Marathon Oil Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 13 speakers on the call.

Operator

Good morning, and welcome to the Marathon Oil Second Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Guy Baber, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Danielle, 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 Q2 2023 results. Those documents can be found on our website at marathonoil.com. Joining me on today's call are Lee Tillman, our Chairman, President and CEO Dave Whitehead, Executive VP and CFO Pat Wagner, Executive VP of Corporate Development and Strategy and Mike Henderson, Executive VP of Operations. As a reminder, today's call will contain forward looking statements subject to risks and uncertainties that could cause actual results to differ materially from those expressed implied by such statements.

Speaker 2

I'll refer everyone to the cautionary language included in the press release and presentation materials as well as the risk factors described in our SEC filings. We will also reference certain non GAAP terms in today's discussion,

Speaker 3

So with that, I'll turn

Speaker 2

the call over to Lee and the rest of the team We'll provide prepared remarks today. After the completion of these remarks, we'll move to a question and answer session. Lee?

Speaker 1

Thank you, Guy, and good morning to everyone listening to our call today. First, I want to again kick off our call by Expressing my thanks to our employees and contractors for another quarter of comprehensive execution against our framework for success. We don't take such delivery for granted and I'm especially grateful for your commitment to safety and environmental excellence in addition To delivering on all of our operational and financial objectives. Well done on another great quarter while staying true to our core values.

Speaker 4

There are

Speaker 1

a few takeaways I want to leave you all with this morning. First, we delivered another very strong quarter on all fronts, highlighted by Sequential increases to our cash flow from operations, free cash flow and our total company oil and oil equivalent production. We delivered around $530,000,000 of free cash flow during the Q2, with a significant increase from Q1 driven by Strong execution and improving production trend and a catch up in EG Cash Distributions. 2nd key takeaway. We continue to lead our peer group and the broader S and P 500 in returning capital to our shareholders.

Speaker 1

During the Q2, we returned $434,000,000 to shareholders, including $372,000,000 of share repurchases. Through the first half of twenty twenty three, we've returned over $830,000,000 to our shareholders, representing 40% of our top line cash flow from operations, consistent with our framework. Our differentiated cash flow driven return of capital framework continues to prioritize our shareholders as the first call on our cash flow, First half twenty twenty three return of capital represents a double digit Our commitment and consistency in returning significant capital is contributing to pure leading growth in our per share metrics. We've now reduced our outstanding share count by 24% in just the last 7 quarters and we are on track to deliver 30% year over year production growth per share. Our 3rd and final key takeaway this morning.

Speaker 1

Our forward outlook remains compelling and differentiated. We are on track to deliver a 2023 business plan that benchmarks At the top of our high quality E and P peer group on the metrics that matter most, shareholder distributions, Free cash flow generation, reinvestment rate, capital efficiency, free cash flow breakeven and production growth per share. Our business plan remains on track with operational and financial momentum improving over the second half of the year. More specifically, Our first half weighted capital spending and completion activity will drive our 3rd quarter total company oil and oil equivalent production To at or above the high end of our annual guidance ranges. With both higher production And lower CapEx over the second half of twenty twenty three, we expect continued sequential improvement to our underlying free cash flow generation across the 3rd and 4th quarters.

Speaker 1

And finally, though our annual production guidance ranges remain unchanged, our full year Oil equivalent production is trending above the midpoint of that guidance. Looking ahead to 2024, While it's too early to share any specific guidance, rest assured that our framework for success and core priorities will remain unchanged. Our case to beat will be another year of maintenance level oil production that maximizes our sustainable free cash flow and prioritizes shareholder distributions and per share growth. My expectation is that we will once again lead the peer group On the metrics that matter most in 2024, benefiting from any deflation that might present itself in the market as well as from the added tailwind of a significant financial uplift in EG from our increased exposure to the global LNG market. With that, I'll turn it over to Dane, who will provide a brief financial update.

Speaker 5

Thank you, Lee, and good morning, everyone. As Lee mentioned, Q2 was a tremendous financial quarter for us as we generated $531,000,000 of adjusted free cash flow And returned $434,000,000 of capital back to shareholders. That's a 10% increase in shareholder distributions relative to the Q1. Importantly, we expect our financial delivery to improve even further over the second half of the year. On a price normalized basis, We expect our free cash flow generation to improve across the 3rd and 4th quarters relative to the 2nd quarter's already meaningful level, driven by higher expected production and lower capital spending, consistent with the phasing of our 2023

Speaker 1

program.

Speaker 5

Returning significant capital back to our shareholders remains foundational to our value proposition in the marketplace. We're focused on building a long term track record of consistent shareholder returns through the cycle that can be measured in years, not just quarters. The first half of twenty twenty three represents another successful step in that journey. Through the 1st two quarters of the year, We returned over $830,000,000 to shareholders, representing 40% of our adjusted CFO. First half return to capital translates to a double digit shareholder distribution yield on an annualized basis, and that's the highest in our peer group.

