Marathon Oil Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 11 speakers on the call.

Operator

Morning, everyone, and welcome to the Marathon Oil First Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Guy Baber, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thanks, Jamie, and thank you as

Speaker 2

well to everyone for joining us

Speaker 1

on the call this morning. Yesterday, after the close, we issued a press release, A slide presentation and investor packet that address our Q1 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 Dane Whitehead, Executive VP and CFO 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.

Speaker 1

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'll also reference certain non GAAP terms in today's discussion, which have been reconciled and defined in our earnings and materials. With that, I'll turn the

Speaker 2

call over to Lee and the rest of the team

Speaker 1

who will provide prepared remarks. After the completion of those remarks, we'll move to a question and answer session.

Speaker 2

Lee? Thank you, Guy, and good morning to everyone listening to our call today. First, I want to say thank you to our employees and contractors for another quarter of comprehensive execution against our framework for success. I'm especially grateful for your commitment to safety, differentiated execution and environmental excellence. Well done on another great quarter while staying true to our core values.

Speaker 2

We have a number of notable topics to cover today that continue to build on our pure leading and market leading financial and operational performance. I'll start by reviewing some key takeaways, consistent with the summary on Slide 5 of our earnings presentation. First, we reported another very strong quarter, both financially and operationally. That is fully consistent with the guidance we provided back in February and further builds on our track record of delivery. We continue to execute against our differentiated cash flow driven return of capital framework, again exceeding our commitment to return at least 40% of our cash flow from operations to shareholders, an industry leading commitment.

Speaker 2

Our adjusted earnings per share handily beat consensus and we generated strong free cash flow during Q1 despite not receiving any e. G. Cash dividends. The entirety of the variance in our cash flow and free cash flow versus consensus can be explained by the fact that we reported $80,000,000 of e. G.

Speaker 2

Equity income, did not receive any e. G. Cash dividends. This difference is strictly related to timing and importantly, We expect to receive over $200,000,000 of AG cash distributions during Q2, more than making up for the 1st per delta versus consensus. And in fact, we expect EG Cash distributions to exceed EG Equity Income for full year 2023.

Speaker 2

We continue to strengthen our already investment grade balance sheet proving we can both deliver industry leading shareholder returns and reduce our gross debt. It's not an either or proposition. And operationally, 1st quarter oil production came in at 186,000 barrels of oils per day, consistent

Operator

with our guidance.

Speaker 2

We expect an improving oil production trend into the 2nd and third quarters given our first half weighted capital program and the associated timing of our wells to sales. 2nd key takeaway. Our full year capital Spending and production guidance remains unchanged. We remain on track to deliver our 2023 business plan, a plan that benchmarks at the very top of our high quality E and P peer group on the metrics that matter most. Those metrics include total shareholder distributions relative to our market capitalization, free cash flow yield and free cash flow efficiency, Reinvestment rate and capital efficiency, free cash flow breakeven on both the pre- and post dividend basis, and growth in our production per share.

Speaker 2

This is strong evidence of not only the quality of our assets, but the that focuses on per share growth. And my 3rd and final takeaway this morning, while we're focused on executing a 2023 plan that leads our sector, we're equally focused on continuous portfolio enhancement to further improve our competitive positioning and longer term sustainability. We've now successfully integrated the highly accretive Ensign acquisition ahead of schedule, and we're realizing excellent results from our initial wells to sell. We're delivering tremendous results in the Permian Basin since our return to activity last year. Today, the Permian is effectively competing for capital on a heads up basis with the best of the Eagle Ford and Bakken in our portfolio, A very high bar to clear.

Speaker 2

And finally, at Equatorial Guinea, we've made great strategic progress in further strengthening the longer term outlook of our unique fully integrated global gas business. With that, I'll turn it over to Dane, We'll provide more detail on our 2023 outlook and how it stacks up to peers.

Speaker 3

Thank you, Lee, and

Speaker 4

good morning, everybody. Full year 2022 data shows that we performed at the very top of a high quality E and P peer group last year as well as the broader market, consistent with the charts on Slide 7 of our deck. An analysis of 2023 guidance indicates that our business plan again benchmarks at the very top of our sector on all the metrics that we believe matter most. I'll start with a recap of our 2023 Return of capital outlook summarized on Slide 8 of our slide deck. As I've stated many times on our earnings calls, Returning significant capital to shareholders through the cycle remains foundational to our value proposition.

Speaker 4

We're focused on going on a long term track record of consistent shareholder returns that can be measured in years, not just quarters. And 1Q was another step on that journey. We again exceeded our commitment to return a minimum of 40% of our CFO, returning 42% to shareholders, including $334,000,000 of share repurchases and our $63,000,000 base dividend. Looking at the full year, we expect to continue adhering to our return on capital framework, while also paying down debt, including some of the Ensign related financing. We believe we can do both, maintain our return of capital leadership and further enhance our already investment grade balance sheet.

