Q3 2019 Earnings Call
Good morning, and welcome to the MRO third quarter earnings Conference call. My name is branded I'll be your operator for today at this time all participants are in listen only mode. Later, we will conduct a question answer session during which you can tell star. One if you have a question. Please note. This conference is being recorded and I will not turn it over to Guy Baber.
Vice President of Investor Relations you may begin.
Thank you brand in and they get everyone for joining us. This morning on the call yesterday. After the close we issued a press release, a slide presentation and an investor packet that address our third quarter results. Those documents can be found on our website at marathon oil dot com.
Joining me on todays call, our Lee Tillman, our chairman President and CEO , Dane Whitehead executive VP, and CFO , Mitch Little executive VP of operations, and Pat Wagner Executive VP of corporate development strategy.
As always 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 with that I'll turn the call over to Lee who will provide his opening remarks, we'll then open the call to QNX.
Thanks, Guy and thank you everyone joining us this morning.
Third quarter once again featured exceptional execution across all aspects of our business.
That's consistent differentiated execution against a transparent framework for capital discipline is driving compelling bottom line financial outcomes for our shareholders that compete not only against our independent M. P peers, but more importantly against the broader market as well.
We continue to consistently and comprehensively deliver against our framework for success, which defines our brand of capital discipline.
We are driving our corporate returns higher generating sustainable free cash flow a conservative pricing.
Prioritizing return of capital to shareholders through dividends and share repurchases.
And improving our capital efficiency cost structure and resource base, including the just announced the addition of over 1000 operated locations all through differentiated execution.
Our strong operational and financial performance continues to be powered by a trends for the multi basin portfolio and a top tier balance sheet. The foundations for our continued success.
Turning to third quarter highlights I will start my commentary by addressing the strong financial outcomes. We have now delivered for multiple quarters that service proof points for our business strategy and that define our investment case.
It starts with our returns first orientation.
On a year to date basis, our annualized cash return on invested capital is 20% consistent with the prior year, Despite a 12% decline and Debbie T.I. prices and meaningful weakness in NGL and gas pricing.
This underlying corporate returns improvement at the outcome of our success across multiple dimensions portfolio management concentrated capital allocation more efficient operations high margin oil growth lower cash cost and well cost reductions.
Additionally, it is this returns first mindset that drives our comprehensive framework for ongoing resource capture and enhancement more on that and just a moment.
Second as our commitment to sustainable free cash flow generation at conservative pricing.
This marks our seventh consecutive quarter of post dividend organic free cash flow generation.
And are now well established track record on this front remains unique in the sector.
We generated $81 million, a post dividend organic free cash flow during threeq, you, bringing our year to date organic free cash flow to approximately $300 million since the beginning of 2018, our cumulative post dividend organic free cash flow totals over $1.1 billion.
This translates to an annualized organic free cash flow yield of approximately 6% on a year to date basis and 9% since 2018, leading our E. M P peer group and competitive with the S&P 500.
Third we continue to return significant capital back to our shareholders through both dividends and share repurchases.
Year to date, we have now repurchased $300 million up our own shares funded entirely with post dividend organic free cash flow.
Since the beginning of 2018 cumulative repurchases now total $1 billion, representing approximately 7% of our outstanding share count and again funded entirely by post dividend organic free cash flow and over the same time period, we have returned 25 per se.
Out of our cash flow from operations back to shareholders through our dividends and share repurchases.
We have a 1.4 or 5 billion dollar repurchase authorization outstanding and continue to believe that a balanced approach to share repurchases governed by organic free cash flow offers a great return to our shareholders.
Our commitment to shareholder friendly actions is further underscored by a return of capital metric within our executive compensation score card.
Finally differentiated execution at the engine that powers delivery against all of our commitment.
And third quarter was again, a quarter long on execution proof points.
Hi margin U.S. oil production exceeded the top end of our guidance and we're now guiding to full year U.S. oil growth of 13% versus 12% previously.
Development Capex during third quarter was inline with expectations at our annual 2.4 billion dollar development capital budget remains unchanged.
Completed well cost per lateral foot remain on a declining trend and all basins unit production cost in both the U.S. and international segments are at record lows since we became an independent DMP and 2011.
And success across all elements of our returns focused resource capture and enhancement framework is delivering on its promise, adding about three years of drilling inventory.
The success, coupled with our extensive portfolio transformation and differentiated position at four of the best U.S. resource plays means large scale M&A is not a consideration.
Lastly, we continue to take proactive steps to enhance our already peer leading balance sheet, we executed three separate transactions that our leverage neutral extend maturities and generate cash savings importantly, we are investment grade at all three primary ratings agencies.