Speaker 5

Over the trailing 7 quarters, we've now returned approximately $4,600,000,000 back to our shareholders. It's almost 30% of our current market capitalization that we've returned in less than 2 years. We repurchased 4,200,000,000 of our stock at attractive levels, driving a 24% production in our outstanding share count, contributing to peer leading growth in our per share metrics. We remain confident our cash flow driven return of capital framework is uniquely advantaged versus peers, providing investors with first Call on cash flow and offering them a differentiated shareholder return profile. Our framework is sector leading and transparent, Clear visibility to one of the strongest shareholder distribution yields in the entire S and P 500.

Speaker 5

For the full year, we expect to continue to deliver against our framework, returning a minimum of 40% of our top line CFO to shareholders. We're committed to the powerful combination of a competitive and sustainable base dividend and material share repurchases. Unless our base dividend unchanged this quarter, keep in mind that we've raised it 8thly last 11 quarters And we're well positioned for another dividend raise later this year with the increase expected to be fully funded The share count reduction from our buyback program. This is consistent with our focus on sustainability Capacity to continue buying back a significant amount of our stock with $1,800,000,000 of share repurchase authorization outstanding. Our plan is to maintain our return of capital leadership and improve our already investment grade balance sheet Through gross debt reduction, we can do both and that's exactly what we're demonstrating.

Speaker 5

We paid down $200,000,000 of high coupon U. S. Ex debt so For this year, every marketed $200,000,000 of tax exempt bonds at a favorable interest rate. The The strength and durability of our shareholder return and balance sheet enhancement initiatives are underpinned by the quality of our assets, our disciplined capital allocation framework, Our peer leading capital efficiency and our strong free cash flow generation. This is proven out by our leadership position when it comes to the most important metrics for our sector.

Speaker 5

For full year 2023, we expect to deliver the best free cash flow yield in the high quality E and P space, the lowest reinvestment rate Among the best capital efficiency, all while maintaining the lowest enterprise free cash flow breakeven on a pre and post dividend basis. With that summary, I'll turn it over to Mike to provide a brief update of our 2023 execution that's delivering the sector leading outcomes.

Speaker 4

Thanks, Dean. My key message today is that the priorities for our capital program remain unchanged and We remain fully on track to deliver on our key commitments to the market, including our annual capital spending and production guidance. Starting with our capital program, we spent just over 60% of our full year budget during the first half of the year, We expect 3rd quarter capital spending to be in the $400,000,000 to $450,000,000 range For the full year 2023, the midpoint of our annual capital guidance remains a reasonable assumption for your models. In terms of the service cost environment, first half twenty twenty three pricing was very consistent with our expectation entering the year. We started to see a general plateauing of costs during the Q2 amid improved access to service and equipment.

Speaker 4

So the macro environment remains dynamic. We've now started to see an improved pricing trend across raw materials and most service lines and equipment, consistent with a lower level of industry wide drilling and completion activity. We'll look to capture better pricing where we can with balance of the year, While continuing to protect our execution excellence, where we are also seeing a number of positive trends. To that point, year to date field level execution has been very strong and efficiency outperformance has us tracking to the higher end of our annual wealth sales guidance in the Eagle Ford, Bakken and Permian. While this won't have a material impact on our full year 2023 capital Production, it should enhance our production momentum into 2024, but we also believe there will be more opportunity to capture Turning to production, the phasing of our capital program is driving strong production momentum into a strengthening commodity price environment.

Speaker 4

For Q3 specifically, we expect total company oil and oil equivalent production to be at or above the high end of our annual guidance range before a modest sequential decline into the 4th quarter. For full year 2023, we've reiterated our production guidance ranges of over trending above the midpoint of guidance on an oil equivalent basis. The combination of higher production and lower capital spending over the second half of the year is expected to drive Further improvement to our underlying free cash flow profile. Turning briefly to our integrated gas business in After receiving a substantial catch up cash distribution during Q2, we expect the relationship between earnings and cash to normalize over the second half of the year. 3rd quarter distributions should be somewhat evenly split between dividends And return of capital.

Speaker 4

Looking a bit further ahead to 2024, we continue to expect to realize significant financial uplift in ET On the back of an increase in our global LNG price exposure, we're right on track with all the necessary contractual milestones. On beginning January 1, 2024, AlbaSourced LNG will no longer be sold at a Henry Hub linkage. It will be sold into the This arbitrage between Henry Hub and global LNG pricing coupled with the highly competitive market for LNG cargoes From a reliable suppliers is expected to drive significant financial uplift for our company at current forward charge pricing. Take further advantage of these new commercial terms, we are actively assessing up to a 2 well infill drilling program at Alba, Targeting high confidence, low execution risk, shorter cycle opportunities that could mitigate base decline and maximize flow of equity molecules Through the LNG plant under the more attractive global LNG linked pricing. These opportunities Are expected to compete with the risk based returns generated from our U.

