchases are value accretive, A very efficient means to drive per share growth and are synergistic to growing our base dividend. During 2022, We reduced our share count by 15% and since reinitiating our share repurchase program in October of 2021, We've reduced our share count by more than 20%, by far the most significant share count reduction in our peer space as shown on the bottom right graphic on Slide 7.

Speaker 4

Another benefit of our buyback program is the capacity it creates for ongoing growth in our per share based dividend. We recently raised our quarterly based dividend by 11% to $0.10 per share, 7th increase in the trailing 8 quarters. While this most recent increase has more than fully funded by incremental cash flow from the Ensign acquisition, Ongoing share count reductions from our buyback program create clear potential for further base dividend increases in the future. Our operating cash flow driven framework is differentiated and it protects distributions from the effects of capital inflation. Offsetting inflation is on us.

Speaker 4

We believe this makes for a stronger commitment to our investors as our investors will truly give the first call on cash flow. For 2023, the recently completed Ensign acquisition makes our framework even more shareholder friendly, adding close to 20% to our pre acquisition operating cash flow and therefore adding 20% to our shareholder distribution capacity. In addition, with the 2022 financial, actual financial results in hand, Along with the December close of Ensign, we anticipate we'll be able to defer U. S. Cash alternative minimum taxes to 2024.

Speaker 4

Our objective for 2023 is to firmly adhere to our return of capital framework, continuing to return at least 40% of CFO, while also paying down debt including some of the Ensign related acquisition financing. We believe we can do both, Maintain our return of capital leadership in this peer space, which is the top priority and continue to enhance our already investment grade balance sheet Through gross debt reduction, all supported by our financial strength and flexibility. On the balance sheet, we have about $200,000,000 of High coupon USX debt maturing and we plan to pay that off with cash on hand to reduce gross debt and interest expense. We also have $200,000,000 of the low cost tax exempt bonds maturing in 2023. These tax exempt bonds are unique and very flexible component of our capital structure.

Speaker 4

We plan to leverage the cost advantage of our Tax exempt credit capacity to refinance those bonds in 2023 and we have the optionality to do the same with future Tax exempt maturities in 20242026. With regard to shareholder returns, A 40% return to capital commitment in 2023 provides visibility to $1,800,000,000 of minimum shareholder distributions At our reference price deck, that's a double digit return of capital yield, one of the highest in our peer space. We've been executing share repurchases so far in Q1 'twenty three and plan to continue to do so consistent with our framework We have ample capacity in our current board authorization to keep moving. While 40% represents a good starting point for your models, our track record has been to exceed that minimum return and we'll look to keep that track record intact in 2023, especially if we benefit from any commodity price support over the balance of the year, which would significantly enhance both Shareholder returns and debt reduction. We have tremendous leverage to commodity price improvement and we'll use that to the benefit of our shareholders.

Speaker 4

Now I'll turn the call over to Pat, who will briefly walk us through an update on the Ensign acquisition.

Speaker 5

Thanks, Dane. Consistent with our market commitment, we successfully closed on the Ensign acquisition before the end of the year. As we've stated, this transaction Checks all the boxes of our M and A framework: immediate financial accretion, return of capital accretion consistent with Dane's comments, Appreciate to inventory life and quality and industrial logic with enhanced scale, all while maintaining our financial strength and investment grade balance sheet. And we based our in sign valuation on a 1 rig maintenance program with no credit for potential upside associated with redevelopment or refracs. Our focus now is on integration and execution.

Speaker 5

In terms of integration, early efforts have gone exceptionally well. We had originally planned for major elements of the transition to take up to 4 months post close. We now expect to be substantially complete with operations transition activities by the end of this month. That accelerated timeline is in large measure due to the excellent collaboration and cooperation between both organizations And it serves to underscore the execution confidence that comes with an acquisition in an established basin that has a track record of success. On the execution side, as highlighted on Slide 11 of the deck, early well performance is consistent with our stated view that The acquired Ensign inventory has the potential to deliver some of the best returns and highest capital efficiency in the Eagle Creek and therefore in the entire Lower forty eight.

Speaker 5

Our first two pads, 9 wells in total, are outperforming expectations delivering top This year, we plan to bring approximately 40 wells to sales on the acquired acreage, accounting for about 1 third of our total Eagle Ford program. The Ensign wells are expected to deliver accretive capital efficiency Financial returns for comparable oil productivity to those in our legacy Eagle Ford program. I will now hand over to Mike

Speaker 6

Thanks, Pat. Turning to Slide 12 of our deck, I'll provide a brief overview of the high points of our 2023 capital program. As expected, Consistent with our disciplined capital allocation framework and our more S and P, less E and P mandate, We expect to deliver strong free cash flow and significant return of capital to our shareholders across a wide band of commodity prices as the graphics on the right of the slide show. At our reference price deck, we expect our $1,900,000,000 to $2,000,000,000 capital budget to deliver $2,600,000,000 adjusted free cash flow at just over a 40% reinvesting rate. As we and Dane both highlighted, we expect to return at least $1,800,000,000 capital to our shareholders.