Briefly touching on the asset specific third quarter operational highlights that are underpinning our enterprise financial success.
In the Eagle Ford.
We continue to deliver compelling financial returns a meaningful free cash flow.
During third quarter, we achieved a new record for oil productivity as measured on an average IP 30 basis and impressive accomplishment. After eight years of operating in the play as our team continues to harness learnings from our 1700 plus horizontal completions in the Eagle Ford.
Beyond another productivity record with our focus on all drivers of capital efficiency, we're making great progress in reducing well cost with third quarter completed well cost per lateral foot, 10% below the 2018 average.
Further we continue to organically at an upgrade the economic quality of our inventory most notably threats successful redevelopment test and core Karnes County, taking advantage of under stimulated early generation completion designs.
In the Bakken, we continue to build on our hard earned reputation as a best in basin operator.
Capital efficiency continues to impress with our average completed well costs down to just $4.9 million during third quarter, a 20% reduction relative to 2018.
We also are seeing encouraging early results from another south Hector core extension test marked by strong initial oil rates and a basin, leading average completed well costs of only four and a half million dollars.
Extended production data continues to validate the economics of 2018 delineation test in both South Hector and Ajax with average well pay outs of about 10 months on actual cost in pricing.
In Oklahoma, we have reduced our activity down to four rigs as part of a concentrated program in the more oily and more economically competitive areas of the play as we protect our returns in a challenge gas and NGL pricing environment.
And to maintain our focus on free cash flow generation.
And the Overpressured stack, we continued to deliver consistently strong and predictable performance along with some of the lowest completed well cost in the play.
And the only scoop Springer early productivity from our first three operated wells. This year is outperforming type curve expert expectations affirming the confidence we have in the additional snine Springer wells, we will bring to sales during fourth quarter.
Turning to northern Delaware, we continue to protect our leasehold delineate our position and improve our margins all while driving capital efficiency improvement, particularly in the upper Wolfcamp and our Malaga area, where third quarter delivered a 35% increase and weld up real productivity come.
Gold with a 20% reduction and well costs relative to 2018.
Looking ahead fourth quarter activity will shift to include more delineation work and the attractive Red Hills area of our footprint.
Internationally, we closed on the sale of our UK asset during third quarter.
Simplifying our international portfolio to our free cash flow generating integrated business any G.
Our integrated EG asset delivered approximately $100 million of EBITDAX during third quarter with unit production cost of less than $2 per Boe.
The third party Atlanta backfill gas project remains on schedule with first gas expected in the first half of 2021.
We believe there's inherent strength in a portfolio of quality assets that span the development cycle from exploration through to full field development and Eagle are.
We have previously shared our comprehensive framework for resource capture an inventory replacement and this quarter, we are providing aggregate results demonstrate the success and the impact of this approach.
This framework is designed to continue improving an already robust resource base through us sustainable multifaceted effort, all fully consistent with our returns first orientation.
Importantly, we are generating success across all three elements of this strategy organic enhancement resource play exploration or Rex and a bolt on acquisitions and trade.
The combined success, the result of disciplined capital allocation and a constancy of purpose has been transformative resulting in the addition of over 1000 company operated locations to our inventory equivalent to roughly three years of companywide drilling.
Complimentary to these additional locations the economic returns of hundreds of existing Eagle Ford and Bakken drilling locations have been significantly upgraded.
Given the importance I would like to spend a few moments on each of the three elements of this framework.
Our success starts with what we call organic enhancement or core extension through productivity uplift enhanced recovery cost reduction and efficiency improvement.
And the Bakken and Eagle Ford alone organic enhancement has resulted in the addition of over 500, new drilling locations to our planet development since the beginning of 2018 more than replacing the last two years of inventory consumption for both assets at the.
Same time, we have meaningfully enhance the economic returns of nearly every remaining drillable location in the Bakken and eagle for with hundreds of existing locations upgraded to top tier.
As a result, the vast majority of our approximate decade of inventory in both plays offers compelling economics.
And while the bulk of both our future Bakken and Eagle Ford inventory has been meaningfully upgraded on an economic basis. We continue to believe there is more resource to unlock through additional core extension in the Bakken through redevelopment opportunities in the Eagle Ford and even through enhanced oil recovery with our phase two.
He or pilot in the Eagle Ford demonstrating encouraging early results.
Additionally, our organic enhancement workflows the product of years of discipline work are fully transferable to our less mature assets in Oklahoma and Northern Delaware. Another example of the power of our high performing multi basin model.
The second element of our resource capture enhancement framework is our resource play exploration program already.
The objective of which is to drive outsize full cycle returns through low entry cost high quality exploration at scale.