Speaker 4

S. Resource plays. Although any all but infill capital spending is unlikely to make a Significant impact on our overall 2024 capital program. Yet, it's not just about capturing near term commercial uplift in EG. As we've stated before and consistent with the recently executed HOA with the EG government and our partner Chevron, We're equally focused on the longer term outlook via the gas mega hub concept.

Speaker 4

By truly leveraging our unique world class Infrastructure in one of the most gas prone areas in West Africa. We expect to extend the life of EG LNG well into the next Thank you. And further enhance our multiyear free cash flow capacity. Next phases of development will include The same gas cap slowdown as well as potential cross border opportunities. With that, I will turn it over to Lee, We will wrap up our prepared remarks.

Speaker 1

Thank you, Mike. For years now, I have reiterated 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 P. We've delivered exactly that type of performance over the last 2 years and not just competitive, but at the very top. Our one line investment thesis is this top tier sustainable free cash flow generation with an advantaged return of capital to again lead both our peer group and the S and P 500 in the metrics that matter most. This is pure lading financial and operational delivery It's not a 1 year phenomenon.

Speaker 1

It's a continuation of a multi year trend. It's sustainable. And looking ahead to 2024, I don't expect My confidence is underpinned by our high quality and oil weighted U. S. Unconventional portfolio that's complemented by our unique Fully integrated global LNG business in AG.

Speaker 1

To close, I want to reiterate how proud I am of the way we've positioned our company. 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 And the world needs more energy, not less. The energy transition is really an energy expansion, And Oil and Gas is uniquely positioned to drive global economic progress, defend U. S. Energy security, lift millions out of energy poverty and protect the standard of living we have all come to enjoy.

Speaker 1

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

Operator

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. The first question comes from Arun Jayaram of JPMorgan. Please go ahead.

Speaker 6

Good morning, Lee and Dane and Mike. You mentioned how your free cash flow should inflect In the second half of this year, just given the call $450,000,000 decline in CapEx, higher output in oil prices. So I wanted to get your thoughts on how you balance cash return in the second half between equity holders, debt reduction And perhaps building up the cash balance, you've been operating around $200,000,000 in cash for this year. So just thoughts on balancing those three items.

Speaker 5

Yes, sure, Arun. Thanks. Yes, the cash return conversation is so central to the value proposition for shareholders. I might take a little longer than you anticipated to cover this, but just to be thorough. We've really been steady Executing a return of capital framework and it calls for a minimum 40% of operating cash flow In the form of either share repurchases or our base dividend, obviously our track record on meeting that minimum return is very solid I'm wavering and we expect that to continue that going forward.

Speaker 5

We returned exactly 40% in the first half 2023 CFO to shareholders, that's $700,000,000 of share repurchases, plus 125,000,000 Base dividend, which equated to 11% amicalized distribution yield, it's really at the top of the class in terms of Now on top of that, we also paid off $200,000,000 of 8 plus percent coupon US ex debt And kind of balancing those share repurchases and returns to investors with debt reduction is something that will be a feature for us Going forward, we certainly continue to see share repurchases as the preferred return vehicle for the lion's share of our shareholder returns. Our stock is trading at a free cash flow yield in the mid teens. So repurchases continue to be very value accretive, a real efficient way to drive per share growth. They're synergistic with growing our base dividend as I referenced in my prepared comments. We have $1,800,000,000 of repurchase authorization outstanding, so Plenty of running room there.

Speaker 5

And the per share growth that we're driving, 24% since Q4 of 2021 when we restarted this program was pretty eye watering. So for the balance of the year, Expect us to continue to return 40% of operating cash flow and look to pay down additional debt. Now Make no mistake, the 40% return to shareholders is the top priority. The second priority will be to start to pay down The term loan that we took out when we acquired the Ensign Eagle Ford asset. We have a very significant cash flow inflection that started to free cash flow inflection that we started to realize in the second quarter, but we expect that to continue in the 3rd and the 4th quarter.

Speaker 5

And even on a price normalized basis, We're going to have a lot more flexibility than we've had over the past couple of quarters to serve both of those needs, shareholder return and debt reduction. With the tailwind we're seeing in commodity prices, particularly WTI right now, that's going to provide even more We can go bigger on share repurchases and we can go faster on debt reduction or some more likely some combination of those. You asked about cash balance. We're operating around $200,000,000 right now. And In the course of a month, we actually may go negative and need to borrow on our credit facility a little bit, Waiting for the big 20th of the month check for oil receipts, which is that's the big time when a big wafer cash flow comes into the company.

Speaker 5

That working capital that we're managing the mechanics of that. We actually just established a commercial paper program, which is very cost effective Compared to the credit facility. And so I think we're comfortable with that. Over time, we may build up cash, but

Speaker 4

I don't it's not a

Speaker 5

priority Right now, it's going to be hit to 40%, exceed it where we can and take down that term loan to get that interest expense out of the

Speaker 6

That's helpful. My follow-up maybe is for Mike, is kind of maybe a 2 parter. Mike, your Updated till guidance is about 17 till is higher, 230 versus 2.13. Does that impacting Any production from the higher tills? That was a question from the buy side.