Speaker 4

And we're off to a great start, beating our 40% of CFO target in 1Q, while paying down $70,000,000 of high coupon U. S. Ex debt and remarketing $200,000,000 of tax exempt bonds at a very favorable rate. We'll take down the remaining $130,000,000 of USX in July at maturity. We continue to believe our cash flow driven return of capital framework is uniquely advantaged versus peers, truly providing investors with the first call on cash flow and insulating shareholder returns from the effects of capital inflation.

Speaker 4

Offsetting inflation is on us, not the shareholder. Even at our minimum 40% of CFO commitment, our return to capital framework is sector leading. It provides clear visibility to a double digit distribution yield across a broad range of commodity prices as shown on the top right graphic on Slide 8. And it benchmarks at the very top of our peer group with a total shareholder yield about double the peer average. In terms of our preferred vehicle for shareholder returns, there's no change to our approach.

Speaker 4

We'll pay a competitive sustainable base dividend with the lion's share shareholder returns coming through share repurchases. We currently have $2,000,000,000 of buyback authorization outstanding, which gives us plenty of room to keep executing. With our free cash flow yield in the high teens, buybacks remain significantly value accretive, a very efficient means to drive per share growth and highly synergistic with growing our base dividend, which we've raised 8 out of the last 10 quarters without compromising sustainability. Though peers have now migrated to our model, we were an early proponent of to reduction in our shares outstanding. The strength and durability of our shareholder return profile underpinned by strong free cash flow generation and capital efficiency.

Speaker 4

While first quarter free cash flow was solid at $330,000,000 We expect both our underlying free cash flow and cash flow from operations to strengthen as we progress through the year. There are a number of factors driving this trend. As Lee mentioned, we didn't receive any e. G. Cash dividends during 1Q.

Speaker 4

We expect to start receiving those distributions in the Q2 beginning with a larger than normal dividend of more than $200,000,000 Additionally, our CapEx is front end loaded with 2Q capital spend expected to be comparable to the Q1 consistent with our outlook for about 60% of our full year Capital to be concentrated in the first half of the year. And the timing of this spend will drive oil production growth from 1Q levels, improving our cash flow generation capacity as we move through the year. Therefore, operationally and financially, We remain fully on track with the assumptions that underpinned our initial full year free cash flow outlook provided earlier this year. And our 2023 outlook very clearly benchmarks at the top of our peer space as illustrated on Page 9 of the deck. We continue to trade at one of the most attractive free cash flow yields in the entire S and P 500 as the top left graphic shows.

Speaker 4

While this leading free cash flow yield is in part due to attractive valuation, it's also a function of our peer leading free cash flow efficiency. The top right graphic shows our free cash flow margin is well above the peer average. For every barrel we produce, we're delivering 30% more free cash Similarly, our reinvestment rate, a direct measure of capital invested versus cash flow generated, A true cash flow efficiency metric as it considers both capital and operating expenditures is the lowest in the peer space, a full 10 percentage points below average. Further, our capital intensity is measured by CapEx per barrel of production is more than 20% better than the peer average. This strong performance is a testament to not only the quality of our asset base, but the strength of our operational execution and the discipline inherent in our capital allocation execution and the discipline inherent in our capital allocation framework.

Speaker 4

Our focus remains on maximizing the free cash flow and corporate Turning to Slide 10, we benchmark ourselves on one of the most important metrics for our sector, Our free cash flow breakeven or the WTI oil price necessary to achieve free cash flow neutrality, a metric so important that we've hardwired it into our short term incentive scorecard. Through disciplined capital allocation, ongoing cost structure And our relentless focus on our capital and operating efficiency, our objective is to maintain the lowest sustainable free cash flow breakeven level. This is crucial to maintaining business model resilience and ensuring we're positioned to deliver compelling free cash flow across a broad range of commodity prices. When commodity prices are healthy, we expect to materially outperform the S and P 500 in free cash flow generation. When commodity prices are challenged, We expect to remain competitive with the S and P 500.

Speaker 4

We can only do this by maintaining a low free cash flow breakeven. And Slide 10 shows we have the lowest 2023 pre dividend free cash flow breakeven among high quality peers at around $40 per barrel WTI. Additionally, we expect to realize significant improvement in our free cash flow breakeven from 2023 to 2024, largely driven by the expected financial uplift in EG. So while our 2023 competitive positioning is strong, it's even better in 2024. Finally, our free cash flow breakeven is the lowest on a post dividend basis.

Speaker 4

While we've raised our base dividend in the 8 of the last 10 quarters, we stayed focused on base dividend sustainability and the synergies that exist between share buybacks and sustainable dividend growth. Whereas certain peers now have base dividends that add $10 or even $15 per barrel to their breakeven, our base dividend adds a more modest $3 to $4 a barrel, underscoring its sustainability and our headroom for longer term growth as long as we continue to reduce our share count. Turning to Slide 11. We've been a leading proponent of a capital allocation framework that strongly prioritizes corporate returns and free cash flow generation over production growth. The reality is that we're leading the peer group in growth on a per share basis.