Speaker 6

To deliver these financial outcomes, we'll operate approximately 9 rigs and 3 to 4 frac crews on average this year. We expect 2023 capital to be first half weighted with about 60% of our total capital spend concentrated in the first half of the year, largely driven by the timing of our activity. At the midpoint of our guidance, we expect to deliver maintenance level Oil production approximately 190,000 barrels of oil per day, flat relative to 20 22 after As is typical for our business, there will be some standard quarter to quarter variability throughout the year. The lower end of our annual guidance range is a good starting point for our Q1 total oil production, approximately 185,000 barrels of oil per day. This is largely a reflection of activity timing And the associate impact on wells sales along with a very modest negative carrying over impact from winter storm LA concentrated in the Bakken.

Speaker 6

With activity and wells to sales weighted to the 1st 2 quarters of the year, We expect to see an improving production trend for oil into the second and third quarters. Turning to oil equivalent production, the midpoint of our guidance is 395,000 oil equivalent barrels per day, inclusive of a planned 2nd quarter turnaround in EG that is designed to set us up for a high level of uptime in 2024. Overall, our 2023 plan is a disciplined and high confidence program designed to deliver strong financial and operational outcomes. In the Eagle Ford, we'll run a 4 rig program. We expect an improving well productivity trend in 2023 From an already strong 2022 due in part to Ensign contributions.

Speaker 6

In the Bakken, we will run 3 rigs on average, again focusing our activity in our high quality hectare area of the plane, For the average well, it pays out in less than 6 months at current commodity prices. In the Permian, we expect Continue improving our capital efficiency by increasing on average lateral lengths to 10,000 feet this year, an increase of over 25% in 20 While our headline Permian well sales guidance looks similar to last year, the strong well productivity Competitive drilling and completion performance that we've delivered since getting back to work over the second half of twenty twenty two supports a higher level of capital allocation. We therefore plan to spot between 25 30 wells this year, inclusive of at least 1 multi well pad In our Texas Delaware Merrimack Woodford fleet, which will support a higher level of wells to sales in early 2024. Our Texas Delaware position is no longer an exploration fleet. The asset is now fully integrated into our Permian asset development team, We will compete for capital on a heads up basis with all the other assets.

Speaker 6

So our Oklahoma asset continues To provide us valuable optionality to a fundamental strengthening of the gas and NGL price environment, we aren't exposing much capital to the asset this year. Rather, near term activity is limited to a 1.5 rig joint venture program that will allow us to efficiently defend our acreage position and delineate some lower priority acreage with limited scope and capital. With that, I'll turn it over to Lee, who will provide an update on our integrated gas business in Equatorial Guinea.

Speaker 3

Thank you, Mike. 2022 was an exceptional year for our unique world class integrated gas business in EG. We delivered over $600,000,000 of equity income, more than double our guidance at the beginning of the year. And we generated approximately $900,000,000 of EBITDA. Our results were driven by solid operational performance as well as higher than expected commodity pricing, especially for Henry Hub and European Natural Gas.

Speaker 3

For 2023, we expect equity income and EBITDA to decline largely due to assume significantly lower commodity prices, especially for National Gas and the already referenced planned turnaround during the Q2. The outlook beyond 2023, however, is robust as we expect to realize significant EG earnings and cash flow improvement in 2024 on the back of an increase in our global LNG price Exposure. A way of background, in addition to our 64% interest in the operated Alba Gas Condensate field, Which produced approximately 60,000 oil equivalent barrels per day on a net basis in 2022. We also have a 56% interest And an equity accounted 3.7 MTPA baseload LNG facility. This LNG facility currently processes Equity gas from our operated Alba field that is sold on a legacy Henry Hub Link contract and 3rd party Alen gas volumes on a toll plus profit sharing basis.

Speaker 3

The Alba Henry Hub Link contract expires at the end of 2023. While we're still working through contractual and commercial details, the bottom line is that beginning January 1, 2024, Alvisource LNG will no longer be sold at a Henry Hub linkage. It will be sold into the global LNG market, which is expected to drive a significant financial uplift for our company given the material arbitrage between Henry Hub and Global LNG Pricing. More specifically, at pricing generally consistent with the forward curve or $20 per MMBtu TTF, We're positioned to realize an approximate $500,000,000 EBITDA uplift in comparison to 2023. As there is a wide range of potential global LNG price outcomes in 2024, we've also provided a high site sensitivity to help you better appreciate The leverage we'll have in 2024 to global LNG prices.