We're pleased to announce we're now advancing exploration and appraisal activity in two oil plays of scale, including a new Texas, Delaware oil play with potential for over 400 extended lateral locations. This new all play spans over 60000 net acres of can.
Take us oily leasehold perspective for both Woodford and Meramec oil targets. The play exhibit outstanding reservoir characteristics with the Woodford over 350 feet thick.
More than 700 feet of separation between the Woodford and Meramec intervals and two excellent source rocks.
After securing our initial acreage position in 2018, we have sense drilled and completed two exploration test this year.
Early results from these first two Woodford exploration wells are robust demonstrating all the attributes we were hoping to prove and the play strong all deliverability low water oil ratios and shallow decline profiles.
We kept this promising early exploration well performance very tight which allowed our team to move swiftly and surgically to fully capture what we had identified as the sweet spot of the play through targeted acquisitions that we expect to close in the fourth quarter.
With our focus on full cycle returns.
We established our position at a low entry costs of less than $2400 per acre.
We expect to deploy a full rig line for appraisal and delineation in 2020, as we continue to progress our understanding of this exciting new opportunity.
Separately and the Louisiana Austin Chalk, we continue to advance our exploration program.
Well go back one or as a new 25% non operating working interest partner in the play.
On a cash basis, our partnership helps fund the incremental Rex acquisition spending during fourth quarter related to coring up our new Texas, Delaware oil play.
Just as a reminder, our Louisiana acreage is focused on what we characterize as the western fairway of the play and the Overpressured volatile oil and condensate phase Windows are core position has largely never been drilled and in fact, a material portion has never been lease for oil and gas operation.
And is on trend with historic Austin Chalk wells that have delivered prolific cumulative oil production, even though developed by short laterals with no modern stimulation.
Results from our first Austin chalk exploration well our expected early next year with additional activity planned for 2020.
The third and final element of our resource capture an enhancement framework includes bolt on acquisitions and trades to further bolster existing core positions.
To that end, we are pleased to announce an eagle Ford bolt on that satisfies all of our key criteria.
Contiguous largely undeveloped with inventory upside industrial logic would meaningful synergies and accretive financial return.
This acquisition includes approximately 18000 contiguous net acres adjacent to our existing northeast Eagle Ford leasehold and Lavaca County.
While largely undeveloped the asset comes with cash flow from existing production as well as valuable midstream assets that are synergistic with our existing acreage we expect to close on this transaction by the end of January .
The acquisition effectively cores up a high return 70, well development area with upside potential that has demonstrated strong well performance from modern completions.
For the cash transaction price of $185 million and our demonstrated execution capability in the Eagle Ford, we are confident and our ability to drive a strong full cycle return from this opportunity.
To summarize this level of comprehensive delivery across all three elements of our framework requires a returns focus a constancy of purpose financial commitment differentiated execution technical excellence and top industry talent.
The same factors that make this approach sustainable into the future.
To close out my prepared remarks, I will provide a high level preview of our 2020 plan, which remains a work in progress that will be shared and final form next February .
Rest assure our framework for success will not change we will put corporate returns first we will build on our track record of sustainable free cash flow a conservative pricing, we will prioritize return of capital to shareholders through repurchases and dividends and we will maintain our focus on differentiated.
Execution across all aspects of our business.
Our focus as a company into 2020.
His last CMP and more S&P.
For almost two years now we have delivered financial outcomes corporate returns free cash flow and organically funded return of capital that view NPS and our pure space have matched.
And while we will continue to work hard to retain and build upon our competitive advantage versus direct DMP peers. We are just as focused on effectively competing with a broader market on a financial basis.
And doing so in a volatile commodity price environment.
To this in our 2020 budget planning basis will remain at $50 per barrel Wi Fi, although our enterprise free cash flow breakeven will be below that level, despite the headwinds of NGL and gas pricing.
Total and development capital spending will be down year over year in 2020, and as a result, our us all growth is expected to moderate from the double digit growth levels that have characterized the previous two years.
We will drive sustainable broad market competitive growth on both an annual and exit to exit basis in 2020 as well as into 2021.
With the final growth level simply an outcome of our rigorous and disciplined capital allocation process that prioritizes corporate returns and free cash flow generation.
The optimization and shape of the production profile is critically important to ensure sustainability across both 2020 and 2021 and as such we expect averaged to average and exit to exit growth rates to be comparable.
Our fourth quarter U.S. production guidance reflects our intentional transition to this more moderate growth trajectory that further enhances our free cash flow capacity in both 2020 and 2021.
While our wells to sales will decline on the fourth quarter fully consistent with our initial plan, which always had for Q, marking the low point on quarterly wells to sales we are running above the high end of the guidance range for wells to sales for the full year have strong exit to exit U.S. oil growth and just raise.