Speaker 4

2021 to 2023, expect to grow our production per share by more than 40%. In 2023 alone, we expect to grow production per share by approximately 30% year over year. Absolute production growth is not the objective, but we do see value in significantly growing our underlying per share metrics. Two primary factors are driving our exceptional per share growth profile. 1st, a consistent and disciplined approach to shareholder returns, A strong emphasis on buybacks.

Speaker 4

Through our buyback program, we've reduced our share count by 22% in the last 6 quarters. Our peers have moved toward our model, but we're definitely enjoying a 1st mover advantage. And second, the highly accretive Ensign acquisition, which increased our maintenance oil production by approximately 12% with no increase in share count. So with that summary of our 2023 business plan competitiveness, I'll turn it over to Mike to provide a brief update on Ensign and our recent outstanding performance in the Permian.

Speaker 3

Thanks, Steve. As we've stated, the Ensign acquisition checks every box of our M and A framework. Immediate financial accretion, return of capital accretion, Accretion to inventory life and quality and industrial logic with enhanced scale, all while maintaining our financial strength and investment grade balance sheet. We've stated before our early focus with Ensign has been on integration and execution. Today, I'm happy to report that our integration of the asset is now complete with a faster than anticipated timeline underscoring the execution confidence that comes with an acquisition in an established basin where we have a track record of success.

Speaker 3

And on the execution side, as highlighted on Slide 12 of the deck, Early well performance continues to demonstrate that the acquired inventory offers some of the strongest returns and capital efficiency in the entire Eagle Ford. Of our first three pads, 14 wells in total are delivering top decile oil productivity in the basin. We plan to bring online another 20 or so Ensign wells during the Q2. These wells are expected to deliver creative capital efficiency and financial returns with comparable oil productivity to our legacy Eagle Ford program. With that, let me turn to our Permian operations where the team has been delivering tremendous results since we returned to a higher level of activity last year.

Speaker 3

As a reminder, we effectively shut down our Permian program in 2020 during the COVID related commodity price collapse. In hindsight, pausing activity was one of the best things we could have done. Not dissimilar from the pausing activity we took in the back end during 2016, also during a period of low commodity price before we transform the performance of that asset. More specifically in the Permian, our team spent the last couple of years better understanding our acreage position from top down, bottoms up perspective and repositioning that asset for success. We closely analyze peer results across the basin by taking a hard look at our well spacing and our completion designs and we work diligently on trades to core up areas we like to enable The extended laterals we are drilling today.

Speaker 3

The culmination of this hard work is shown on Slide 13. Since returning to activity at scale during the second half of last year, we brought 23 Northern Delaware wells to sales, 18 of which are extended laterals with an average lateral length of about 9,000 feet. These 18 extended laterals are significantly forming the Delaware Basin, top quartile on a cumulative oil basis by about 30%, truly exceptional results that compete with the absolute best operators in the basin. This well set also includes the strongest well in the entire Delaware Basin during 2022, the Thunderbird 14H in Red Hills, which produced over 380,000 barrels of oil during its 1st 180 days. Geographically, these 18 extended laterals are evenly split between our Red Hills and Mulligan areas.

Speaker 3

And from this point forward as we benefit from coring up our acreage footprint and high grading our development program, we'll almost exclusively be drilling extended laterals. With these results, the asset is now effectively competing for capital against the best in the Eagle Ford and the Bakken in our portfolio, which is no easy task and enhancing the long term outlook for our company. I'll now hand it back to Lee, who will provide an update on our DG operations and then conclude our prepared remarks.

Speaker 2

Thank you, Mike. As highlighted on Slide 14, we recently completed a significant planned EG turnaround and the asset is now back to normal operations. While the downtime will reduce our 2nd quarter EG production by about 12,000 oil equivalent barrels per day, It's intended to contribute to stronger uptime for both the winter of 2023 as well as next year and beyond when we'll benefit for more attractive pricing for our Alba Equity gas. The turnaround impact is fully contemplated in our full year production guidance. We are reducing our full year EG equity income guidance by about $50,000,000 strictly due to lower assumed natural gas prices.

Speaker 2

However, We expect our EG cash flows to prove more resilient. EG cash distributions should actually exceed equity income this year, starting in Q2, illustrating the strong cash flow nature of the assets plus a bit of catch up in dividends from prior quarters. Looking ahead to 2024, we continue to expect to realize significant earnings and cash flow improvement on the back of an increase and our global LNG price exposure. While we're still working through contractual specifics, the bottom line is that beginning January 1, 2024, AlvaSource LNG will no longer be sold at a Henry Hub linkage. It will be sold into the global LNG market, which is expected to drive a Significant financial uplift for our company given the material arbitrage between Henry Hub and Global LNG Pricing.

Speaker 2

Yet it's not just about capturing commercial uplift in EG. We're equally focused on the longer term outlook and fully leveraging the value of our unique infrastructure in one of the most gas prone areas of West Africa to enhance our multiyear Free cash flow capacity. That's exactly what our recently signed HOA summarized on Slide 15 is intended to accomplish. A few elements of the recently announced HOA are worth highlighting. For clarity, Phase 1 of the EG Regional Gas Mega Hub is already completed and delivering value via the processing of 3rd party gas on a toll plus profit share basis from the LM bill.

