Marathon Oil Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 13 speakers on the call.

Operator

Good day, and welcome to the Marathon Oil First Quarter 2024 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 very much, Danielle, and thank you as well to everyone for joining us on our call this morning. Yesterday, after the close, we issued a press release, a slide presentation and investor packet that address our Q1 2024 results. Those documents should be found on our website at marathonoil.com. Joining me on today's call are Lee Tillman, our Chairman, President and CEO Dane Whitehead, who as of yesterday is now our advisor to the CEO Dane's successor is our EVP and CFO also yesterday, Rob White. Welcome, Rob.

Speaker 1

Pat Wagner, 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. I'll refer everyone to the cautionary language included in the press release and presentation materials as well as to the risk factors described in our SEC filings. We'll also reference certain non GAAP terms in today's discussion, which have been reconciled and defined in our earnings materials. So with that, I'll turn the

Speaker 2

call over to Lee and the rest of

Speaker 1

the team will provide prepared remarks. After the completion of their remarks, we'll move to a question and answer session. And in the

Speaker 2

interest of time, we have

Speaker 1

a lot to cover today, so we ask that you all limit yourselves to one question

Speaker 2

and a follow-up. Lee? Thank you, Guy, and good morning to everyone joining us on the call. I want to start by again extending my heartfelt thanks to our employees and contractors. We built a track record of execution excellence that is differentiated in our peer space and the S and P 500, a track record that now spans multiple years through the ups and downs of the commodity cycle.

Speaker 2

Such execution is only made possible through the hard work and dedication of our talented people, who through it all remain committed to our core values, including safety and environmental excellence. Now turning to Q1 results. We have a lot to cover today. I'll start with 3 key takeaways. 1st, Q1 was another strong financial and operational quarter.

Speaker 2

We executed our plan and we built on our multiyear track record of sustainable free cash flow generation, meaningful return of capital to shareholders and strong capital and operating efficiency. More specifically, we returned 41% or $350,000,000 of our cash flow from operations back to our investors. Consistent with our cash flow driven return of capital framework that provides our investors with the first call on capital. Oil production of 181,000 barrels of oil per day was just above our guidance and free cash flow generation was solid despite not receiving any EG Cash distributions from equity affiliates. This is purely due to timing and we expect to receive a catch up in EG Cash distributions during Q2.

Speaker 2

Importantly and similar to last year, Q1 marked the trough for both our oil production and free cash flow generation for 2024. Free cash flow momentum should build significantly as the year progresses starting with the Q2. This is driven by several factors, including the expected catch up in EG cash distributions, a significant increase to our oil production, especially into the second and third quarters and a moderating capital spending profile over the second half of the year consistent with the phasing of our capital program. My second key takeaway this morning, we continue to make important strides to organically enhance our asset base, making Marathon Oil a stronger, more resilient and more sustainable company. Specifically, we're improving our capital efficiency through extended lateral drilling.

Speaker 2

About 25% of our Q1 wells to sales were 3 mile laterals spread across the Permian, Bakken and Eagle Ford. Execution on this program was excellent, including a record pad in the Permian Basin. We continue to bolster the strength of our asset base through refracs and redevelopment, disclosing approximately 600 opportunities across the Bakken and Eagle Ford. These opportunities are complementary and additive to our company's decade plus of primary development inventory life and have been derisked through multiple years of technical work by our teams and actual results generated in the field. Notably, 30% of these opportunities are concentrated in the acquired inside acreage, an upside to our acquisition basis.

Speaker 2

And we continue to progress the EG Gas Mega Hub, a key competitive differentiator for our company. During Q1, we realized the long awaited shift to global LNG pricing for our Alba LNG. We started optimizing our integrated gas operations by diverting a portion of our Alba gas away from methanol production and towards higher margin LNG cells. And we sanctioned a high confidence, low execution risk Alba infill program that offers risk adjusted full cycle returns that are competitive with our U. S.

Speaker 2

Onshore portfolio. So not only are we realizing improved financial performance this year on the back of our shift to global LNG price realization, but we believe this improvement is sustainable due to all the great work our teams continue to do to advance the EG Mega Hub concept. My third and final key takeaway this morning. We remain fully on track to deliver a 2024 business plan that once again benchmarks at the top of the E and P sector on the metrics that I believe matter most: free cash flow generation, capital efficiency and shareholder returns. This is demonstrated by the strength of our Q1 execution supporting no changes to our annual guidance.

Speaker 2

This data is comprehensively summarized on Slides 89 of our deck and is a compelling endorsement of our value proposition in the marketplace. No peer offers such comprehensive top quartile performance across this powerful combination of metrics. More specifically, we're expecting $2,200,000,000 of free cash flow generation this year, equivalent to a mid teens free cash flow yield. We'll stay true to our CFO driven return of capital framework and expect to again return at least 40% of our CFO back to investors through the combination of our base dividend and material share repurchases, providing visibility to both a double digit distribution yield and significant growth in 1st year metrics. We'll keep improving our capital efficiency, delivering flat year on year total oil production with fewer net wells to sales.

Speaker 2

And perhaps most importantly, we believe all these results are sustainable. That's true for our U. S. Multi basin portfolio and that's true for our integrated gas business and EG. Before I close my introductory remarks, I'd be remiss if I didn't use this time to recognize Dane Whitehead and his contributions to Marathon Oil as our Executive VP and CFO over the last 7 years.