At our 2019 full year U.S., all growth guidance by 100 basis points.
We are confident in the operational momentum and capital efficiency, we're carrying into 2020, and most importantly, and our ability to deliver on all elements of our framework for success.
More specifically relative to the U.S. resource play capital allocation split that is characterized our development program for the last couple of years, approximately 60% to the Eagle Ford and Bakken and about 40% to Oklahoma and Northern Delaware, We will allocate a greater share of our development capital to our highest return.
Current assets, the Eagle Ford and Bakken.
This will drive oil production growth for both assets in 2020 supported by the tremendous resource base enhancements success. We have realized in both plays that has only further enhance capital allocation optionality across our multi basin portfolio.
Finally, with a focus on establishing line of sight to outsize full cycle returns are Rex program will transition from one heavily weighted toward acreage capture to one more focused on exploration appraisal and delineation drilling and our new Texas, Delaware oil play and end the Louisiana Austin chalk.
In summary, we are proud of the results we have delivered and we are excited about our outlook.
While we are frustrated by market volatility and bar sectors equity performance, we believe in our strategy and our framework for success.
Then that contacts we will remain focused on what we control, which is our execution and the consistent delivery of compelling bottom line financial and operational outcomes quarter. After quarter end time. It is this superior financial performance that will ultimately be rewarded by the market.
Thank you all for listening and with that I'll hand, it back to the operator to begin the QNX session.
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And from JP Morgan ARPU Junior Rob. Please go ahead.
Good morning Lee.
I wanted to maybe clarify good morning.
I wanted to see if you could maybe elaborate on your commentary regarding 2020 as well as of the outlook comments you made on 2021.
Is it did I understand this correctly that you anticipate.
MRO to deliver year over year us oil growth in both years as well as on an exit rate basis for both years and does that contemplate lower spending than the $2.4 billion development Capex budgets that you had this year.
Yes on your first part of an absolutely you've interpreted it correctly. We think it's the first of all its a vitally important that your starting point is from a position of driving returns and sustainable free cash flow generation and to that end, we will optimize our production profile as an output of.
That and we believe it's very important from a sustainability standpoint to ensure that that profile.
Holds true for not only average to average growth, but also for exit to exit growth, particularly when you look across a kind of a multi year timeline.
Great and just wanted to my follow up is regarding.
How should we think about Rex spending.
In 20, and 21 as you transition more from an leasehold capture mode into testing the concepts and has also wondered if you could maybe elaborate on the level of infrastructure that is in the Texas, Delaware oil play that you highlighted last night.
Okay, Great I'll take the maybe the Rex spend question, then maybe let Pat comment a little bit about.
The new Texas, Selover oil play, including the infrastructure on your first question, though round of Rex spin, we do anticipate spend in 2020 and 2021 to be consistent with the kind of longer term run rate guidance that we have provided in the past.
Which is the nominal 200 million dollar Mark we believe that we can continue even with this transition to more of a appraisal and exploration drilling program to live within.
That type of a budget and maybe with that I'll, let Pat make a few comments about the new Texas, Delaware oil play sure. Good morning, everyone. Just there is existing cell production and ongoing development on these leases that is above the woodford the Meramec and in fact, we have our gas production from these two.
We'll have all of our oil production on pipe by the end of the year.
These are very large leases with favorable surface ownership and we don't anticipate any problems with the development plenty of infrastructure.
I'd also say really 20 miles from the week terminals. So we're very close to the markets and we feel really good about this.
Great and is the rig line that you anticipate Pat in the Texas.
Lower oil play is that going to be within the rex or within the broader.
Budget.
It will be within Rex.
Yet I would say around given the nature of the type of drilling bear in mind that even though we have two very encouraging wells one of them has about 100 days of production. The other about 150 days of production. We're still in the very early phases and this is a very large acreage position which is complete.
Okay and develop so we really still are in an exploration and appraisal mode. Even as we go into 2020.
But we do have a very good confidence, though that we are seeing in these two wells the types of results.
That we were expecting.
Great. Thanks, a lot.
Thank you.
A quick reminder, 12 participants we ask that you. Please limit yourself to one question and one follow up if he goes through the question answer session. This morning.
From RBC capital markets, we have Scott handled please go ahead.
Yes. Thanks.
Just a little bit more on.
This is new airing the Permian your phone can you give us a sense of how you build this concept I mean, obviously there are lot of companies run around in the Permian Basin and this is not out on the beaten path. So what did you find differently than others are seeing and how confident do you feel on success going forward.
Maybe I'll make a few general comments and again I'll handover to Pat to maybe talk a little bit specifically I want to maybe remind everyone again just about the concept that is inherent in our Rex activities and I mentioned this in my remarks. This is really the pursuit of these low entry cost on.