Speaker 2

Phase 2 of the Gas Mega Hub involves the expected 2024 cash flow uplift I just discussed, processing our Equity AlbaGas Molecules under new contractual terms as of January 1, 2024 with linkage to the global LNG market. The HOA aligns all the critical parties on the necessary commercial principles to that end. Under Phase 2, we're also analyzing the potential for infill drilling on our Alba block, given our alignment across the value chain for our equity Alba molecules. Recall that we have a 64% working interest in the upstream Alba unit and a 56% working interest in the downstream EG LNG facility and are the operator of both. More specifically, we're assessing up to a 2 well program targeting high confidence, low shorter cycle opportunity that could mitigate alba based decline and maximize flow of alba equity molecules through the LNG plant under more attractive global LNG linked terms.

Speaker 2

These opportunities are expected to compete with the risk based returns generated from our U. S. Resource pledge. Phase 3 highlights the next step in the development of the regional gas mega hub. The intent to process third party ethane gas at our facilities once capacity at the LNG plant begins to open up.

Speaker 2

The Asane gas cap blowdown can access the same upsized pipeline that was funded and constructed by the Alen partners. This is fully consistent with our long stated objective to extract maximum value from our world class EG infrastructure by keeping the LNG facility as full as possible or as long as possible. Phase 3 will effectively extend the life of the EGLNG facility into the next decade, enhancing our long term free cash flow capacity. Beyond Phase 3, we'll continue to assess additional opportunities with the same objective in mind. There is a lot of discovered undeveloped gas in the area and the path to monetization runs through our infrastructure.

Speaker 2

A recent cross border agreement between EG and Cameroon opens the door to additional to fast track opportunities in addition to other regional discoveries. Turning now to Slide 16. I'll close our call on the same slide we've used to conclude our remarks in recent quarters. For years now, I've 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.

Speaker 2

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, top tier sustainable free cash flow yield at an attractive valuation with an advantage return of capital profile centered on per share growth. And as our detailed 2023 competitive benchmarking slides show today, we're well positioned to again lead both our peer group and the S and P 500 on the metrics that matter most. This peer leading financial and operational delivery is not a 1 year phenomenon. It's a continuation of a multiyear trend.

Speaker 2

It's sustainable, underpinned by our high quality and oil weighted U. S. Unconventional portfolio recently strengthened by the Ensign acquisition that is complemented by our unique fully integrated global gas business in EG. To close, I want to reiterate how proud I am of the way we 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 the world needs.

Speaker 2

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 billions out of energy poverty and protect the standard of living we have all come to enjoy. With that, we can open the line for Q and A.

Operator

Ladies and gentlemen, we'll now begin the question and answer session. Prior to pressing the keys to ensure the best sound quality. In the interest of time, we do ask that you please limit yourselves to one question and one follow-up. At this time, we will pause momentarily to assemble the roster. Our first question today comes from Arun Jayaram from JPMorgan, please go ahead with your question.

Speaker 5

Yes. Good morning. Lee, I wanted to get Maybe a few more insights on the dividend expectations for 2Q out of EG. Wanted to run some math by you. In the first half of the year, including 1Q actuals, You'd expect it to generate about $115,000,000 of equity income.

Speaker 5

And based on that $200,000,000 dividend, that would suggest maybe $85,000,000 tailwind to cash flow relative to your equity income guide. So I wanted to Run that math by to see if that made sense to you.

Speaker 2

Yes. Arun, thanks for bringing a little bit of clarity to But your math is relatively spot on. And the reality is that we do have a little bit of dislocation from time to time between Equity income and receipt of the cash dividends and we're in that space in Q1. But as you actively We stated we're going to more than make up for that in 2nd quarter with a greater than $200,000,000 cash Dividend payment coming from EGLNG. But your math is spot on, Arun.

Speaker 5

Great. And just my follow-up, Lee, I wanted to go back to EG again. Looking at the 10 ks, gross sales out of Alba We're about 2,000,000 tons per annum at the 3,700,000 ton per annum facility. I know that The LN volumes bring you closer to nameplate. But as you know, Lee, one of the bare thesis on the stock has been the fact that Alba volumes are declining call it at a 10% to 15% annum clip.

Speaker 5

And so I want to get your thoughts on how Phase 1, Phase 2, Phase 3 Of your strategy on slide 15 can help keep the plant full. The duration that you see from these opportunities and just broader thoughts on Marathon continuing this capital light strategy with 3rd party volumes or wanting to get more operating volumes through that facility.

Speaker 2

Yes. Thanks for the question. You're exactly right. Right now, coupling both The Alba equity volumes with the Alen volumes were at a relatively high utilization rate through the physical plant. And that was really part of the design of Phase 1 was to ensure that with a long life low decline You feel like Alba coupled with some third party volumes, in this case, Alba, that we would kind of bridge to that next set of And keep that facility utilized.