Speaker 2

Under Dane's watch, we've established a truly differentiated track record of sustainable free cash flow generation and return of capital to our shareholders underpinned by an investment grade balance sheet. Dane's contributions to this success have been invaluable. But more than that, he's led his organization with the utmost integrity and humility. Dane, on behalf of the entire organization, thank you and you'll be missed.

Speaker 3

Lee, thank you for those kind words. I really appreciate it. The past 7 years at Marathon Oil has certainly been the highlight in my 40 year career. Working with you, our executive leadership team in Ford and with all of our talented employees and in forums like this with our analysts and investors. Rob and I have been working very closely together in recent months and that will continue for a while as we ensure a seamless transition.

Speaker 3

Rob has been with the company for more than 30 years and I have all the confidence in the world in his leadership. With that, I'll pass the CFO torch to Rob, who will be handling our prepared commentary today on our financial performance and return on capital initiatives. Rob, welcome to the show.

Speaker 4

Thanks, Dane. As Lee mentioned, under Dane's leadership, our company has built a track record of providing a truly compelling shareholder return proposition, while at the same time continuing to enhance our investment grade balance sheet. You can expect more of the same going forward with continuity in our long held capital allocation framework and conservative financial policies. I'll now walk through a few key highlights regarding our Q1 performance and reiterate our key financial priorities for this year. 1st quarter cash flow and free cash flow generation were solid and consistent with our plan despite not receiving any EG Equity Affiliate Cash distributions in the quarter.

Speaker 4

As Lee mentioned, this is purely a timing issue. For the full year, we expect total EG Cash distributions to approximate our annual equity earnings starting with catch up payments during 2Q. The EG catch up distributions during the Q2 will contribute to an overall significant improvement in our free cash flow momentum as 2024 progress. This is driven primarily by a significant production increase, especially in the second and third quarters and a moderation of our capital spending starting in Q3 given the front half weighted nature of our capital program. Turning now to our key financial priorities for this year.

Speaker 4

Priority 1 is clear, continuing to return at least 40% of our cash flow from operations to shareholders, consistent with our return of capital framework, which represents one of the strongest shareholder return commitments in our peer space and across the entire S and P 500. For 2024, our minimum 40 percent commitment translates to $1,700,000,000 of total distributions to shareholders at $80 per barrel WTI price deck, providing our investors visibility to double digit shareholder distribution yield, a truly compelling shareholder return proposition. During 1Q, we returned $350,000,000 or 41 percent of CFO to shareholders. We believe our commitment to shareholder returns and the consistency and transparency of our approach have positively differentiated our company. Over the trailing 10 quarters, we now returned $5,800,000,000 to equity holders, including $5,200,000,000 of share repurchases, reducing our outstanding share count by 29% and contributing to peer leading growth in our per share metrics.

Speaker 4

We continue to see share repurchases as the preferred return vehicle with our stock trading at a free cash flow yield in the mid teens. Repurchases remain value accretive, are a very efficient means to continue driving per share growth and are highly synergistic with sustainable base dividend growth. Regarding the base dividend, as we've messaged before, our focus remains on competitiveness and sustainability. Given the ongoing benefits of our material share repurchase program, as well as the interest expense savings from our gross debt reduction initiatives, we see clear potential for further base dividend growth while protecting the lowest enterprise free cash flow breakeven in the peer group. After meeting our shareholder return commitment, our 2nd priority this year remains continued enhancement of our investment grade balance sheet through gross debt reduction.

Speaker 4

Last year, we returned meaningful capital to shareholders and also reduced our gross debt by $500,000,000 My expectation is that you'll see more of the same from us in 2024. During Q1, we strengthened our financial flexibility by completing a $1,200,000,000 offering of 5 10 year bonds. Investor demand was strong at greater than 7 times oversubscribed, which enabled us to achieve a timely and competitive weighted average interest rate of 5.5%. Proceeds from the proceeds from the offering were used to repay the remaining balance on our variable rate term loan facility in its entirety, which in turn delivers $20,000,000 of annual interest savings. With the term loan facility paid off, our focus now turns to the $400,000,000 of tax exempt bonds that are due in July.

Speaker 4

As a reminder, this is a very unique vehicle in our capital structure with advantaged interest rates relative to taxable debt instruments. As such, we will likely remarket those bonds as we've done previously. As the bottom right graphic on Slide 11 of our deck shows, after having paid off terms of the term loan, we have minimal bond maturities over the next 5 years. We do, however, retain the ability to efficiently delever down to our medium term gross debt objective of $4,000,000,000 which would make our current debt to EBITDA of 1 times at strip durable down to a more conservative $50 to $60 WTI pricing environment. To be clear, our balance sheet is in great shape and provides us with tremendous financial flexibility, including $2,200,000,000 of liquidity at quarter end.

Speaker 4

Our top priority remains consistently meeting our 40% of CFO shareholder return commitment, but we are also committed to reducing debt over the medium term down to our $4,000,000,000 gross debt objective. We can do both. With that, I'll turn the call over to Mike to walk through the operational highlights. Thanks, Rob.

Speaker 5

With strong Q1 execution consistent with our plan, we've made no changes to our annual guidance and remain fully on track to deliver a 2024 program. But once again benchmarks at the top of our sector on metrics that we believe matter most. Combination of free cash flow generation, capital efficiency and shareholder returns. During the Q1, oil production of 181,000 barrels of oil per day was slightly better than our guidance, while capital expenditures of $603,000,000 were in Lush. It's been a very strong start to the year for our asset teams.