Opportunities that have appropriate scale that we believe can generate truly outsize full cycle returns. It's a very different model, it's a very different organizational structure.
The talented members of this team are compensated a bit differently than the rest of the of the organization. So it's a very different approach that we have taken within within the Rex program and and and of course in this case the the Texas.
Oil Delaware play is one that really we've been working since 2018. So it has been a work in progress, but maybe I'll, let pat share a little bit more about the journey and how we find ourselves where we are today sure.
Thanks Scott.
Lee kind of hit on the organizational structure and kind of the way. We've we've set up this team, which I think it's been very important.
To this success.
The team has been very focused on looking for oil resource that has multiple targets and they've been very surgical in the way. They look look at that there is this play that we have identified.
We're reviewing today that has woodford has merrimack and potentially other.
So in between.
We initially leased 20000 acres drill the two wells.
We're very enthusiastic about the results. So that we quickly went out and grew the play to 60000 acres, we feel like now we've captured the core of the physician.
And we feel very good that it's set up well for development and we're ready to move into delineation and further appraisal.
Okay and you know as my follow up question on the news in the Eagle Ford on the new acreage do you plan on allocating some activity in 2020, 2021, and how much to that area.
Yes, we will get into more specifics on relative capital allocation, but you should assume Scott that this acreage will fold into the current optimization that we're doing.
Across the enterprise right now to develop both our 2020 and 2021 execution level plans and this will just be part of that broad enterprise optimization.
Okay. Thanks look forward to it.
Thanks Scott.
From Bank of America, we have Doug Leggate. Please go ahead.
Hi, good morning, everybody.
I Wonder if I could just to the.
Lead to the.
The international just through second.
Skew if you could give us an update on.
Oh, you see the longevity Hello.
At this point no have touched on this before but clearly a big viewer.
Your go forward proposition as you are significant free cash flow in a couple of your please onshore but also from the so would it be stone today in terms of phone.
Any efforts you see to continue to non stop fluent and move the mobile transaction. For example, just so you see the longevity about free cash flow Nicole.
Yes, yes, thanks, Doug Yes first of all maybe just a statement just about which the assets that are generating free cash flow. Although IGI is certainly a low investment.
Hi, free cash flow asset I want to make it very clear that we're getting strong free cash flow support from our U.S. portfolio as well, particularly obviously in the Bakken in the Eagle Ford was with respect to EG, specifically, you know I would I talk about EG in terms of there are two value proposition.
Within EPG, there as the Alba gas condensate field, which is on a basically as a long life low decline asset and then there is the value associated with this unique and differentiated world class infrastructure that we have they're sitting on the OCO wireline which occur.
This is a gas plant methanol plant and LNG facility with storage and off loading that as a very unique piece of kit, we've already leverage that to bring in the OLED volumes and we expect again.
Those molecules to show up kind of in the first half a 2021, but we also recognize that.
Both locally and regionally. This is a gas prone area and we are the natural aggregators gas, we have a hey, Barry.
Well run a world class facility here that does have allege that will come available and we want to make sure that we place.
That asset in a position to compete.
For those other regional and local gas volumes and that's that's a big element of that go forward value proposition for equity organized.
I appreciate you answer and oversee will continue toward showed on the goals.
My follow up is.
Well, we don't do predictably on that on the new please.
Maybe a little bit of an which is question but.
Clearly you haven't really giving us a lot of do you feel for obvious reasons, but I'm wondering if you can speak to hold this so potent pardon the pun relative to the existing Delaware position in terms of.
Oil maturities in terms of each which continuity.
Whether there's any thoughts for the future relative capital allocations, whether this might jump of both for the existing deliberate because of the position in the queue. We did there. Thanks.
Yes, I think it's probably a bit premature right now to talk about relative capital allocation from a development capital standpoint, but certainly Doug we feel strong enough about the competitive nature the potential competitive nature of this acreage by talking about a full rig line running there.
And 2020 with a view toward getting that play relative ready to compete for capital allocation and the development capital budget from a continuity and contiguous nature standpoint. This is a very contiguous acreage position.
As Pat already mentioned, we have large blocks. We also have 100% working interest today in the basin or in the acreage that we've acquired and so we believe this to be very complementary asset to our already strong northern Delaware position.
So firstly, thank you Doug.
From Goldman Sachs, we have fried singer. Please go ahead. Thank you good morning.
Good morning, Brian .
When you think of the more S&P part of the going forward strategy can you add some color on whether that means that first priority is free cash flow and how you broadly think about the desired ranges on more of a mid mid cycle basis of free cash flow yield dividend yield and and topline growth.