Speaker 6

And then maybe I'd love to see if you could describe The positive variance of the Eagle Ford this quarter may be a little bit light in the Northern Delaware, a couple of those variances in 2Q?

Speaker 4

Yes. Just looking at the wells to sales cadence, I'd probably start with capital program is very much Tracking as planned, so kind of we fully expected to execute on that. Kenneth, fairly typical for us to be more front end loaded. We are seeing some outperformance from an A execution perspective, particularly in the drilling space, looking back and I think we've had a record quarter in the second quarter from a Similar story in Permian where I think year to date we've had our best ever drilling performance, similar story in the completion space. And then in Eagle Ford, again, a similar story there.

Speaker 4

I think what's encouraging in Eagle Ford It's with the Ensign acreage. Since we've got in there, we're probably drilling our wells about 10% faster than what They were drilling them last year. So when you kind of combine all of that together, it's putting a little bit of pressure on the wells to sales in the year. I think how I think about it, that pressure is going to really translate more so in the Q4. So if you think about it, we're probably pulling a Well, I was in from the Q1 and Q4.

Speaker 4

So from a capital and production perspective, not going to have a big impact On 2023, but potentially could set us up well for the run into 2024 in the Q1 there. You asked specifically about Eagle Ford's well performance. Yes, I think we highlighted the 74 Ranch Wells in Atascosa County, those are extended laterals. We're seeing some great performance, some great early production performance out of those. That's an area of the play that we've got some future running room.

Speaker 4

I expect that's going to be a big part of our execution portfolio in 2024 and Then end to 25. Hopefully, that answered all the questions that you had there.

Speaker 1

Yes. Thanks a lot. Just maybe on the Yes. I'll just take 1, Arun, just on Permian. 2, you'd ask a little bit about why we saw a little bit of step down sequentially there.

Speaker 1

That was generally speaking to a little bit of lag in our workover program, then on top of a couple of large producers that went down. We had to get a workover rig on them. And then Finally, we had some midstream gas takeaway that was a little bit delayed on one of our new pads in the quarter. All that's been resolved now. So really just a question of timing.

Speaker 1

No well performance issues whatsoever.

Speaker 6

Thanks, Lee.

Speaker 1

Yes. Thank you, Gus.

Operator

The next question comes from Josh Silverstein of UBS. Please go ahead.

Speaker 7

Yes, thanks. Good morning, guys. Lee, you had some comments before on the some of the EG infilling opportunities there. Can you also talk about just the product scope of some of the other field developments, the timeline for investments? Are these A couple of $100,000,000 projects over 3 or 4 years, just a little bit more about the scope of the opportunity there.

Speaker 7

Thanks.

Speaker 1

Yes, you bet, Josh. Happy to do so. Yes, just maybe stepping back, first of all, on the infill drilling program, The objective here of course in EG is to continue to base load our 3.7 MTBA train. We obviously prefer to do that with Equity Molecules, but to the extent there's OLEDs, we'll also drive 3rd party molecules there to Maximize the value proposition out of this really world class infrastructure. The unique feature, of course, of the Alba inbuilt program is that We're fully aligned across the value chain from the Alpha PSC all the way through EG LNG.

Speaker 1

So those are extremely valuable molecules and would Ultimately help us offset and mitigate some of the decline that we're seeing from the Alpha field. And again, remember, we have aligned interest. We've got about 64% interest in the Albin unit. We've got about 56 So the beauty of the program is this is going to be a very high Confidence, low execution risk. And in the world of offshore production, we would consider this about a short cycle As you can get, these are this would be jackup drilling over existing facilities, typically reentry, dry trees.

Speaker 1

And so, Again, from an offshore perspective, these are relatively straightforward opportunities. The work we're doing now is, of course, Assessing the economics, really making sure that we have good solid target locations, working with our partners To ensure there's good alignment there, but ultimately, we believe up to 2 wells in Alba can compete With those risk very strong risk adjusted returns that we're generating here in the U. S. Portfolio. If we can stay on track With an FIG decision in the near term, then that could have us in a position subject to rig availability You may even be able to spud late 2024 in that timeframe.

Speaker 1

The way the capital will phase, Josh, quite frankly, on a, I'd say a notional couple of $1,000,000,000 budget, it's not going to be material. It will be phased over time. And again, across our total budget, We just don't see this to be a big needle mover for us, but very accretive opportunities for REG Asset. Got it.

Speaker 7

That's helpful. And then obviously there's a lot of upside to come as the contract rolls off. But we've also seen a lot of volatility in TTF and international pricing. Is there anything you guys can do to take some of that volatility out? Are there Is there hedging liquidity?