Speaker 5

That's especially true in the Eagle Ford as our Q1 drilling rate of penetration was among the best it's been in the last 5 years. 1st quarter Eagle Ford completion efficiencies also continued to improve. And in the Bakken, despite the challenging winter weather, we held on to the same execution efficiencies on both the drilling and completion side that we were delivering during the second half of last year, a trend which bodes very well for execution in future quarters. Referencing Slide 14 of our deck, I'd like to highlight the performance of our Permian team. First quarter was another excellent execution quarter marked by significant production growth.

Speaker 5

The primary driver of the production increase was our growth well outperformance. 3 Upper Wolfcamp wells in core Red Hills with all at 100% working interest are significantly outperforming Pikesville, realizing early well productivity almost 4 times that of the average Delaware Basin well. But this isn't just about 1 pad or 1 quarter of performance. Our Permian team has now built up a clear track record of execution success. For all wells brought online since 2022, our Permian program has delivered among the best results of any Delaware Basin operator for oil productivity per foot.

Speaker 5

And the team has done so with very competitive drilling and completion execution, now almost exclusively bringing online 2 mile plus laterals. Additionally, after taking a 2 year break in the Permian during the 2020 pandemic, we now have one of the more likely developed acreage positions in the play with over 2 decades of high quality drilling inventory at current activity levels. We're allocating more capital to Permian and the asset will continue to be a growth driver for us. But we'll continue to increase our capital investment at a disciplined pace with an eye on maintaining our execution excellence. With this exceptionally strong start across our U.

Speaker 5

S. Asset base, our annual guidance midpoints for both production and capital expenditures remain unchanged. And my confidence in delivering on our full year guidance commitments is high. Consistent with our initial outlook, we expect our 2024 capital program to be heavily weighted for the first half of the year, similar to the profile we've seen from us before. Driven by realized execution efficiencies, we're pulling forward some of our activity.

Speaker 5

This should result in a slight increase to both our expected capital spending and our oil production during Q2 versus our original assumptions. We now expect our capital spending to be just over 60 percent weighted for the first half of the year, which will drive a significant sequential increase in 2nd quarter oil production, up to the midpoint of our annual guidance range 190,000 barrels of oil

Speaker 4

per day.

Speaker 5

In addition to delivering on our guidance commitments, Phelps remained focused on continuing to enhance our capital efficiency and the strength of our underlying asset base through both the application of extended laterals and other organic enhancement initiatives summarized in more detail on Slide 13 of our deck. Extended laterals remain a compelling opportunity to continue enhancing our capital efficiency. At a high level, we're expecting significantly lower total well cost per foot, yet similar EUR per foot, and thus better returns and higher per well NPV in comparison to shorter landfills. And that's exactly what our initial cohort of 12 3 milers during Q1, representing 25% of our total well set is delivering. Execution on the cost front is a clear positive, as we're consistently realizing well cost savings on a per foot basis of more than 20% versus comparable 2 mile laterals.

Speaker 5

While early time production in the Bakken and Eagle Ford has been consistent with our expectations, Our first three mile pad in the Permian Basin, as previously mentioned, has dramatically outperformed. It's shaping up to be one of the strongest pads in basin history. In addition to extending laterals, we also continue to further bolster the strength of our asset base through refracs and redevelopment. More specifically, we're disclosing 600 high quality refrac and redevelopment opportunities across the Bakken and Eagle Ford. Approximately 30% of these opportunities are concentrated in our Ensign acreage in the Eagle Ford, representing upside to our acquisition bases.

Speaker 5

These refrac and redevelopment opportunities are complementary and additive to our decade plus primary drilling inventory at the total company level. They've been derisked through multiple years of technical work, numerous trials over the last 5 plus years and a recent track record of very strong bottom line results. Importantly, we progressed this opportunity set with tremendous discipline and intentionality. Re dev and refrac testing has been a key part of what we've long described as our organic enhancement program, which typically comprises 5% to 10% of our total capital budget for a given year. This is capital dedicated to enhancing the returns and resource recovery of our existing asset base through targeted testing of the best concepts the asset teams bring forward each year.

Speaker 5

For redebs and refracs, we've specifically identified potentially stranded resource from early vintage completions that we can economically access through integration into our primary plan of development. In total, we brought online over 100 refracs and 58 redevelopment wells across the Bakken and Eagle Ford to date. So we've compiled a rich technical data set and amassed a deep operational understanding. All 600 of future opportunities we are disclosing are strongly economic at prevailing commodity prices and about half of the 600 we believe are directly competitive with the Tier 1 primary development inventory industry is drilling today. More recently, we've been bringing on around 20 or so of these opportunities per year.

Speaker 5

This year, we're expecting to bring online just over 25. Again, this can account for around 10% of our activity in the Bakken and the Eagle Ford. In terms of our development approach, for the most part, we aren't doing refracs or redevelopment as part of separate standalone program. Rather these opportunities are mostly integrated into our primary plan of development, typically directly offsetting our primary activity with the goal of maximizing the capital efficiency, financial returns of our overall program. Recent results have been very strong, proving out the economic attractiveness of these opportunities, supporting the disclosure we're now providing.