Yes, certainly from when we talk about more S&P, what we mean by that is returns first and sustainable free cash flow that is sustainable across a broad range of commodity price outcomes, we want to ensure that our model is.
As robust as kind of the low end of the commodity price range and its competitive but then we also want to make sure that the higher end. If we do see price support that we can generate outsized full basically free cash flow yields we believe that presents an investment case.
That that that can gain traction because we're offering upside potential to offset some of the implicit volatility of the commodity but the number one objective as we do our capital allocation and set our budget will be wrapped around corporate returns and generating that sustain.
Annabelle free cash flow yield once we obviously have that plan in place just as we've done for really almost now the last two years. We will then make prudent decisions about how best to share that free cash flow with our shareholders. We have a dividend today that is competitive.
With our NP peers and in fact, if you look at similarly sized S&P industrials. It's also competitive it's still a conversation that we have quarter ending quarter out, but today, we still believe that a disciplined.
Repurchase program and the in todays environment and based on were equities are trading today offers the best return to our shareholders, but that those financial outcomes that we just went through Brian those are the objectives of our business plan again for us volley.
And production outcomes are just that theyre outputs from that process.
Great. Thank you and then my follow up is with regards to bolt on acquisitions other acquisitions, and then the interplay between that and returning capital to shareholders.
Yes.
When we look at the.
Opportunity here in the Eagle Ford 185 million, how available our additional opportunities throughout the portfolio that could add scale to your existing assets and when you think about saving up potentially saving up cash for inorganic.
Opportunities acreage or not how does that influence your return of capital to shareholders.
Yes, I would say that we're we're constantly scanning the market for opportunities you know, it's a challenge that we talked about the characteristics of the Eagle Ford bolt on the fact that it was synergistic that it was returns a creative.
That is essentially offered largely in an undeveloped position with upside once you start putting that kind of filter on the full opportunity set whether that be eagle Ford Bakken or anywhere else that really narrows the field and so we have to be very disciplined about how.
We evaluate and ultimately how we might transact even on small bolt ons like the one that we just announced but I think once you start applying the criteria.
Playing field to gets reduced very very significantly and so we're we're always in the market, we always want to be opportunistic and the financial flexibility that we have created with our balance sheet strength is something that we get to lean on when those opportunities do in fact.
Up that also allows us to pursue those opportunities in a way that's not mutually exclusive to continue to return free cash flow back to our shareholders again, our return of cash to shareholders is governed by our free cash flow generation and.
We can leverage our balance sheet to take on some of these more opportunistic things in the marketplace.
Thank you.
From Suntrust, we have delisting, but please go ahead.
Morning lean team.
Okay.
One quick question that could not help but notice the prepared remarks, you you mentioned that you would increase your activity on your two highest margin plays Eagleford Inbox I'm just wondering could you speak to how you see the returns on these especially compared to northern Delaware position again, we know how good that is always interested to hear your comments.
Throwing out the Eagle Ford and Bakken potentially even better returns than this.
Yes, I want to be really clear to that as you guys. We look ahead. When we say increase we mean increase on a relative basis again the development capital program is coming down it's the relative allocation, that's going up and it shouldn't be that surprising again. This is one of the advantages of the multi basin portfolio.
With with really the dislocation of NGL and gas pricing right now that tends to drive you to your more oily assets and so for us.
That coupled with the fact that we have been so successful and the organic enhancement activities in both Eagle Ford and Bakken in this current pricing environment. It gives us the opportunity to lean on those a bit more we're still progressing activity at and Oklahoma and northern Delaware those returns and those.
More concentrated programs are still very competitive, but as you look at the near term kind of pricing environment Theres no doubt that the Bakken in the Eagle for because of their oil waiting our superior from from an economic return standpoint, you know I mentioned.
In my opening remarks that and some of the extension work that we did last year in the Bakken even on actual pricing and actual costs. Those wells payout in 10 months. I mean, these are very impressive economic returns, but it all has to come to roost.
And your enterprise level return, so we're going to design our program in such a way that it will ensure that we continue this underlying rate of change and our corporate level returns to we don't want to get half cycle returns are great as we do our internal relative capital allocation.
But we're going to judge our investment program on how is it moving our enterprise level returns certainly even on a price normalized basis.
Thanks for the clarification and then looking at Slide 14, maybe following up on the Bakken you all done a nice job just continuing to expand that and extend that play. So typically down south could you talk sort of sit today. How you think about total core inventory and maybe where the focus is going to be for 2020 net net play.
Yes sure Neal this is Mitch.
I think slide 14 that you're referencing there.
And the slide earlier in the deck, where we really have highlighted organic enhancement helps.
Characterize and gives you a good visual on how it's how much we've extended the core.