Speaker 3

Assuming an upside case of $40 per MMBtu TTF in 2024 are a price consistent with the average of the trailing 12 months. The potential EBITDA uplift could be in excess of $1,000,000,000 And beyond the significant financial Uplift expected in 2024, we remain equally focused on further maximizing the long term value of our unique EG gas assets by leveraging available And one of the most gas prone areas of West Africa and is a natural aggregation point to monetize both indigenous EG Gas as well as discover undeveloped cross border opportunities. In summary, for years now, I've reiterated my view that for our company and for our sector to attract increased investor sponsorship, We must deliver financial performance competitive with other investment alternatives in the market as measured by corporate returns, free cash flow generation and return of capital, more S and P, less E and D. We've delivered exactly that type of performance over the last 2 years and not just competitive, but at the very top. And as I said before, our challenge now is to prove that our results are sustainable Quarter in, quarter out, year end and year out.

Speaker 3

We believe they are. We're up for the challenge, and I believe our outlook For 2023, we're providing clear visibility to double digit shareholder distribution yield. We have an established track record of market leading free cash flow yield and shareholder distributions at an attractive valuation and offer investors a free cash flow and return of capital profile that competes with any sector and company in the S and P 500 across a wide range of commodity prices. We have delivered per share growth across all the metrics that matter via share repurchase program that leads our peers in addition to a durable and competitive base dividend. We believe this peer leading financial delivery is sustainable, underpinned by our high quality U.

Speaker 3

S. Unconventional portfolio with over a decade of high return inventory and a track record of sector leading capital efficiency recently strengthened by the Ensign acquisition. Our portfolio provides commodity leverage with strong oil weighting coupled with a unique and increasing exposure to global LNG prices and will drive material financial uplift in 2024 and beyond, all underpinned by an investment grade balance sheet. And finally, we're delivering these results to help meet global oil and gas demand while prioritizing all elements of our ESG performance. To close, I want to again reiterate how proud I am of the way we position our company.

Speaker 3

We are results driven, but it is also about how we deliver those results, Staying true to our core values and responsibly delivering the oil and gas the world needs. The oil and gas that is critical to furthering global economic progress, Defending U. S. Energy security, lifting billions out of energy poverty and protecting the standard of living we have all come to enjoy. With that, we can open the line for Q and A.

Operator

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you have further questions, you may reenter the question too. The first question today comes from Jeanine Wai with Barclays. Please go ahead.

Speaker 7

Hi, good morning, everyone. Thanks for taking our questions. Good morning, Amy. Good morning. Our first question maybe just starting with the 2023 outlook for Lee or Mike.

Speaker 7

One of the things that really stood out to us in the outlook was Actually, the number of Eagle Ford wells to sales in the plan, which was decently below our forecast and it's about, I think, 20% lower year on year on an adjusted basis if you just assume maintenance mode and then you add the 40 Ensign wells to the number of wells you did last year. And we saw your comments about higher aggregate year over year well productivity in Eagle Ford in 2023, and we were just wondering if you could share any further details about the implied Capital efficiency in the Eagle Ford because it seems to be pretty meaningful. So for example, if The Eagle Ford is the Eagle Ford actually in maintenance mode this year on an adjusted basis? And are there any other factors out there that would be affecting the wells This year to sales, whether it be the mix, the working interest or anything else? Thank you.

Speaker 6

Hey, Jeanine. It's Mike here. I'll take that So to maybe answer part of your question there, yes, I think it is safe to assume that the Eagle It's in maintenance mode oil maintenance mode this year. I think it's also correct you're also correct And the legacy position, we are holding volumes flat on a lower wealth sales count in 2023, which is obviously a positive thing. A couple of elements that I would say go into that.

Speaker 6

The first one being the timing of when we bring wells Online in the year, we are going to be bringing close to 60% of our legacy wells to sales in the first half of twenty twenty That definitely helps the annualized volumes. I think the second element and probably the more important one from my Perspective is well productivity and a lot goes into well productivity. But one of the things that the team has been doing is really continuing to Our completion design that has resulted in an uplift in our well performance and you see that factored in to this year's business plan and

Speaker 5

the ultimate

Speaker 6

and volumetric outlook. So we were already setting up 1st from here in Eagle Ford with the legacy business. I think the addition of the Ensign acreage only reinforces our position. As Pat mentioned, I We're particularly encouraged with the performance of the first four well, 9 wells from 2 pads that we brought online in the condensate window, Very strong productivity, top decile in oil, really, fully consistent with our belief that this is some of the highest capital efficiency inventory in Eagle Ford, and that only adds to what was already a highly capital efficient business. So very, very excited about The opportunities that the acquisition brings us this year and even beyond.

Speaker 7

Okay, great. Same Thank you for all that detail. Maybe Dane, turning to you on just the shareholder returns versus Debt pay down, you're committed to returning at least 40% as CFO this year. The balance sheet is in a really comfortable place. At least at Barclays, our house forecast calls for meaningfully higher crude prices than $80 this year.