Speaker 5

In the Bakken, our opportunity set is more heavily weighted to refracs, where we've had good success. Over the last couple of years, our refrac program has delivered 6 month oil productivity per foot that is per per foot more than 20% below the industry average for a new drill well. Again, most of our Bakken refracs have not been standalone, rather the offset new development wells. This has had the added benefit of improving the productivity of direct offset middle Bakken wells by around 10%. In the Eagle Ford, our opportunity set is a bit more balanced, split roughly 55% to refracs and 45% to redevelopment.

Speaker 5

Over the last couple of years, our refrac and redevelopment productivity has actually been better than the base and average for industry new drills. In fact, it's been closer to top quartile. With our refracs, we realized the same positive impact to offset wells that we've seen in the Bakken. To summarize, at approximately 10% of our activity in the Bakken and Eagle Ford, our refrac and redevelopment programs aren't primary drivers for capital spend in those businesses. But they still represent a very valuable opportunity set that is positively contributing to our bottom line results and extending effective inventory life.

Speaker 5

And they're a great example of our ability to extract the most value possible out of our existing high quality resource base. I'll now turn the call back to Lee, who will wrap up with an EG update and some closing thoughts.

Speaker 2

Thank you, Mike. Shifting to our EG operations on Slide 15. With the expiration of our legacy Henry Hub linked LNG contract at the end of last year, Q1 marked the transition to fully realizing global LNG pricing for AlbaGas. Under the new contractual agreements effective this year, we began marketing our own share of Alva LNG directly into the global LNG market. During 1st quarter, these LNG sales at a $7.21 per Mcf realization drove a significant increase to the international revenue within our consolidated financials.

Speaker 2

In comparison to previous years, when our EG income was dominated by equity affiliates, of our EG profitability will accrue to the upstream through our Alba LNG sales and will therefore be consolidated in our financial statements. These reporting changes should all result in improved transparency into the underlying operations of our Integrated Gas business in EG. We see no change to our 2024 guidance as we continue to expect $550,000,000 to $600,000,000 of total EG EBITDAX this year, assuming $10 TTF. That's a significant increase from our actual 2023 EBITDAX generation of $309,000,000 Importantly, we don't expect this to be a 1 year financial uplift. For some time, we've been focused on sustaining this improved financial performance by progressing all elements of the EG gas mega hub concept.

Speaker 2

The 5 year EG EBITDAX outlook we provided last quarter demonstrates the sustainability of our EG cash flow generation. You'll recall the strength of our multiyear outlook is driven by a number of additional factors beyond realizing global LNG pricing. Ongoing methanol volume optimization, which started during Q1 our Alba infill program, which we just sanctioned and further monetization of third party gas through the ethane gas cap. A few more details on our just sanctioned Alba infill program. This is a high confidence, low execution risk, shorter cycle project with returns that are competitive with our high quality U.

Speaker 2

S. Onshore reinvestment opportunities. We successfully contracted a rig within the region and expect a first half of twenty twenty five spud with first gas from both wells expected during the second half of the year. These wells will largely mitigate Alba Bay's decline contributing to a flat production profile from full year 2024 to full year 2026. Our 2024 capital spending for this program is limited, but fully accounted for in the capital spending guidance we provided to market in February.

Speaker 2

We expect 2025 capital for the program to be about $100,000,000 We covered a lot of ground today, all great stuff and all intended to further our more S and P mandate. Consistent with that mandate, for the last 3 plus years, we've been delivering financial performance highly competitive with the most attractive I fully expect 2024 to build on this track record and we're off to a great start. Our compelling investment case is simple. A high quality multi basin U. S.

Speaker 2

Portfolio and integrated global gas business that delivers pure leading free cash flow, a unique and differentiated return on capital framework that provides our shareholders with the first call on cash flow. The output of which is clear visibility to compelling shareholder distributions across a broad range of commodity prices and sector leading growth and per share metrics and a multiyear track record of consistent execution and proven discipline. And perhaps most importantly, everything we're doing is sustainable with resilience through the commodity cycle. This is due to the quality and depth of our U. S.

Speaker 2

Multi basin portfolio, where we have over a decade of high return inventory and a disciplined and multifaceted approach to portfolio renewal, including organic enhancement initiatives. It's also due to our differentiated integrated gas business that's now fully realizing global LNG pricing as we continue to progress all elements of the regional gas mega hub concept. Rest assured our commitment to our strategy is unwavering and is built upon our core values, resilience across the commodity cycle and our long term track record of success. With that, we can open up the lines for Q and A.

Operator

We will now begin the question and answer session.

Speaker 5

The

Operator

next question the first question comes from Scott Hanold from RBC. Please go ahead.

Speaker 6

Yes. Hey, thanks. Mike, you spent a lot of time kind of going through the refracs and talking about that a lot. Obviously, it seems like it's going to be it has been an initiative, but it's got a little bit more prominence. But could you sort of dumb some of the sort of the economic and productive parameters down for us?

Speaker 6

Like what would a typical Bakken and then a typical Eagle Ford well be producing when you'd contemplate a refrac? And what would that bounce to after that? And could you just give us a sense of the cost associated with it?

Speaker 5

Yes. Let me start with the cost, Scott. So I mean typically when you look at these refracs, I mean refracs, we got a deeper history in the Bakken than the Eagle Ford necessarily. But when you look at the costs, we're kind of thinking about it. Roughly 80% of our new grassroots well.