Speaker 7

Are there contracts you can sign? Just anything that you can provide there, given we've seen as much volatility there as we have here? Thanks.

Speaker 1

Yes. I think we've tried to show the notional uplift that we could Obtained from the change in commercial terms that will occur January 1, 2024. And the reality is, Josh, as long as there is arbitrage With Henry Hub and TTF, there's going to be financial uplift in EG. Really, it's just going to be a matter, as you said, of where does that global LNG market price Ultimately, Lam, we've shown some sensitivities, dollars 15, dollars 20 $40 PTF. And in all those cases, There is material uplift relative to what we're seeing in 2023.

Speaker 1

The work is ongoing from a Commercial standpoint, from a liquefaction agreement, the lifting agreements all the way through to LNG marketing, More to come on that, but as I think we said in our opening comments, the good news for us is we're going out into a very competitive market today where LNG cargoes, Particularly, Atlantic Margin Sourced LNG cargoes that are advantaged into Europe are going to be very much sought after. And I would just emphasize that buyers are looking for reliable suppliers. And over the life of EG LNG, we've never And so I think we're in a very good position to maybe not damp out all the volatility that you referenced, but certainly take full advantage of the market price That's available to us.

Speaker 7

Great. Thanks guys.

Operator

The next question comes from Scott Hanold from RBC Capital Markets. Please go ahead.

Speaker 8

Thanks and good morning. I guess just sticking with EG since we're on that topic, Can you give us some color on how those discussions with counterparties are going and your partners? And just give us a sense if you could What I guess, counterparties are looking for in terms of duration and flexibility as well that would be helpful?

Speaker 1

Yes. I would just say, first of all, this is a competitive process, Scott, that we're in. And from a mile Stone standpoint, we're right on track in terms of the commercial milestones that we laid out. And so I want to be absolutely clear, There's no question that we'll be receiving global LNG pricing come January 1. Right now, we're in a competitive with multiple buyers to again drive that competitive attention and deliver what we think will be the most Val, you from whoever that counterparty will ultimately be, but that's an active ongoing process right now, Scott.

Speaker 8

Yes. I mean, are you able to talk about what kind of duration you're looking for? And obviously, you talked about maybe stabilizing the Elba field. Is that Part of showing that the assets have duration for those counterparties?

Speaker 1

Yes. I'll go back to my comment around reliability and security supply. So Certainly, duration is an important element that is in, of course, the terms that we're currently discussing. But until we kind of complete that competitive I don't want to get too far into some of the commercial details. Suffice to say though, Scott, that we do believe that So it will be certainly, we're looking at a longer term kind of contractual relationship.

Speaker 8

Okay. And then my follow-up is a little on 2024. You gave a few tidbits, but clear you're sticking to the maintenance program. But With some of the potential tailwinds coming into the year that you spoke of based on your more efficient program, I mean, at a high level, that coupled with maybe some service cost savings. Can you give us a sense of how in general you're thinking about that CapEx budget Relative to the 1, I guess, 195 you're targeting this year?

Speaker 1

Yes. Well, of course, it's a bit early To start forecasting into 2024, but let me first of all just share a few thoughts. The case to be for us remains a maintenance Oil production level, that means we're going to be back targeting kind of that notional 190,000 barrels of Oil per day. So no real surprises there. And in fact, even at a capital allocation level, I wouldn't expect a sea change in terms of the mix Amongst even our assets as we look ahead to 2024.

Speaker 1

I do believe and I think Mike hit upon this in the Comments that market trends continue to, I think, give us an opportunity to see some downward pressure In pricing, I think we're well positioned to take advantage of that in the second half of the year. But I think from a materiality standpoint, Those deflationary impacts are really not going to take root until 2024. Now, that's all going to be subject to The market kind of staying where it is. I mean, on the service side, it continues to be a supply demand market for them as well. So, Do you see an encouraging trend there?

Speaker 1

Yes. Am I going to give you a quantification of that right now? It's just a bit too early to go there.

Speaker 5

Thanks.

Operator

The next question comes from Neal Dingmann of Truist Securities. Please go ahead.

Speaker 9

My question is on the D and C specifically. It's like a number of your peers continue to sort of push the limits and see the benefits of going to larger Well, such as the 3 milers and talking about the upsides that they see on returns from this versus the 2 milers in 1. I'm just wondering, do you all agree With this assessment and if so, what type of opportunities in your place do you have for this?

Speaker 4

Yes, Neal, it's Mike. Yes, I definitely agree with that assessment. It's been a focus area for I think it started predominantly with Permian asset, we progressed from a lot of single mile laterals there. Teams have done an incredible amount of work over the last We've actually traded close to 5,000 acres over the last couple of years. And that's allowed us to develop this inventory of 10 years plus We've now expanded that approach.