Speaker 7

And assuming our prices How should we think about the allocation of capital in this scenario between buybacks and early debt pay down? We heard your prepared remarks where you talked about your track record is to actually exceed your original target percent return. In the You've given kind of different percent targets at different commodity prices, but this time around you've got the new Ensign debt in the mix. And so At what point do you really start chipping away at the enzyme debt? Is it as simple as if oil is 85 or 90, you start going after that more?

Speaker 7

Can you provide any Caller? Thank

Speaker 4

you. Good morning, Janine. Yes, definitely. Let me kind of go back to our return on capital commitment framework for a second, and then I'll work my way to how we're thinking about paying down Bringing cash flow to shareholders as long as WTI is above $60 and obviously we're well above that right now. In 2022, we significant And we exceeded that.

Speaker 4

We hit 55%, dollars 3,000,000,000 back to shareholders, dollars 2,800,000,000 of that was share repurchases. So Significant return through in the form of share repurchases and that's how we're thinking about 2023 as well. The Ensign acquisition really enhances our shareholder return capability, Added about 20%, both our pre acquisition operating cash flow and our shareholder distribution capacity. So another way to think about that is 40% minimum shareholder return post Ensign would have equal 50% pre Ensign. So at our minimum, we're pretty close to what we actually delivered last year.

Speaker 4

But we like having the track record, not only of meeting Our goal, meeting our minimum target, exceeding it. And that's what we've done so far. And we intend to continue that. Too soon to Give you more guidance to model on that, but that's our bias. Now with respect to how do we pay back acquisition debt in the context of that return framework, I think we really have the capacity to do both.

Speaker 4

Even at today's commodity price, as I look at this, I see the capability to not only meet and Our shareholder return goals, but to start to meaningfully chip away at the acquisition debt and get that interest expense and just that gross debt out of the system. From your lips to God's ears on higher oil price, we have a tremendous amount of leverage to strong commodity prices, especially Oil and that would just increase our return capacity. You did note our balance sheet is really strong, ratings agencies have given us positive feedback Around that, so we're not in a mad rush to delever. But my base case is to get that Taken down that $1,500,000,000 2 year term loan paid off within that window. And we can prepay it without penalty.

Speaker 4

So we can just start kind of slicing chunks off as we go through. And I think we'll probably just assess that periodically as we go through the year based on how our cash generation is. But once again restated, Our primary goal, our number one goal is return to shareholders and that will not take a back seat to paying down the debt. While I'm here, let me just talk a second about the flexibility we have in our capital structure. I noted in my prepared comments, we have $200,000,000 of high Coupon legacy USX debt, it's going to be sure it's like 8.5% to 9% coupon.

Speaker 4

So it'd be really nice to get that out of the system. It's Quantum, so we're just going to pay that off with cash on hand. Aside from that and the acquisition term loan that I already referenced, The only other maturities we have between now and 2027 are in aggregate $1,000,000,000 in tax exempt bonds. They mature somewhat ratably over 23, 24, 26. And under that tax net bond arrangement, We can refinance these as they come due in any tenure all the way out to 2,037.

Speaker 6

So a

Speaker 4

ton of flexibility there. They're very interest rate advantaged to tax Even in this crazy interest rate environment, they're quite a bit advantaged and they things normalized As we get go forward here a little bit from an interest rate perspective there, the coupon on this one we're retiring now is 2% and that's kind of part from the We really like that flexibility. And the last thing I'll say is we extended recently our $2,500,000,000 credit facility Now to July of 2027, so kind of flexibility there. Bottom line, shareholder returns first, Payback debt second, we have capacity to do both. I'm not going to give you a bright line formula how we're thinking about it, but That's our commitment and that's how we're going to proceed.

Speaker 7

Great. Thank you, gentlemen.

Speaker 6

Okay.

Operator

The next question comes from Neal Dingmann, Tuohy Securities. Please go ahead.

Speaker 8

Good morning, all. Lee, my first question for you or Dane on capital allocation specifically. I definitely appreciate and really support the buyback focus. I'm just curious, Have you all changed the way you think about your stock dividend or your stock valuation, I should say, versus the dividend payout? Just wondering, I mean, do you all Think about some mid cycle prices used when looking at the metrics or is there any other details you're Dave could provide on kind of how you're looking at that buyback versus the diff?

Speaker 4

Yes. Well, I'll take a cut at it, Neil. Yes. So from a base dividend perspective, we want that to be Competitive and sustainable. And sustainability is kind of the governor there.

Speaker 4

We look at sort of conservative mid cycle pricing, maybe a $50 WTI World and try and not get too far above say 10% of operating cash flow on that base dividend. And so that's a bit of a governor. Now we have the synergy with the share repurchases that surprisingly is surprising how quickly You can buy back enough stock to pay for another $0.01 increase and we'll definitely be in that window again Yes, sometime this year. So that's how we think about the dividend. Share repurchases obviously are getting involved in lion's share of our return of capital program and I would expect that to continue as long as our free cash flow yield It's indicative of a really efficient way to buy back stock.