Speaker 5

And that's kind of how we'd be thinking about it on a go forward basis. In terms of the well productivity, I think I covered that in some of the prepared comments that we just gave you. The refracs that we're seeing in the Bakken pretty comparable from when we look at some of the new wells that the peers are bringing online. And in Eagle Ford, it's actually a more constructive story where we're seeing the refrac redev wells actually outperforming some of the new wells that are bringing online. In fact, if anything, they're kind of you're looking at kind of top quartile performance there.

Speaker 6

Yes. And I guess maybe the point I was trying to ask is, are these wells like producing like 50 or 100 a day and then they're going to get back to a new well and kind of continue the typical profile that you would see with the new well? I guess that was my specific kind of question.

Speaker 5

Yes. I mean, very similar to Newell, you get that initial production and then you get back on to that pretty regular decline rate that you would expect with the new well.

Speaker 6

Okay. And then my follow-up question is the Permian. Obviously, you guys really stood out this quarter with those Lee County wells. And you talked about having like 2 decades roughly of inventory, but looking to maybe increase that pace. Like where should we think about like Marathon kind of moving the Permian terms of capital allocation as you think about 2025 and beyond?

Speaker 6

Because obviously, 20 years is nice, but optimally, it seems like your investment there should probably increase given your returns and your visibility of inventory.

Speaker 2

Yes. Maybe I'll start, Scott, and let's see if Mike wants to add any additional color. I think we've been very methodical in our approach to the Permian. I think as we stated in the prepared comments, it's probably one of the light more likely developed positions in the basin because we have pace it. I mean, we have fantastic black oil assets right in the bottom of the Eagle Ford that deliver superior top of Tier 1 kind of returns.

Speaker 2

And so it's taken a bit of time for Permian to kind of penetrate into the capital allocation. But based on the results that we've really seen kind of post, I'd say, the pandemic pause, they are now competing. What you've seen is a steady increase in the capital that is flowing into the Permian. And you should expect to see that continue. We don't view it as a it's going to be a step change increase in one given budget cycle, but you should expect to continue to see us drive more investment there.

Speaker 2

As Permian, as you said, it is going to be a growth asset for us as we move into the future. And there's a tremendous amount of potential. And so with no doubt, as that consumption of wells to sales goes up, that 20 plus years of inventory will obviously moderate. But the strength of that inventory is unquestioned and probably at least half of that inventory life, we believe we can ascribe to extended lateral drilling as well. So it's we're very excited about it.

Speaker 2

I mean the Permian team has definitely earned their spot in capital allocation now.

Speaker 5

I think maybe the only other thing I'd chime in is we've been very thoughtful in terms of how we reengage with that asset. And I think I described in my prepared comments, we've been doing things at a very disciplined pace. I mean that's we've done that for a number of reasons. It certainly allows us to mitigate any potential execution risk and moving too quickly. It also provides us the ability to integrate any learnings into what we're doing.

Speaker 5

Maybe the final thing I'll say is when I think about our go forward program in the Permian, I probably characterize this. We've been we have been focused on the Wolfcamp. But as I think about the go forward program, I'd say we're going to be targeting it's going to be proven benches at a very proven well spacing, maybe even slightly conservative well spacing. So I think just to echo Lee's comments about we feel very, very good about the go forward program there.

Speaker 2

Yes. And the last thing I would maybe add, Scott, this is also a great demonstration of the strength of the multi basin portfolio and how we kind of feather these other assets. I mean, today, as you see the dislocation between value between oil and natural gas, obviously, the true black oil areas are very strong, the Eagle Ford and the Bakken. And then you even if you look at some of the realizations coming out of the Permian, which are challenged today on the gas side, very little of our revenue and production is being sourced or being exposed to that today. And again, it just really demonstrates the strength of having a multi basin approach where you can move capital allocation around.

Speaker 7

Thanks for the color. Thanks, Scott.

Operator

The next question comes from Arun Jayaram from JPMorgan. Please go ahead.

Speaker 8

Good morning, team. Mike, I wanted to get a little bit more details on the refrac program. As you know, the buy side has historically been a little reticent to give value for refracs versus call it primary sticks on the map. So you mentioned that you're doing kind of 25 refracs this year. I'd love to get a sense of what kind of MPVs per well do you see in this program versus a primary development?

Speaker 8

And how do you think about value creation potential? You highlighted 600 opportunities across the Bakken and the Eagle Ford.

Speaker 5

Yes. I mean, as I mentioned to Scott in the last call, in terms of volume, we're looking at these Bakken refracs being very comparable to industry new drills. So I think you could hang a number of data around. And then similarly in the Eagle Ford, again, we mentioned that refracs there were probably out competing some of the new drills that industry was bringing on. If anything, they're kind of top quartile.

Speaker 5

So again, I think you could get a number there and you can do the math 600 times that number. It gets you to potential volume uplift.

Speaker 2

Yes. And maybe just to stress, we're not looking at refrac and redevelopments as necessarily displacing primary development opportunities within our portfolio. But when we benchmark them against what others are drilling today, economic wise, they're very, very competitive. But it's going to be Masa Maine is kind of 10% of the Eagle Ford Bakken program. It's not a it's not a major driver necessarily in terms of capital, but it is very high value.