We certainly would say the majority of Hector and Ajax have been proven up through our organic enhancement trials.
To put some context to that if you look at Hector over the last two years weve doubled well productivity evolve shaving, 30% off of well costs.
Thats a game changer for economics in the Bakken and as we mentioned in his remarks.
We have significantly upgraded the returns.
Hundreds of locations across both those basins to where the vast majority of our remaining inventory in both basins as top tier.
I also want to make it really clear the 500 ads that we talked about in the release.
Those are absolutely new sticks that weren't in our prior.
Life of field plans of development so.
We'll see a good mix of Hector and murmured on next year on the upgraded returns.
I don't have the exact split between those right now as we're still finalizing and tweaking the plans, but we'll certainly have activity in both areas and we will continue our efforts across all of these basins to drive further enhancements from the organic enhancement efforts that are targeting not only well productivity, but also.
Well cost.
And we certainly see additional running room for future ads in both of those basins.
Perfect. Thanks, Lee Thanks, Mitch.
From Susquehanna, we have be shoe parent Shirley. Please go ahead.
Hi, good morning lead going back to the double that of allocation of capital next year.
I suppose the.
The success that you're seeing in the Bakken and Eagle Ford.
Good.
Function of your understanding of that.
Rock there.
And when you.
In the northern Delaware looks like you have sort of a methodical delineation program. So.
Can you give us some.
Goals or milestones, you're looking forward and but delineation.
Before you can.
Before that African garner more.
Proportion of your Capex.
Yeah, I'll, maybe say a few things then also asked Mitch to chime in as well you're right. We have been very methodical in our approach to northern Delaware you have multiple stack plays across a very broad.
Graphic area.
We mentioned for instance in fourth quarter that were actually moving over into the into the Red Hills area to continue our delineation. There. So that work is really still ongoing in parallel with that delineation and appraisal work. We're also continuing to work on other aspects of the business in northern Delaware.
To ensure that we're maximizing our margins and thats everything from getting oil and and water on pipe to ensuring that we have the abstral absolute Lois lease operating expense there as well. So we're doing all the things that we need to do to be prepared to take that asked.
That into a more I would say aggressive growth mode that we get it to more of a scale in our portfolio, but we can be methodical we can be patient.
This is the again the beauty of the multi basin model, we don't have to get in front of our our headlights. We can make sure that we truly are optimizing the field development plan and that's what's going to be our focus and certainly we have a lot of work left to do in that area in 2020.
Yes, because you I'll just add a little bit of.
Additional color I think Lee is covered the the medium term outlook really well.
Speaking, specifically about 2019 about half of our activity was in the Malaga area and Eddy County in about half in Red Hills.
And we would characterize the Red hills activity is more heavily weighted towards delineation.
You see across our more mature basins the type of productivity, we're driving and those workflows translate to all basins, we operate and.
Highlight the upper Wolfcamp activities in Malaga.
There were where weve.
Had enough activity in that area to move into development mode.
See similar kind of import.
Performance improvement, there with 35% increase in productivity per lateral foot and 20% well cost reductions.
But this is a multi bench play.
Lot of column to work with I.
I think we.
Had tested six different intervals over the course of 2019, and we'll have more delineation as part of the program in 2020, So there's there's a.
An efficient pace at which to move forward on these some areas are moving into development and other areas, we're still in delineation mode.
Thats that thats very helpful and.
My second question was in the new play in the Woodford in the slide deck you showed two lending soon.
Can you see if these first two wells tested days.
Both of those zones or what are they both in the in.
One zone.
This is Pat.
We're not going to disclose exactly where we landed the existing wells, but both of those wells to test the Woodford.
Understood.
Thank you.
Thank you.
From Stifel, We have Derrick Whitfield. Please go ahead.
Good morning on thanks for taking my questions.
Shifting to today.
Shifting back to the bucket in slide 13, specifically, you've done an exceptional job of taking capital cost out of business and arguably have the lowest cost in the basin could you comment on the drivers for the design savings and on whether or not you've tested or evaluated in basin sand.
Sure Derek the submits again.
Let me.
Let me back up to kind of a high level, then I'll walk you through some of the specifics, but I'm sure you can appreciate probably not going to give you. The full play by play of our success, but.
I can share the mindset and the approach we're taking.
And then I'll address your regional sand question.
You know what I would say as our corporate returns focus has really resonated well throughout the organization and deep into the organization.
We started on this organic enhancement journey with a focus on well productivity, which was really driven by high intensity completions.
But as we've evolved that approach.
It's evolved to a relentless focus on not only well productivity, but well costs and so the way we attacked that.
As we've evolved our proprietary workflows that.