Speaker 3

Yes. I think, Neil, if you look At the aggregate efficiency of our share repurchase program, it really has been a differentiating, I think, feature Since we started that program back in October of 2021, I mean to be talking about a 20% over 20 And shares outstanding and the dramatic impact that that has on per share metrics, It's pretty notable. And as Dave noted, not only is that a very efficient mechanism for getting that cash back to shareholders, but the synergy effect that it has with the base dividend is also pretty remarkable. So Those mechanisms we believe are still the case to be as we look ahead into 2023.

Speaker 8

Yes, Lee, I love that per share growth. It really stands out. And then my second question is just on costs, specifically, incremental costs Expectations for the next few quarters seem to be now the most topical once again. Just curious on how volatile you all believe these the cost, Let's say for the next 2, 3, maybe even 4 quarters, we'll continue to be. And can you continue it seems like you've done a pretty good job in the past Locking in a good piece of those.

Speaker 8

I know when talking to Mike and the team. So just wondering when you guys look at that, how you're thinking about costs here for the, call it, the nearer term and locking in?

Speaker 3

Yes. Maybe I'll just provide a couple of comments and hand over to Mike to perhaps get into some of the details of how Really working to mitigate those pressures in time. But when you think about costs overall, We have to bear in mind that 2022 was kind of a tale of 2 half of the year. The first half of the year was Certainly didn't see the level of inflationary impacts that we saw in the second half. So some of the pressure that I think we're feeling not only as a company but as a sector In 2023 is the fact that we have the full year impact of those inflationary pressures.

Speaker 3

And our $1,900,000,000 to $2,000,000,000 number Fully contemplates that full year impact of those inflationary pressures. I think the team has done an outstanding job Being very disciplined about how we lock in both capacity and cost from our service providers and maybe I'll let Mike, just expand a little bit on that point.

Speaker 6

Yes. Thanks, Lucas. Mike here, Neil. Maybe a couple of things. How I'd maybe characterize 23, at a high level, we've kind of assumed similar service costs to that 4th quarter environment.

Speaker 6

So that's probably a good starting point for you. That may be consistent with what we've highlighted previously, and we touched on this a little bit. We're assuming 10% to 15% Inflation, that is built into our 2023 budget. That's relative to 2022. As we mentioned in the past, we've been working That's one hard.

Speaker 6

Really, our objective was to really base load the maintenance program and kind of really try to minimize the need for It's all Bart. A lot of benefits in doing that from a safety execution and commercial perspective. We've taken what I would describe as a disciplined but thoughtful approach. Our priority has been to really protect side of the business and try to get access to the same high quality providers and equipment that we were using in 'twenty two, and I can tell you we've been successful there. The majority of the folks that we're working in we're working with in 'twenty three are the same folks that we're working with in 'twenty two.

Speaker 6

As I think about the year for the first half of the year, majority of our rig, pressure pumping, sands, steel leads, All fully secured, most of the prices locked down. There's a little bit of open pricing, but not a lot. And where we can try to index Linked that to the pricing mechanisms. And then maybe for the second half of the year,

Speaker 4

that's where

Speaker 6

we've been a little bit more patient. That Feels like the right call, just given the macro volatility at the moment. Feel good about our ability to access high quality providers and equipment, but We've maybe been a little bit more thoughtful in terms of how much prices we lock in. Potentially, that Could work to our advantage later in the year, particularly if you see some of this commodity price weakness that we've seen recently about persist, Especially on the natural gas side of the business, that could potentially lead to less drilling completion activity, particularly in some of those higher cost And gas, please.

Speaker 3

Yes. And maybe one just kind of closing comment as well, Neil. I know we spend a lot of time talking about inflationary pressures on the CapEx side of our business. I don't want to On the CapEx side of our business, I don't want us to forget that our operating expenses are also a critical element of our business model. And if you look at our guidance, particularly for the U.

Speaker 3

S. Business this year, the U. S. Unit production expense is actually Going down by circa 10% year over year. Obviously, a lot of great work by the teams, But also, it reflects some of the implicit efficiency that we're gaining through the scale And the performance from the Ensign acquisition.

Speaker 3

So I just don't want to focus All of our time just on CapEx, OpEx is still a very key element of delivery of our financial metrics. And so I just wanted to highlight that before we left this question.

Speaker 8

That's a great add. Thanks, Lee. Thanks, Mike.

Speaker 3

Thanks, Neil.

Operator

The next question comes from Doug Leggate with Bank of America. Please go ahead.

Speaker 2

Good morning, guys. Thanks for getting me on. So Lee, tremendous acquisition in the Eagle Ford. My question is, whether you have line of sight or any thoughts about How you address the balance of the portfolio? And let me frame my question like this.