Speaker 2

And that's what I think is very exciting. The other thing that I'll just emphasize is if you rewind back to when we talked about the Ensign acquisition, we were very clear that we ascribed no value in that transaction to refrac and redevelopment. And here and so the importance to think of this think of this disclosure is multifold, not only at an enterprise level, but even zooming in on that acquisition, 30% of these opportunities lie in the Ensign acreage, which is that upside that we referenced when we described that acquisition.

Speaker 5

Okay. Great. Maybe I'll make a final point Arun. When I think about we're doing 10% refracs, re deves every year, I think that talks to the quality of our primary inventory. The fact that we are undertaking the refracs development as part of the overall primary development.

Speaker 5

It's not a standalone program. Again, I think it just talks to the quality that we've got in the existing primary

Speaker 9

portfolio.

Speaker 8

Great. And just my follow-up, I know that some of the accounting in EG will change this year given the change in the marketing agreements. We'll have to spend some time with Guy to go through this in terms of our model. But one of the questions that's come in is, does it impact how you're recognizing cash flow from ops versus CFI? Just wanted to see if there's any changes to how you're how this will impact the reporting of cash flow on a go forward basis.

Speaker 2

I'll maybe hand over here in just a minute to Rob and or Dang. But first of all, I want to be clear, don't let the accounting situation kind of take away from the results in EG. If you look at the bottom line results that we generated this quarter, they were very much in line with the expectations of capturing that global LNG pricing. So we can get into the vagaries of consolidated versus equity accounting, but from a bottom line delivery standpoint, the asset is delivering exactly what we described. Okay.

Speaker 2

So now I'll turn over to the green eye shades here and let them talk a little bit about the accounting piece.

Speaker 4

Hey, Arun, this is Rob. Just a quick point there. I think actually a difference you would see would be a positive difference on the cash flow perspective with more of our business flowing through the consolidated side. It kind of eliminates the timing issue of the dividend. So as we migrated that from the EG LNG EMI earnings over the consolidated side, these LNG liftings, the cash would come in without a dividend process.

Speaker 4

We'll be subject to lifting schedules. So the timing of some of those liftings might put us in under over lift position at the end of any quarter, but would potentially be a positive on dividend timing.

Speaker 8

Great. Dane, I wanted to thank you for all of your counsel and help over the years and glad you had a successful act after EPE, but great work and we'll miss you.

Speaker 3

Thanks Arun. I really appreciate it. Yes, thinking back to the early days of EP Energy, boy, there's been a lot

Speaker 4

of water under the bridge, but it's been a great run here at Marathon and

Speaker 3

really proud of where this company is right now. So thank you

Speaker 4

for all your support.

Speaker 8

Thanks.

Operator

The next question comes from Betty Jiang of Barclays. Please go ahead. Good morning.

Speaker 10

I want to ask about the continued value maximization efforts that we're seeing here at EG Integrated Gas Assets. Lee, perhaps if you could help us think about the value uplift from redirecting the volumes into the methanol plant instead of LNG sales? And basically, is there opportunity to do more of that before that gas contract expires in 2026, I believe?

Speaker 2

Yes. No, thanks for the question, Betty. Yes, I think the overall approach in EG has been very comprehensive. We've always talked about EG in terms of a value proposition that consists of the Alba gas condensate field, but also this world class infrastructure and how we can maximize taking advantage of that. And so we're always looking to drive more opportunity here.

Speaker 2

And you just highlighted one of the very key ones as we look to optimize gas flows within this integrated gas asset. And for where methanol stands today and where obviously uplift to global LNG stands today, it makes a lot of sense to divert a large component of the gas feed into AMCo or the methanol facility into LNG. It's best for our partners. It's also best for the state as well in terms of maximizing revenues. The GSA, the gas sales agreement that we have with the methanol plant runs its course in 2026.

Speaker 2

And obviously, at that point in time, we'll have another strategic decision to make going forward around what is the future of that facility. But again, we would not be subject to that gas sales agreement in 2026. So maximizing flow to EG LNG becomes a real option for us at that stage. Today, you should really think about it as a we're taking advantage of that arbitrage to the extent that we can while also keeping AMCo running in good stead and continuing to meet our marketing obligations on the methanol side.

Speaker 10

Got it. That's clear. Thanks. And then I have another question on the Permian. It's great to see that the 1Q results showcase the strength of the wells that were brought on during the quarter.

Speaker 10

But I'm also wondering how sustainable is this level of productivity that we're seeing in the Permian. Basically, as you start ramping up activities in the basin as the development approach potentially evolve, can we expect to see this level of productivity going forward? Or would there be some level of dilution as you go into full development?

Speaker 5

Benny, it's Mike here. I'll take that question. Yes, I mean, we probably touched on that one a little bit one of the earlier responses. But when I look at the Permian, we talk about over 20 years of inventory at the current drilling pace. When I look at what we're going to be targeting in the future, again, I'd describe it as it's we're going to be targeting proven benches at proven, if not conservative well spacing.

Speaker 5

So when I think about the capital efficiency coming out of that basin, I think it's going to be pretty consistent certainly in the near term. So you should expect more of the same as we potentially look to even ramp up some activity there in the coming years.

Speaker 2

Yes. Ben, I would just reference the fact again that when you look at our acreage position just because of the way we've developed it, it is one of the more lightly developed positions in the peer group, which I think just underpins what Mike says. We've got a lot of running room there with very high quality inventory, a big chunk of which will still be subject to extended lateral drilling as well.