Speaker 4

We're having a look at potential And the Eagle Ford in the Bakken, what I'd say, Permian is probably still the basin that I think presents the most opportunity for us. But I mean as we included in the deck, we've got some opportunities that we just brought online in So it's a county and this quarter in Eagle Ford. I expect more of that. I mentioned that earlier in the response to Arun. I expect More of those types of wells coming into the portfolio next year and potentially even 25, having a look in Bakken, it's probably a bit more of a limited Trinity set there, but nevertheless the team are looking at and even Oklahoma, we're drilling 3 mile Springer well at the moment has been drilled under the JV that we've got there.

Speaker 4

But if that proves successful, that could open up a few more pads as well for us and oily It's also in Oklahoma, which is always helpful. So I'd characterize it by yes, we're definitely seeing the uplift and it's something that the teams are actively progressing.

Speaker 9

Very good. That's great to hear. And then

Speaker 10

my second question just on sort

Speaker 9

of the regional oil production. I know you guys don't Specifically guide on each of the regions, but there's definitely continues to be a pretty nice notably pickup in the Bakken. And I'm just wondering, I guess, almost Simultaneously, it seemed like the perm fell a little bit more than we were anticipating. I'm just wondering for each of those, is there anything to read into that? Or is it just more timing Of the D and C plan?

Speaker 4

I think in Bakken, you're seeing the benefit strong execution there In the Q2, you've seen the benefits and read through into volumes. I think that would translate into the Q3 As well. And Permian, as Lee mentioned, we've had 3 or 4 quarters growing volumes there, but a bit of out seen some outperformance there, a little bit of underperformance This quarter, but again, as we mentioned, 2 contributing factors there. We had a few prolific base wells go down that we had to work over. And that was simply that was transitions ESPs, the gas lift.

Speaker 4

So just it was more of a timing thing there. We do plan for a bit of that in any given But we just saw a few more wells coming out of normal and then it was just some tie ins that were a little bit late on the gas side for the new 5 well pad that Brought on there. So no nothing concerning. And again, as we mentioned, we're back on track early in Q3 So, yes, no concerns there.

Speaker 9

That's great details. Thanks, Mike.

Operator

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

Speaker 3

Thanks. Good morning, everyone. Thanks for having me on. Dan, I wonder if I could just pick up on the cash tax commentary on the slide deck. It's obviously been a moving piece for you guys Given the AMT, but can you if I look at Slide 18, can you give us an idea what that free cash flow delta would look like at different decks On when you expect to transition to cash tax to full cash tax?

Speaker 5

Yes. I may Maybe not quantify it

Speaker 4

specifically, but let me just tell you

Speaker 5

what's happening. So we have In a non AMT world, sufficient tax attributes not to be taxable, U. S. Federal income tax taxable until late 2025. When this new rule, the Inflation Reduction Act and the AMT that came in with it Imposed paying a 15% alternative minimum tax if you're not paying taxes, If you meet certain criteria, the primary criteria is, if your 3 year average pretax book income was $1,000,000,000 or more.

Speaker 5

In 2023, we are not we're below that $1,000,000,000 threshold. In 2024, we expect There was a big loss here, a pandemic loss here in the current 3 year average number that will roll off when we get to 2024. So we expect we're going to be AMT taxable at a 15% rate starting in 2024 And we expect actually to continue at that rate for about a decade. In the background, the conventional NOLs and Tax attributes will be converted to AMT credits. And so we'll end up sort of capping our tax 15% in the U.

Speaker 5

S. For that period of time. That 15% will only apply to U. S. Income, we pay a 25% rate in ET and that generates its own foreign tax credit, so it won't get delegated by the AMT Tax rate as well.

Speaker 5

So hopefully that you can apply that kind of math to any price outcome you're looking at and

Speaker 3

I know it's a complicated issue, Dan. Thanks for running through that. I guess my follow-up Lee is we haven't really heard a lot about REX recently. I wonder if you could just give us your updated thoughts on Thinking on portfolio developments and maybe set it alongside how you see the M and A landscape for Marathon after the that terrific deal you did in

Speaker 1

Yes. Well, let me start and I may ask for some support from Pat as Well, on the portfolio development side, we really look at this kind of as a multi element When we talk about resource replenishment, inventory replenishment, on one end of the spectrum, you have Large acquisitions like the Ensign acquisition, which as you stated was a tremendous win for our shareholder. I think the other avenue that we have are smaller bolt ons and trades. And I think Mike actually mentioned that some of the trade work in the And then you have, I would say, our internal kind of self help, which is Can be some of the redevelopment activities, but also the REX program as well. And so we look across All those dimensions, we talk about resource replenishment and how do we continue to build the resource base.

Speaker 1

Since we are An extractive industry, we have to stay on top of that. So maybe I'll let Pat talk a little bit about Our program particularly may be focused on the Texas Delaware program and how that's now kind of progressed from what we would have originally called the REX program, now more into

Speaker 11

Good morning, Doug. This is Pat. As we said, our primary project within REx has been this Texas Delaware oil We have now fully integrated that into our Permian asset team. So it's no longer categorized as REX. And we talked a little bit about it last quarter.