Speaker 2

On Slide 20, you're showing about a 13 year inventory in the over 48, You're also suggesting that Eagle Ford today is more than 15 years, and that's about half the production. So I guess I'm coming to a conclusion that the rest of the portfolio is probably sub-ten. So I'm wondering if you could give us some thoughts as to whether that sounds reasonable, Maybe break it down by asset, but how you think about extending the asset life on those other parts of the portfolio? I've got a follow-up, please.

Speaker 3

Yes. No, thank you, Doug. Well, first of all, I appreciate you pointing out the inventory life because I do think this is an important topic. This is 3rd party data. This is that we showed in the pack.

Speaker 3

It's also kind of sub $50 WTI breakeven data. So you just have to keep in mind that this is a very Specific slice of inventory life. To me, one of the key takeaways is that we're clustered in with 4 or 5 other companies That are really sitting in that 12 to 15 year inventory life. And so we're in a very good zip code there. So I want to start That as a premise, we're not disadvantaged in any form or fashion when it comes to quality inventory lines Exceptionally low breakevens.

Speaker 3

Getting beyond that and talking about inventory life For the portfolio, but also at a basin level, you're right in the sense that Ensign has been very accretive specifically to the Eagle Ford. But as you know, capital allocation and consumption rates ultimately sets the inventory life calculation. That's why we tend to look at it At a portfolio level as opposed to a basin level. But you can take comfort in the fact that when we look across our basins, in aggregate, They are all at that kind of 10 year or better inventory life when we look at that from an internal perspective. We said, well, how do you think about growing that inventory life moving forward?

Speaker 3

Well, I think right now, we're just We're wanting to integrate and digest the Ensign acquisition, which to us was very much representative The type of acquisition that makes sense for a company like Marathon, right? If you we talked extensively about the Criteria we would use to evaluate any acquisition and it was obviously financial accretion, it was obviously industrial logic, But a big component of that was to look for assets or opportunities that would also have a net positive effect On inventory life and not just long dated inventory, but inventory that can compete right now Today, and that's exactly what we're seeing from the Ensign acquisition. So to the extent That we continue to screen and look at opportunities here in the U. S. And they and we find some that meet that Criteria, I will take a very hard look at that.

Speaker 3

Pat and his team are constantly looking at the opportunities within our core basins. But if anything, Ensign has actually raised that bar and raised and elevated that criteria because it was so

Speaker 2

Appreciate the answer, Lee. I mean, good assets and enhanced great management Got a lot of cash. You can kind of see where I'm going with that. So thank you for the answer. My follow-up is kind of a similar question on EG.

Speaker 2

And You know where we've been kind of struggling with this a little bit because I realized that the step change in the 18 year contract is extraordinary. The problem we're facing is that on our numbers, at least on 3rd party data in particular, the $900,000,000 of EBITDA more or less On the production, it looks like it's about $600,000,000 gross going through the plant. That production looks to decline about 70% over the next 5 years. And you don't have any capital associated with the uplift this coming year. So my question is, how do you maintain what are the opportunities that In terms of whether it might require capital or 3rd party owners of that gas to spend capital, which Brings questions over what kind of margin you can actually maintain on that.

Speaker 2

So I guess I'm looking for confirmation. Is that really the decline rate? And how do you backfill it?

Speaker 3

Yes. Well, I think in the first of all, on the decline rate, on the equity, the equity Alba gas condensate field, we're kind of 8% to 10% annual decline rate. So that's kind of the decline rate that we would typically experience within that asset. In terms of future opportunities, let me describe it like this. First of all, as I said in my opening comments, we have this World class, very unique infrastructure sitting in one of the most gas prone areas of West Africa.

Speaker 3

And quite frankly, those molecules will not get monetized unless they Probably flow through EG LNG. We are the route to monetization. And we've already demonstrated success in If you look at the ALEM project, which as you said, is a, if you will, an others molecule, a non equity project. But with that, we were able to participate both from a tolling as well as a percentage of proceeds on the profit sharing side of that. Not only that, But when you talk about capital, we had more infrastructure built out on someone else's capital, I.

Speaker 3

E, the Alen pipeline. And that was obviously critical for the Elend project, but it also subsequently now connects us To additional discovered undeveloped gas that we know ultimately will come to market. Remember, we're in the Atlantic Basin For transportation and geographically advantaged to European markets, there is no other monetization route For those molecules, so I have a very high confidence that between third party opportunities as well as the fact that we continue to Both on block alba and off block opportunities ourselves. Now, there could be some capital requirements there, But for 3rd party molecules, those are going to come to us and we're going to be able to participate in the upside just like we have in the Alen project. So In aggregate, when I think about all of those opportunities, when I think about our already demonstrated success at Alen, we have a commercial framework that And that framework can be replicated.

Speaker 3

The fact that these molecules have to find a home or they're going to be stranded gas, I have a lot of confidence that we've got a very strong trajectory for EG LNG out to 2,030 and beyond.