Speaker 10

Great to see. Thank you.

Operator

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

Speaker 9

Good morning, guys. Thanks for your time. Lee, my first question is on capital allocation specifically. I was hoping maybe you could just maybe give a broad comment on how you view the current value of your stock versus what you're seeing out there for potential assets in the market. I'm just wondering, I mean, I love how you continue to sort of dig in and keep repurchasing those shares.

Speaker 9

And I'm just wondering if that's still because of your view on the valuation versus where some of this external assets are at?

Speaker 2

Okay. Well, certainly, as you look at the efficiency of a share repurchase program, when you quickly go to the free cash flow yield that you're generating. And being strongly and double digit yields there, it still makes a lot of sense to see any discretionary cash flow above and beyond our base dividend flowing to that vehicle. I mean, I think as we said in the opening remarks that, that still is our preferred vehicle, the combination of a competitive and sustainable based dividend as well as ratable share repurchases. We still believe in that.

Speaker 2

Now I would say there's really 2 independent questions there. I think that your shares can be a good value in the market, but we obviously continue to watch all of our basins for opportunities and organic opportunities to enhance our business, but we have a very strict criteria for that. And we've been very clear about that from the beginning and that was really exemplified in the Ensign transaction. If anything, that criteria is even higher when you consider the addition of Ensign, some of the Permian performance that we've just described and the length and duration of inventory there and even the refrac and redevelopment opportunity set that we've disclosed here. So that bar for that type of opportunity remains high as it should be in such a high quality portfolio.

Speaker 2

But I kind of view those a little bit as 2 independent decisions. I still think from a return of cash to shareholders standpoint, a 40% CFO commitment that reigns supreme and the best vehicles for accomplishing that are base dividend and share repurchases. But we're going to continue to obviously watch and evaluate any and all high quality opportunities that come into market, but we're going to scrutinize those through the lens of a very exacting M and A criteria.

Speaker 9

Very clear. And then just a quick second one on EJ. I think I know the answer, but I want to ask. Is there any room there to expand your current footprint? I'm just wondering, given how positive the contractual terms and other things you have there, is there any opportunities for expansion over in Egypt?

Speaker 2

Yes. I think when you say expansion, we continue to look at, I would say, gas aggregation in the area, both indigenous gas and EG, but also cross border opportunities as well, particularly in Cameroon. So yes, I think there is opportunity there to expand our footprint. Now that may not necessarily look like upstream investment. It could look at look like maximizing throughput through ETLNG for an extended duration.

Speaker 2

But we see a lot of opportunity there. But right now, I think as you look at kind of the multiple phases and how we're executing those within the gas mega hub, it really started with the Alen third party molecules that got infrastructure built using someone else's money. We now have access to that infrastructure and we're realizing both tolling plus profit share on those molecules. The next step was really coming into the global LNG market with our Alba Equity Molecules. We can now kind of tick that one off the list.

Speaker 2

Complementary to that was to get more Alba Molecules, which the infill program will help us drive more high value molecules, equity molecules there. And then finally, we're right now in the throes of negotiating the Assane gas processing, which that's the Assane gas cap that we know is there. We're well positioned with the infrastructure that was built for Alen to bring those molecules to EG LNG. And all of these are continuing to extend the runway of this world class infrastructure. And by extending that runway, you just open up the aperture for even more opportunities, which may look like something like could be indigenous EG gas, but it could also very well be cross border gas because this facility is going to be the natural aggregation point for regional gas in this area.

Speaker 9

Very thorough answer. Thank you, Lee, so much.

Operator

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

Speaker 11

Hi, good morning and thanks for taking my question. Lots of good updates this quarter. I just want to focus on the long laterals. Obviously, this quarter you did I think about 8 long laterals in the Eagle Ford and the Bakken and a few less in the Permian. Given that your Bakken and Eagle Ford are more developed than your Permian assets, what's the mix of your future inventory when it comes to these 3 milaterals?

Speaker 2

Yes. Maybe I'll take it at a high level and then I'll let Mike jump in and maybe talk a little bit about at an asset level. Year over year, the portfolio is actually the lateral length has increased by about 5% to 10%. And so we are moving the entire portfolio toward longer laterals. Some areas, some leases and some basins are more adaptable to extended lateral 2, 3 mile kind of approach.

Speaker 2

So it's going to be very dependent upon the lease form, our position in that particular basin. But we're definitely pressing hard to drive as much of our capital allocation toward extended levels because we see just the efficiency of doing that, the reduction in costs on a per foot basis and then essentially very similar EUR per foot in the extended laterals. I mean, what we're seeing in the 3rd mile is consistent with a lot of capture out of that 3rd mile. So, there's a lot of incentive for us to continue to drive and other operators feel the same way. And so, in areas where perhaps there are some trades or some swaps that you can make, it kind of benefits everyone to continue to consolidate and drive as much of their operated acreage toward extended laterals as they can.

Speaker 5

I think you've covered it, Lee. I think maybe the only thing I'd add in. Our land team is doing a great job. They've done a great job, continue to do a great job. I think as Lee mentioned, we see the capital efficiency enhancements.

Speaker 5

There's alignment there with offsetting operators. So the trend that we've been on in terms of increasing our average lateral lens, obviously, gets a little bit more difficult every year. But say the land team has done a phenomenal job and they're all of the asset teams are very, very active in terms of engaging with those offset operators just to see if there are deals that we could do to just extend the average lateral length.