Speaker 11

We brought on a 4 well pad this year doing a down spacing test. That pad has Performed exactly as we expected it to. We'll drill another pad in 2024 coming up that we'll bring online in 2020 We're committed to now a development approach that is 4 by 4, 4 in the Merabag, 4 in the Woodford 10,000 foot lateral length is kind of our development plan to beat going forward. The good news in this Recent pat as well was we still are not seeing any communication between the Meramec and the Woodford, so we can definitely co develop those 2 zones. Our real work now is to try to drive our D and C cost down as low as possible.

Speaker 11

I've got a lot of experience in Oklahoma These two formations that we're trying to replicate here in this project. So we'll just continue to mature this project and it's part of the Kind of the development portfolio now moving

Speaker 4

forward. Yes.

Speaker 1

Thank you.

Speaker 3

Appreciate the answers guys. Thanks. Gordon Lee?

Speaker 1

Yes, sorry, Doug. I was just going to say, I think it's we're really now focused for this Woodford Meramec play, really looking at how do we get up the learning curve to get D and C cost down as low as practical. So it really has moved more into a development project that has to And that's exactly what we want to see as an output from the REX program is moving that stuff into development mode. I did want to come back to your question too just around M and A though real quickly. I think you mentioned, of course, the very successful Ensign acquisition.

Speaker 1

If anything, Doug,

Speaker 2

I would say that actually raised the

Speaker 1

bar. If anything, Doug, I would say that actually raised the bar for us from an M and A perspective. And We're not going to compromise, obviously, on our criteria along those lines. I mean, we would be making sure that something is Absolutely accretive. From a financial metric standpoint, it would have to be accretive.

Speaker 1

From a return of capital standpoint, It would have to be accretive to our overall sustainability, meaning inventory kind of resource life accretive. There would have to be industrial logic there, Meaning it needs to be in one of the basins where we have high execution confidence. And then finally, we wouldn't want to do anything that would damage the financial flexibility and the balance That's a very tough filter. And I will tell you today as we look into the market, We just don't see anything today that really hits all of that criteria and that's what we saw in Ensign. It really did Check all of the boxes and that's why I think that's been such a successful addition to our portfolio.

Speaker 3

Pardon the clarification question Lee. With

Speaker 5

the permit

Speaker 3

the Permian oil play included in your inventory, what would you say the inventory life is now

Speaker 4

in the Permian? I'll leave it there. Thank you.

Speaker 1

We would probably say today based on Pat, kind of doing a nominal 4x4 spacing, recognizing obviously that there Some variability across the play, but it's generally a contiguous 55,000 acre position. So, we're thinking several 100 locations right now, And we'll get more specific on that as we get up that learning curve on D and C and can really integrate it in with the rest of our enterprise level inventory.

Speaker 4

Thanks guys.

Speaker 1

Appreciate it. Thank you, Doug.

Operator

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

Speaker 12

Good morning, all. Just a follow-up around the shift in the Till count for the year. We noticed that the Oklahoma assets saw a slight Downshifts in your expected TILs under the JV. I was curious if that was operationally driven or if just given the low commodity prices, Some of those wells are sliding into 2024. And more broadly speaking, how do you think about the return profile in Oklahoma relative to the rest of the portfolio?

Speaker 11

Yes, this is Pat. This is Matt. Just a little bit on the JV in Oklahoma. That's a very targeted Program and we're getting close to finishing that up. It's just really been focused around lease retention there using somebody else's Capital to try to maintain our lease program.

Speaker 11

There are some other strategic advantages including keeping an active crew working there.

Speaker 1

Chris, I don't think

Speaker 11

you have anything else to add there.

Speaker 4

No, I don't think there's anything. I mean, we think we guided 15 to 20 Well, I was there earlier, Matt. I think we just think we're going to be at the low end of the range. I don't think there's anything to read through into that.

Speaker 12

Perfect. And then maybe just a follow-up on JVs across your asset base. I know you have a couple at this Point that are for lease retention purposes. Given the strengthening crude market and what could be Better environment for gas and NGLs as we head into 2025. How's the company's And developing those on your own going forward.

Speaker 11

And this is Pat again. I think what our approach On JVs to date is to keep them very small and targeted to achieve certain strategic objectives. We're not doing large multiyear operated programs. We're just trying to satisfy lease commitments or protect operatorship, Things like that. So we'll continue to view them through that lens.

Speaker 11

And as we see an opportunity to do that, We will go ahead and do very small ones. Most of the inventory that we consume in these JVs is not our top tier inventory. You bet. And we will go ahead and drill that. But if there's lesser quality inventory that doesn't keep compete for capital in the current Next few years and we need to execute on it to retain a lease and we'll bring in a JV partner to help us do that.

Speaker 10

Thank you.

Operator

The next question comes from Paul Cheng of Scotiabank. Please go ahead.