Speaker 2

And that's been networks completed. We now have another piece of fantastic infrastructure in a pipeline that connects us with the Alen field. So that phase is doing exactly what it was designed to do. As we look out ahead, Phase 2 is really dominated by really the shift in the commercial structure, which is less about really Production volume and more about gaining more exposure to the global LNG market and the associated cash flow uplift that we'll see from that. Because Even though we've seen a weakened gas environment, the reality is that the arbitrage between Henry Hub and global LNG pricing remains intact.

Speaker 2

So that's going to be a value uplift. And an additional element that we've kind of brought into play as part of Phase 2 has been the fact that we are evaluating the potential for some Alba infill drilling opportunities, which have the potential to mitigate some of that base decline, but also allow us to move equity, high value equity molecules through the EG LNG facility. And just for clarity, we're still in the early days in that evaluation, but these are going to be this is Relatively shallow water. This is jackup drilling, dry trees. So, when you think about it from a capital standpoint, There's not these are not going to be material movers in our capital budget.

Speaker 2

They will also be kind of phased out in time. And the test for those is just making sure that those do compete head to head with the opportunities, of course, that we have here in the U. S. So that's a little bit of an addition that we weaved into the story this quarter. And then finally, when you get to Phase 3, This is again looking at 3rd party molecules coming from that broad kind of a land, a SANG area.

Speaker 2

This is the gas cap associated with the same field that of course is operated by Chevron just like the Lynn is. And it's our view that We will be the monetization path for that and that was part of the HOA that was signed with EG and other relevant parties. The positive there is all of that work, Phase 1, 23, really extend us out through into the next decade. So, it gives us this runway to now advance additional opportunity. So, what could be beyond Phase 3?

Speaker 2

Well, We talked about and I mentioned in my opening remarks, the bilateral agreement between EG and Cameroon that opens up the aperture to cross And quite frankly, as I said in my remarks, this is one of the most gas prone areas in West Africa. And there's numerous discover undeveloped opportunities that EG LNG could provide a very efficient and profitable monetization route.

Speaker 5

Great. Thanks a lot, Lee.

Operator

And our next question comes from Scott Hanold from RBC. Please go ahead with your question.

Speaker 6

Yes, thanks. Just turning to the Permian, the results looked Pretty impressive. And my question would be is, can you talk about the depth of inventory and the Sustainability of those extended laterals and how do you kind of look at this play going forward? I mean, it seemed like it was Complimentary to kind of the overall asset base, but it does seem like now it's got the ability to really step up and be a bigger part of the Folio, so what's the depth of that inventory look like? And are you guys looking at opportunities to add to that acreage position?

Speaker 3

Hey, Scott. It's Mike here. I'll hopefully answer that question for you. In terms of the runway that we're looking at, The current consumption rate, current activity rates, I think we've disclosed publicly that you're looking at almost 2 decades or up to 2 decades of maybe even more than 2 decades The potential inventory there. So that maybe gives you a feel for what we could be looking like in the future.

Speaker 3

And you're absolutely right. Based on The performance that the team has delivered there, not only from a well productivity perspective, but from an execution perspective as well. I mean, some of the drilling completion results That the team's delivered since they've got back to work in middle of last year, absolutely competing for capital. And I would remind you that while maybe the completion activity whilst the sales is from have loaded in Permian, We do have a pretty heavy drilling program this year, which will then set us up well for 2024. So we've kind of preempted this a little bit in terms of the

Speaker 4

Performance with

Speaker 3

the additional drilling and the sale, we've been looking for those wells. We're not probably going to see those wells coming to sales until the early part of next year. But you're absolutely right. Based on the performance that we've seen since getting back to work there, That asset is definitely going to be competing for capital as we go forward.

Speaker 2

Yes. And if I maybe if I could just jump in for a minute as well. One thing I want to I highlighted that in the Permian numbers now, we have fully integrated what we refer to as the Texas Delaware oil play, the Woodford Merrimack oil play that has been very successful for us. It has now migrated from more of an exploration play into really part of our base capital allocation within the Permian Basin. And so that's another tranche of inventory That has now moved into that asset team.

Speaker 2

And that's unique in the sense that, I'll just remind everyone that our Permian and Oklahoma Teams, they are integrated teams. And so it makes absolute natural sense for that Woodford Meramec play to migrate into a team that already has such Broad experience in how to develop those two zones. To your other question around acreage addition. What I would say to that is that our M and A framework remains unchanged. And if anything, the addition of Ensign probably raised that bar even further.

Speaker 2

We still look at everything within our core basins, but I would just tell you that today we don't see anything in the market It really satisfies what is a very demanding M and A criteria.

Speaker 6

Got it. And just to clarify one thing on, you said there's 2 decades of inventory there. Are those extended lateral? Are those 2 decades of extended laterals?

Speaker 3

Pretty much, Scott. There's maybe It maybe tails off to the back end, but predominantly extended laterals. And quite frankly, the team have been very active converting some of those smaller SLs to 2 XLs. So maybe some of those SLs that are at the back end of the portfolio at the moment, Expectation is that we'd be looking to convert those to longer laterals over time.