Speaker 11

Great. Thanks for the answer there. And I just wanted to touch on the hedging. We noticed that you had added some gas hedges to your portfolio in 2025. They're pretty wide colors.

Speaker 11

But just to the thought process behind hedging some of the gas exposure? It's not like you have much of it anyway, but just any thoughts there?

Speaker 7

Good morning. This is Pat. I'll take that one. I think we've covered our hedging strategy in past. And we as you said, gas is not a big component of our revenue, but we did see a unique opportunity in the market for next year.

Speaker 7

You may be seeing weakness in the prop this year. And so we saw some really nice hedges available on a two way collar last sitting at a 2 fifty floor. So we went ahead and took that. I mean hedging is just a part of how we manage our commodity risk. We have a strong balance sheet, very low breakevens.

Speaker 7

We're in a good position. So we don't need to go into the market to protect our capital program. But when we see an opportunity like that, we'll do that. We need regularly to look at those opportunities and we're always ready to capitalize a little bit when we see them.

Speaker 11

Okay. Thanks for the answers.

Operator

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

Speaker 12

Good morning all. Just maybe a follow-up to Nitin's question on the 3 mile laterals. I was actually curious on Ajax specifically, seeing some strong results there with the lighter spacing in the 3 mile lateral development. Wondering if you might be able to just speak to the return profile you're seeing at Ajax versus maybe the development program that's a bit more focused on Hector over the last year or so?

Speaker 5

Yes. It's Matt, it's Mike here. It's certainly getting it more competitive. As you know, we've had a pretty successful program there with 11 wells brought online between the Q4 last year, Q1 of this year. We covered it in the prepared comments.

Speaker 5

Over 20% reduction in TWC per foot savings and you couple that with the solid initial production, which is very shallower declines that we're expecting actually come to fruition. But with the enhanced capital efficiency that we expect is going to come from it, I'd certainly hope that the Ajax portfolio is going to get more competitive.

Speaker 12

Great. And then maybe just a high level question. Curious if you might be able to speak to maybe the drilling and completion efficiency gains you've seen this year. I know that was a big theme for you all last year, but it seems like you're continuing to see success on that front both on the drill bit and on the frac side. And what that may mean, I guess, as we think about the guidance range for the wealth to sales, it's a little bit early, but should we be thinking about biasing our expectations towards the higher end of the range if you guys continue to see success on efficiency gains?

Speaker 5

No. You shouldn't expect much of a change in terms of wells to sales. It's really just the phasing within the year math is how I describe it. Yes. I

Speaker 2

think just on your specific question, I think Mike hit upon

Speaker 5

a little bit of this

Speaker 2

in his opening comments. But on the D and the C side, we've definitely seen improvements on rate of penetration. Certainly, Eagle Ford was a bit of a standout there on the drilling side. I mean, we continue to find ways to drive execution efficiency there. And even on the frac side as well, I think we're continuing to see in terms of stages per day and hours, pump hours, see improvements there.

Speaker 2

And I don't know, Mike, quantify that a little bit.

Speaker 5

Yes. I think we touched on the Eagle Ford and the Bakken. I think Bakken, despite the winter weather challenges that we had in the Q1, we held on to a lot of the efficiencies that we secured the second half of last year. That obviously bodes really well for future quarters. Interestingly, in Permian, that's 1st quarter 3 mile Wolfcamp program.

Speaker 5

When we look at peer data, it looks like we drill those wells 40% faster than

Speaker 7

the peer average.

Speaker 5

We're also just completing up the drilling of the Texas Delaware multi well pad. Looking at some of the numbers there, our ROT, 25% faster than the last time we were drilling wells there. Yes, I think there's a lot going into that. We certainly took advantage of the improved market situation towards the back end of last year where it made sense. We've high graded in certain years of the business.

Speaker 5

I think you're seeing the benefits of that and the performance. A lot of effort has gone into the pre planning side of things. We actually brought on a couple of new rigs in Eagle Ford at the beginning of the year and we have not missed a beat there. They very quickly got up to the expected pace. And then just continuing to work with the longer term program contractors, implementing a lot of changes with them.

Speaker 5

We're drilling these extended laterals. What we're finding, we're drilling a lot more of these laterals with a single trip and that includes some of the 3 milers that we've recently drilled. And that's a little bit of a balancing act, but we've had some success there just in terms of trying to get a little bit more probabilistic in terms of how we should manage the correctional plan. So a lot going on in the execution space, but great to be off to such a solid start beginning of the year. And I think it bodes well for the rest of the year.

Speaker 2

Yes. I think at the end of the day, it provides us very high confidence in delivery of our full year guidance. It's more of a timing question, as Mike said, is pulling forward a little bit of activity. And that just enhances our confidence in overall delivery on both our financial and operating commitments this year.

Speaker 12

Great. Thanks so much.

Operator

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

Speaker 2

Thank you for your interest in Marathon Oil and I'd like to close by again recognizing all our dedicated employees and contractors for their commitment to safely and responsibly deliver the energy the world needs now more than ever. And let me end also by just thanking Dane once again for his commitment as well to Marathon Oil. So thank you and that concludes our call.

Operator

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

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Earnings Conference Call
Marathon Oil Q1 2024
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