Speaker 2

Appreciate the full answer, Lee. Thanks so much.

Speaker 3

Anita, maybe we could do one question, for analysts to try to

Speaker 5

make our way through the remainder of the queue here.

Operator

Okay. The next question comes from Matt Portillo with TPH. Please go ahead.

Speaker 9

Just a follow-up to Doug's question, great to see the Texas Delaware making its way into the development program.

Speaker 3

Just curious, could you give us

Speaker 9

an update on the delineation plan for this year? What you've learned so far? And how this Impact kind of your inventory views for the Permian kind of moving forward?

Speaker 5

Yes, I'll take this one. Good morning, Matt. This is Pat. Yes. As you said, we just completed 3 wells on our most recent pad.

Speaker 5

The wells are performing well to date consistent with our Predrill expectations, all 3 wells have achieved at least 1,000 barrels of oil per day on flowback. It's still early. We're still watching the wells. We need some time to look at longer Sure performance, but early indications that are good. They're exhibiting high oil cuts.

Speaker 5

They're showing low water oil ratios and On a low decline, some positive outcome there. You may recall that we deliberately down spaced this pad in Woodford to check our Spacing for development, we collected a lot of fiber data and other data trying to look at the optimal spacing both vertically and horizontally. The key takeaway so far has been there's no communication we've seen between the Woodford and the Meramec, which gives us strong evidence that we can Successfully co developed those 2 reservoirs without any interference. With regard to future development spacing, I'd say early learnings from this pad To confirm our original view that optimally, we'll probably go with a 4x4 co development. That will be the most capital efficient way Develop the acreage.

Speaker 5

I'll remind you that the previous pad, we had the strongest Woodford oil well ever drilled and that well continues to just Yes, really strong well. We now have about 12 wells online across the fifty 5,000 acre position that we have, Aitken and Woodford for the Meramec. Again, very confident in all their performance, Very high oil productivity, low water oil ratio on shallow decline. And we think ultimately this play is going to generate very high returns. As Mike said in his opening remarks, no longer an exploration play, fully integrated into the team.

Speaker 5

It will compete Capital with the rest of the portfolio. That said, we will drill another multi well pad this year to continue the development and we'll see how that goes.

Speaker 2

We'll go from there.

Operator

The next question comes from Subash Chandra with Benchmark Company.

Speaker 10

Yes, hi, thanks. Just curious on your gas Yesterday, we might have seen a company that targets oil and sees gas as derivative and the risk of that strategy given What's happened in the macro world? I think in your commentary, you are more cautious on gas, at least in Mid Con, etcetera. But could you talk more specifically to how you might adjust activity at all based on gas prices? And Secondly, I should follow-up, no follow-up, sorry, Bakken is getting gassier and how you kind of look at that going forward?

Speaker 3

Yes, Smedes, this is Lee. Just in terms of gas use, We're not in the business of predicting pricing. We're a price taker. We do have though, however, a very Natural hedge by virtue of our portfolio. I want to keep in mind that our portfolio is about 50% oil, About 50% gas and NGL.

Speaker 3

So even though prices will inevitably exhibit volatility, we've seen that on the gas side, We don't anticipate radical changes within our capital allocation program for this year. Could we see some small optimization here and there? Well, absolutely. But again, we're not going to try to predict or chase pricing because inherently, We have a very balanced portfolio that gives us a very broad exposure across the full commodity deck. So we feel very good about that.

Speaker 3

We talked about Some of the sensitivities within our portfolio, we still are very leveraged to oil. We like that. We think that, that is I'm very constructive on oil now and in the future. And I like the fact that for every dollar change in WTI, that's a $70,000,000 Uplift in cash flow

Speaker 8

for us.

Speaker 3

So don't anticipate any major shifts in capital allocation as a result of gas volatility. On your other question just around the Bakken, obviously, Typically, as we have moved into the Hector area, etcetera, we will see some natural variation in GOR. But again, we're driven by profitability. I won't say we're fully agnostic

Speaker 2

So

Speaker 3

to commodities, but again, we're going to be driven by economics.

Speaker 6

Yes. I think, Subash, I'll just chime in as well in the back end. What you're seeing there It's maybe just the improving cash capture situation in the basin as well and for ourselves. We've progressively each year got better and better and I have to continue. So there's probably an element of that playing into it as well.

Speaker 3

Yes. And that's been a conscious investment On our part to improve that gas capture, to capture that value in the field as well as obviously the emissions benefits that come with that.

Speaker 1

Thanks, Subash.

Operator

The next question comes from Nitin Kumar with Mizuho Securities. Please go ahead.

Speaker 10

Hi, good morning and thanks for taking my question. I'll limit myself to a one question, one part question. Can you talk a little bit about how do you see capital allocation amongst your 4 key U. S. Resource space going forward?