Speaker 10

Thank you. Good morning. I have to apologize first that I joined Lee, so my question already been addressed. Please let me know, I will look at the transcript. Lee, just curious that some of your competitor is talking about the refrac and redevelopment opportunity in Eagle Ford.

Speaker 10

Have you guys do a more detailed analysis on that? I assume that currently your Inventory backlog that you mentioned, the 10 to 12 year, that's not including that. So if we're including those that, how big is that Opportunity for you and what kind of oil and gas price you need in order for those that to be economic? That's the first question.

Speaker 1

Yes. Paul, let me take a first pass at this and I'll maybe let Mike fill in some details. First of all, in terms of inventory, we do not put Refracts into our inventory. So when we talk about inventory life, these are primary development opportunities, new drill wells, If you will. We've had a lot of experience in the Eagle Ford with refrac and redevelopment.

Speaker 1

It continues to be An area that we pursue, but again, because we have so many primary recovery opportunities there, We usually do them when they're synergied with nearby new development work. But maybe I'll let Mike just throw in his $0.02 as well.

Speaker 4

Yes, Paul, no, you hit the nail on the head there. I mean, our approach with refracs is, Yes. We're pulling together our planned development. We're looking at our primary infill. We'll have a look at the section and we'll determine then the teams will determine then is there Potential refrac candidates in the section.

Speaker 4

And quite frankly, those opportunities have to compete for capital on a heads up basis With all the other opportunities, so rest assured that we're doing refracs. They are profitable and they are competing with infill opportunities. I mean to give you a kind of idea for the scale in any given year, I think we're probably doing less. We're probably in the 10 to 15 refracs this year and That's kind of how we think about it. It's not a targeted program, but we will go and do a bunch of refracs.

Speaker 4

Exactly to Lee's I think we've got enough primary infill opportunities that we just don't need to do that. Yes. I think we've probably answered most of your questions there. The pricing, they've got to compete on a heads up basis with All of the other capital that we're deploying.

Speaker 1

Yes. The other maybe item I would point out, Paul, as well as maybe just reflecting back on the Ensign conversation that we were having. In that acquisition, we placed no value on refrac and redevelopment We base the value really on PDP and the full 600 plus new primary recovery kind of Opportunities that existed there. So as you recall from the acquisition, there were 700 existing wells, many of which, Most of which were completed back in time, right? And so, you've got a lot of early generation completion technology out there.

Speaker 1

We haven't had a chance yet to quantify that because the primary opportunities with Ensign are so attractive. They're a little bit further down our priority list, but we We expect in the balance of time to continue not only in the legacy area of Eagle Ford, but also in the inside area of Eagle Ford So look at refrac and redevelopment opportunities going forward. But again, it's just a question of prioritizing them within the capital allocation.

Speaker 10

Thank you. The second question is want to go back into the YiJi commercial renegotiation on the Post 2023, Lee, is it necessary for you that to have 100% of the war name Under long term contract or from a portfolio management standpoint, better off for you to Serve a fairly sizable amount on the spot market so that you can take opportunity of the trading Maybe arbitrage opportunities. And also that I know you already have a large exposure Starting next year on the international gas market, but does it make sense for you to further diversify Your maybe that when we argue that it's financial engineering on your U. S. Natural Gas exposure to also link to the international market by signing some supine agreement that with the U.

Speaker 10

S. Gulf Coal LNG operator, I know some of your peers have done.

Speaker 11

Hi, Paul. This is Pat. I'll take that. Maybe I'll start with Second question first on U. S.

Speaker 11

Gas linkage to LNG. I mean, we're always exploring ways to maximize our realizations. Well, we are heavily exposed in EG to the global and GE market. So there's nothing even in the U. S.

Speaker 4

You have to have a

Speaker 11

This came out of gas volume to do that in the U. S. And we just haven't focused on that and don't see us doing that in the near future. In terms of ET, we will commit to a certain level of volumes through a long term contract. We will have some terms in there that I don't want to get into too much detail that we'll have how we handle extra volumes, but I expect that will have capacity above that and sold into the spot market as we progress.

Speaker 11

That's a lot of those details are still to come and it depends on the

Speaker 10

Pat, can I just want to clarify that from a company Intention, what will be the ideal mix for the YiJi contract? Do you have a number in my 70% logged in on contract and 30% spot or something bigger, something smaller, any number that you can share?

Speaker 11

No, I don't have any specifics to share with you, but I would think the bulk of the contract will be fixed.

Speaker 10

Okay, we do. Thank you.

Speaker 4

Seeing

Operator

that there are no further questions at this time, I would like to turn the call Back over to Lee Tillman for closing remarks.

Speaker 1

Thank you for your interest in Marathon Oil and I'd like to close by again thanking all Our dedicated employees and contractors for their commitment to safely and responsibly deliver the energy the world needs now more than ever. Cannot be prouder of what they achieve each and every day. Thank you and that concludes our call.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Marathon Oil Q2 2023
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