Speaker 6

Okay, understood. And then my follow-up question Just go back to EG again. Thinking about the contract kind of rolling over at the end of this year, How are you positioning for that? Like what steps are you taking right now to look at what Is the best way to kind of optimize it going forward? Do you expect to sign some sort of a hard longer term contract?

Speaker 6

Or do you want to keep it more open and flexible just Neil, be more opportunistic with it. But just give us a sense of how you're looking at setting up the pricing dynamics starting in 2024?

Speaker 7

Hey, Scott. This is Pat. I'll take that one. Yes, obviously, we're getting ready to market on January 1, 2024. We will be going to market shortly with an RFP for the global LNG providers.

Speaker 7

And that will be, as Lee has said, linked to global LNG prices. What marker is still to be determined, but we'll have a bid process through that and Expect to tie up those contracts probably in Q3.

Speaker 6

Understood. Thanks.

Speaker 2

I'd just say, Scott, there's still details to be worked out there, but we believe that there will be competitive tension in the market for Such an advantage set of LNG cargoes that are proximal to the European market.

Speaker 6

Right, right. What is that cost benefit do you think relative to say like U. S. Shipping U. S.

Speaker 6

Volumes?

Speaker 2

Well, I think we look at it through the lens of kind of how does that look relative to where we stand today. And when you think about the movement, The bulk movement from a Henry Hub link to a global LNG link, I mean, the torque there, regardless Where absolute gas pricing goes is going to be pretty significant. I mean, you're going to be talking about 2x or 3x kind of uplift as you move to a more index global index contract.

Speaker 6

Understood. Thanks.

Speaker 8

Thanks, Scott.

Operator

Our next question comes from Doug Leggate from Bank of America. Please go ahead with your question. Hey, good morning guys. This is actually Clay on Doug, I've got a couple of follow ups on EG. First one, can you discuss what your decline rate is and what the infill drilling And secondly, you guys highlighted that there will be a turnaround or a turnaround has been completed and that's going to improve the uptime.

Operator

What does that mean for volumes in 2024? And does that simply means less downtime? Can you qualify what that downtime is that was avoided? And I'll leave it there. Thanks.

Speaker 2

Yes. Well, maybe to start off with the decline question. I mean, our nominal decline in EG is about 10% per year. So that's really where we land. There's no doubt that an Alba infill program will help mitigate some of that decline.

Speaker 2

It's Probably too early to talk about the contribution and the amount of offset until that program is fully defined and ultimately funded by the partners. With respect to the turnaround, that's really a triennial turnaround. It's very comprehensive. It occurs Usually every 3 to 4 years, it's both onshore and offshore. So it's a very comprehensive turnaround and really that's protecting Uptime performance that's already world class at EGLNG.

Speaker 2

This is recognized as one of the best operating, most Reliable facilities globally in the LNG market and we're really investing to continue to protect That exceptional uptime performance that that team delivers really each and every year. And so, this really is that investment and It becomes even more important as we transition into this commercial phase where we're going to be leveraging much more heavily global LNG price It was the Henry Hub. So it's very fortuitous to be getting that turnaround done during low gas prices and while we're still linked to Henry Hub contracting.

Speaker 3

Yes, Khalid, I'll just give out a little bit more color. We're looking at 99% plus uptime there from the facilities in EG. So as we pointed out, it's really about protecting that uptime as we get into next year specifically.

Operator

I appreciate it, guys. Thank you. Our next question comes from Neal Dingmann from Truist.

Speaker 9

My first question maybe for Lee or Mike just on Ensign. Just wondering now that you've operated the asset for just a brief time, Can you speak to any thoughts or changes on how you think the asset will compete for capital versus the legacy assets? Both are good, so I'm just curious how they'll compete.

Speaker 3

I mean, obviously, super happy with how the integration has gone ahead of schedule. No surprises. Everything is positive. You saw the well results that we put in, I think it Slide 12 of the deck, top desk on performance there on oil basis within the basin. I think it's a little bit too early to say in terms of what that does from a capital allocation perspective.

Speaker 3

But I think first impression is very, very positive. And if we are going to be doing anything from a capital It feels like we may be allocating more in the future, but a little bit early just to get too definitive on that.

Speaker 9

Looking forward to see what you can do with it, Mike. And then second question just on OFS inflation. I'm just wondering if you could speak to any Not only potentially some softness that some others have spoken about, but any specific areas either domestically or EG that you might be

Speaker 3

Yes, I'll take that one again. Neil, maybe just start with a reminder. Our 2023 guidance, we did incorporate about 10% to 15% compared to 2022. What we were assuming was the cost environment through 2023 would be comparable to the Q4 of 2022. We didn't assume any deflation with the second half of the year.