Speaker 10

As Janine pointed out, you had fewer wells in the Eagle Ford, but you're also doing a few more in the Bakken than we expected for 2023. So just how should we think about the allocation of capital within the 4 plays?

Speaker 3

Well, maybe I'll say a couple of things and I'll let Maybe Mike fill in some of the details. But in this year's capital allocation, about 80% of the capital allocation is flowing To the Eagle Ford and the Bakken, but we also have an uplift year over year in allocation to the Permian as well based on the outstanding results That we experienced in 2022. And so that's what we're looking at this year. I would expect that as we move March forward in time, The Eagle Ford and the Bakken are still going to compete very, very heavily for capital allocation. But there's no doubt The Permian, now coupled not only with the Northern Delaware position, but with the Texas Delaware Woodford Meramec, is going to start stepping up And competing more directly for capital.

Speaker 3

There are obviously some other subtleties within each basin in terms of how the capital allocation is flowing. Maybe I'll let Mike give a little bit of color on specifically what's happening at a basin level.

Speaker 6

Hey, Nitin, it's Mike here. Yes, just A little bit more detail on 23. We provided the reg splits and the wells to sales and the deck. So 9 to 10 regs in total, That's excluding the JV activity, 4 rigs in the Eagle Ford, and that'll be 1 on the Ensign acreage. We've got 3 in Bakken and then 2.5 2.5 in Permian and then 1.5 JV rigs in Oklahoma.

Speaker 6

I I think Lee mentioned there, roughly 80% of the capital is going to Eagle Ford and Bakken. Eagle Ford is obviously now the highest capital asset with the addition of And Simon, maybe a little bit surprised, well, maybe not with Permian just grabbing the majority of the remaining capital. And really that's driven by the excellent results that we've had in Permian last year. That asset is now effectively competing for capital against Eagle Ford and the Bakken, which It's no small mean feat. We're making a strong case for even more capital in 2024.

Speaker 6

A couple of elements to that. Well productivity is

Speaker 5

a big part of it.

Speaker 6

We've seen some very, very strong results there in aggregate. The 19 wells That we brought online last year averaged IP30s of over 2,200 barrels of oil equivalent per day and a 70% oil cut. Extended production history in Lea County is looking really good as well. 1 of the Thunderbird 4H well in Red Hills, that achieved an IP120, Over 2,100 barrels of oil per day and I think you then couple that with the D and C performance that we've seen, the team is really excelling there. Completion activities, we're probably pumping for over 19 hours a day.

Speaker 6

I think you combine all of that together and you see the capital efficiency. A lot to like about 2022 performance, you then just factoring the great job that the teams have done as well with acreage trace and kind of adding to our average It just causes that asset to become even more capital efficient. Yes, that's probably.

Speaker 3

Anita, we'll take one more question.

Operator

Thank you. Our next question comes from Neil Mehta with Goldman Sachs. Please go ahead.

Speaker 9

Yes. Thanks for sneaking me in here. Just a quick question on capital efficiency. Obviously, you provided the 2023 guide here. But Are you seeing any signs real time of the second derivative of inflation improving with diesel Coming off, chemicals getting a little bit better.

Speaker 9

Just talk about what is sticky and what might actually be moving back into your direction?

Speaker 3

Well, I think that there's no doubt that the rate of change on inflation is certainly slow. And as Mike said earlier, what we have embedded in this year's budget, the $1,900,000,000 to $2,000,000,000 is basically The inflation levels that we saw as we exited 2022. So from our perspective, to the extent that we see Inflation and commodities, like diesel, etcetera, start to moderate, we would expect that to be basically a tailwind Relative to not only our capital program, but also obviously our operating cost as well.

Speaker 10

Mike, I

Speaker 3

don't know if you want to say anything else on I

Speaker 6

think I mean, the other thing probably you look at rig count, broadly speaking, that's definitely flattened off. So from an activity perspective, that I kind of alluded to this in maybe one of my previous answers. With commodity prices, particularly gas being where they are, potentially some of the gas basins maybe in particular start to See activity and tailing off and that potentially could beat a little bit of a weakening And the market as well. And I'll probably start with rigs, but then there's a knock on effect on completion crews and everything else that comes into the oilfield service Sector, so I think when again, I touched on this a few minutes ago, when I think about our strategy, our approach to the year, In terms of locking in pretty much most of our prices in the first half of the year and then that flexibility in the second half of the year, I think we feel pretty good about the broad macro situation.

Speaker 3

Thanks, Neil.

Operator

This concludes our question and answer I would now like to turn the conference back over to Lee Tillman for any closing remarks.

Speaker 3

Well, thank you for your interest in Marathon Oil. I'd like to close by again thanking all of our dedicated employees and contractors Their commitment to safely and responsibly deliver the energy the world needs now more than ever. Thank you very much.

Operator

This conference is now concluded. Thank you for attending today's presentation. You may now

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Earnings Conference Call
Marathon Oil Q4 2022
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