Speaker 3

We did assume a little bit of moderation in steel pricing, Which we're actually starting to see. What I'd say we're seeing at the moment is maybe a general Blattening or plateauing of service costs. What we are definitely seeing is the access side that has definitely improved and That could potentially lead to maybe some improved pricing later in the year. As I look at the specific or the larger areas of spend, Start with maybe rigs. I think we've all seen the softer guidance and activity that the publics have come out within the 2nd quarter.

Speaker 3

Again, Could lead to some modest softening in the rig rates later in the year. Pressure pumping, market access certainly improved, but I Still think it's a little bit early to make a call and where rates potentially go the second half of the year. As I mentioned, steel Pricing is definitely trending lower there. And that's pretty consistent with just the general softness that we're seeing in all of the commodities. One point I would make is with the improving market access situation and the contracting that we've got in the second half of the year.

Speaker 3

We've actually already been able to hybrid in a few areas of the business. So for example, we'll get more experienced crews, we're getting better equipment. That was something that just couldn't happen 5, 6 months ago. So I'm probably paying a somewhat positive Trend there, I would just caution, it does feel a little bit too early to be counting in deflation in the second half of the year, I think, particularly Just when you think about the volatility of the backdrop that we face at the moment.

Speaker 2

Yes. I think that if I could just jump in, Neil, I think that we intentionally left Commercial and contractual flexibility in the second half of the year such that we would have the opportunity to take advantage of any softening in the market. However, we took no credit for that within the budget. So as Mike said, our budget fully reflects Inflation across the full year. So if we were to see more softening, that would certainly be perhaps a bit of even a tailwind in the second half of the year.

Speaker 9

That's great details. Thanks guys.

Operator

Our next question comes from Matt Portillo from TPH, please go ahead with your question. Good morning, all. Maybe just starting out on the Permian, You turned in line an additional 4 wells in the Texas Delaware. Looking at the state data over the last few years, that's been an area that's been quite in terms of well performance. Curious if you can give us any color on early time performance from these wells and also just updated thoughts on the Spacing design, I know you guys are working on some tests that may be a bit too early to infer anything, but just curious how you all are thinking about the spacing design going forward?

Speaker 7

Hi, Matt. This is Pat. I'll take that one. As you said, we brought on 4 wells in the Q1. I would characterize those wells as performing In line with Regill expectations.

Speaker 7

This is a reminder for everyone. I think we held this a little bit last call. This was a down spacing test. We did 3 wells in the Woodford at 8 80 foot spacing and 1 Meramec about 650 feet above those kind of between 2 of the wells. The key takeaway from early time in this, Pat, is that the wells are They're acting just like the other wells, strong oil production, high oil cuts, lower oil ratio and already low decline that we're seeing.

Speaker 7

The other key takeaway is that there's been no communication between the Woodford and the Meramec, which gives us a lot of confidence about the co development Moving forward, we do now have 13 wells online across our 55,000 acre Rocky position, And as I said, we're very confident now in productivity and we've moved it into the Permian asset team and fully integrated it In terms of future development, this was a down spacing test. I think our early learnings is that we're going to probably to a 4 by 4 co development, which will maximize capital efficiency. But there's such a large volume of oil in place in Woodford, we're going to continue to look at maybe a little bit tighter spacing in

Speaker 4

the Woodford. And just as we drill

Speaker 7

the next pad, We will look at that again.

Speaker 2

Maybe if I could just add too, Matt. We were really a first mover in this kind of combination Woodford Meramec Oil Window. And we were able to essentially amass 55,000 netacre continuous position at relatively low cost at 100% working interest. And of course, now we see other operators are starting to get more in both the Woodford and the Meramec, and I think that all is constructive and supportive of kind of what we've been saying all along that we believe That this asset can compete for capital allocation. It's one of the key reasons we've now integrated it in with the Permian as we believe we're out of the exploration phase and really moving into that developmental phase.

Operator

Perfect. And then just as a follow-up question, just Just wanted to clarify on the color for the volume cadence for the year. You guys gave context on Q2 and Q3, which is quite helpful. Just curious as we look towards the second half of the year, I know you've got a heavy tilt program in the Eagle Ford in Q1 and Q2 and it looks like the Permian For the most part, we'll wrap up from a Till perspective in the first half as well. Any additional color you might be able to provide into Q4 as we should think about volume cadence, I know you gave some color there on Q3, but just trying to figure out how we should be thinking about the back half of the year in general?

Speaker 2

Maybe let me jump in on that one, Matt. I think as Mike mentioned in his opening comments, we expected Q1 to be Right, where we landed at, the 186,000. Our guidance for 2nd quarter is right around the midpoint of the full year guidance. But we do see 2nd and third quarter being an increasing, if you will, oil production trend moving forward, which is really reflective of The capital program. Having said that, our full year guidance remains intact and on both the oil and OEB basis.

Speaker 2

So that profile will

Speaker 8

in fact

Speaker 2

generate those midpoints that we provided. And we also are very mindful, of course, of making sure that we maintain momentum as we start thinking ahead to 2024 as well. Thank

Operator

you. Our next question comes from Scott Gruber from Citigroup. Please go ahead with your question.

Speaker 8

Yes, good morning. Actually want to come back to the theme of future opportunities, maybe look out a little bit further. But as we contemplate the growth potential for gas demand along the Gulf Coast, we may need more than Just the Haynesville and associated out of the Permian and Eagle Ford. Do you guys have a good sense for the economics in the dry gas window of the Eagle Ford? It's deeper, so the wells are going to toss more, but I'm wondering whether you have a sense of the breakevens.

Speaker 2

Yes. Well, certainly, as we look at No, the complete inventory in all of our basins, dry gas today is at a bit of a disadvantage, both pricing and As you say cost, as you get into some of these areas of these plays, the drilling and completion costs will get quite high. We also have, of course, dry gas optionality within our Oklahoma position as well. And that's a good example. I think Oklahoma, we've put in place a JV structure in Oklahoma that allows us to protect our acreage, keep our crews operating, and in general, be prepared If we do find that we see a more favorable environment for gas production and these combo plays that do rely a bit more heavily on both gas as well as NGLs.

Speaker 2

But the JV program is a good example of how we're really keeping everything warm and ready to go. So I don't think that gas question is necessarily limited to the Eagle Ford. I think it could apply to Oklahoma as well. And we just need to be ready with opportunities when that makes sense. It's all going to be done based on return and capitalized.

Speaker 2

I mean, I wouldn't say we're completely agnostic on commodity, but at the end of the day, it's going to be driven by economics.

Speaker 8

Yes, of course. It's good to highlight the Oklahoma position. I'm just thinking about kind of with gas prices depressed here near term, but Given the potential demand recovery and future growth, whether it's worthwhile to contemplate building out a An acreage position kind of further south from the Ensign position or is that I know you guys have A lot on your collective plate today. Just wondering whether that's on the radar or not.

Speaker 2

Yes. Well, I think you're right in the sense that there's certainly there is More gas optionality, even though we're getting a lot of oil production from Ensign, it also brings significant gas with it as well, particularly in this Very strong condensate window. But there are dry gas opportunities within Ensign as well that we could certainly look to Lloyd, in the future. I do think though if you just step back, Scott, and you think about our portfolio today, we're generally kind of a 50% Oil 50% gas and NGL company. And we like that balance and we like that commodity price exposure.

Speaker 2

So we want to be very mindful of just again at an enterprise level, keeping that balanced exposure to the kind of the Full commodity price. And that even includes our EG assets, which of course have a different kind of commodity price exposure and that they're exposed to both Brent, on the condensate side. And then right now, clearly, linked into Global LNG and in the future, That linkage is even getting stronger.

Speaker 8

Got it. I appreciate the color, Lee. I'll turn it back. Thank you.

Operator

Our next question comes from Umang Chaudhry from Goldman Sachs. Please go ahead with your question.

Speaker 10

Hi, good morning and thank you for taking my question. Good morning. Hey. My first question is on just on the international gas price outlook. Clearly, the ARB between international gas And Henry Hub is very attractive today, but would love your thoughts if you see any rest of those ARBs with the sharp build out in LNG capacity through 2027.

Speaker 2

Yes. Without trying to look too deeply into the crystal ball, one of the things We never want to pretend to do is to predict pricing going forward. But what I will say is The world certainly needs more energy. A lot of power generation is going to still lean heavily On gas, in Europe, that's likely going to be LNG. There are LNG projects that are coming on in the second half of this decade that I think will start to meet that demand, but demand is growing.

Speaker 2

And so U. S. LNG as well as global LNG, we believe will still be in strong demand. And I think that arbitrage will still be in Certainly between Henry Hub and Global LNG Link contract. So even if we see volatility in the absolute Gas pricing, we think that arbitrage will still remain intact.

Speaker 2

And certainly, when you look at Europe today and

Speaker 4

you look at the

Speaker 10

dynamic there, we still believe that's

Speaker 2

going to be a strong market for LNG. We still believe that's going to be a strong market for LNG in the future.

Speaker 10

Got it. Very helpful. Thank you. And then just given the weakness in natural gas prices today, as we think through your plan, I was wondering if there's any flexibility to shift more towards any liquids rich drilling away from a more gassier areas?

Speaker 2

Yes. Well, the reality is that we've already optimized our plan around that outcome. As I mentioned, we have a very balanced program And an enterprise level. But the reality is that our program is a very oil weighted program in terms of capital allocation. The bulk of our capital allocation is flowing to our Black Oil basins, which are the Eagle Ford and the Bakken.

Speaker 2

So and that's again going back to that Oklahoma JV, we recognized that early on. And so rather than spending Our operated capital there, we're basically leveraging the funding of others for that very reason. So we believe the program is already optimized The commodity pricing that we're seeing today and we feel very good that it's going to generate extremely strong returns.

Speaker 10

Thank you. Thank you for taking my questions. Thank

Speaker 3

you. And

Operator

ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Lee Tillman for any closing remarks.

Speaker 2

Well, 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 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

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

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Earnings Conference Call
Marathon Oil Q1 2023
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