We deploy targeted data acquisition, we integrate with data analytics advanced stimulation techniques and empirical results.
It really allow us to optimize from spud all the way through flow back.
We address well construction.
We're targeting pumps schedule cluster design stage spacing use of Diverters use of artificial lift so very comprehensive list of things that were attacking.
And showing great improvement on.
Is there more room to grow or to go in the Bakken.
We certainly believe so in our team certainly believe so the last two quarters, we've driven.
Program completed well cost a new records.
In our Herbert pad, which is the southernmost Hector test today, we delivered four and a half million completed well cost versus 4.9 million average for the Bakken.
We have looked at regional sand.
Number of times were not currently deployed that we're always looking at alternative sourcing models.
But we have seen some gains just in the contracting structures and strategies that have driven on proppant cost down in the Bakken as well.
That's very helpful and comprehensive.
As my follow hub.
Perhaps building on Doug's earlier question on the Texas, Delaware oil play could you comment on the pressure gradients for the Woodford and Meramec intervals and speak to the range of oil yields you're expecting across the trend.
Sure Derek this is Pat.
I won't give you the exact pressure gradient, but both the Meramec and Woodford are over pressured.
I didn't catch the last part of your question.
Sure. The last part was just speak to the range of oil yields you are expecting Oh sure yeah, it's about 65% average oil cut across the entire.
Leasehold.
Thanks, guys, it's very helpful.
From Wells Fargo, we have the team Kumar. Please go ahead.
Good morning, guys and thank you for taking my questions.
Maybe just going back to the 2020 and 2021.
Talk process.
Thats why the maintenance capex that you're seeing for those years, as you're bringing activity down and growth I imagine that maintenance amount of spending is coming down, but if you could quantify that.
Yes, we're not going to quantify maintenance capital obviously, we're still in the process of optimizing our business plan I will get more into.
The details of the plan in February , but suffice to say I think in lieu of talking about maintenance capital that even though we're setting our basis at $50 WT API, we expect the enterprise breakeven the point at which we're generating organic free cash flow to be below that in both of those years.
Yeah.
Got it.
And then just.
You mentioned the rig spending earlier about 200 million what does the impact of equal Nordic should we be thinking whether 200 million net to marathon now or some of them into 25% Ecuador holes.
That would that be included in that.
Well, obviously thats and included but you should think at the 200 as a net marathon number.
Great. Thank you so much.
Thank you.
From Barclays. We have Judy why please go ahead.
Hi, good morning, everyone. Thanks for fitting me in here.
Good morning Janine.
My question is on 2020, so in terms of your decision to spend last year over year and lower the U.S. oil growth rate do you have any kind of ballpark estimate on how much. This enhances your either free cash flow capital efficiency or corporate breakeven relative to what your initial panelized, which I think conference.
Increase and development activity next year.
Yes first of all Ginnie I would say it.
Objective was not to spend less our objective was in fact to enhance returns and drive free cash flow generation and that model is what is as an output is generating a more moderate growth profile and 2020 and and 2021, we're going to provide.
Much more details more aligned with the last part of your question Janine as we get out into February similar to this year's plan, we expect to quantify the plan not only in terms of operational outcomes, but also in terms of financial delivery as well based on our fifth.
The dollar planning basis, so I'd, just say stay tuned on that but obviously, we believe that the optimize plan will strike the correct balance here between returns free cash flow generation, while also achieving a more moderate oil growth rate here in the U.S.
Okay. That's really helpful. Thanks ill look forward to February and my follow up is on the organic inventory expansion you've made really good progress on that.
Over 500 locations added in the Bakken and the Eagleford can you provide a little bit more color on this so for example.
Additions more heavily weighted and one pay versus the other I know from this slide it looks like it could be pretty even and how much of the additions are related to 2018 improvements and lastly, what is your economic cut off from moving locations into this bucket.
Yeah, I would say that your your assessment is correct and that probably the split is generally pretty even maybe a little bit bias toward Eagle Ford again, we talked about replacing a couple couple of years of inventory at current run rates, obviously the run rate in Eagle Ford is as a bit huh.
Higher than the Bakken, So you could kind of pro rata that to probably back into what that what that split is.
We still obviously believe that that theres a lot of of remaining running room.
To chase there.
I believe that the teams have done a good job, we believe it's a sustainable process.
As we look ahead.
And as we do with all three elements of the inventory enhancement framework.
Okay, great. Thank you for taking my questions.
And from Raymond James We have Pavel Molchanov. Please go ahead.
Okay.
Thanks for taking the question.
Key.
Please.
Yes.
Portion.
Peter.
Yes.
But both politically speaking.
So you talked about making loans or.
Good.
With.
That you are planning at the LNG facilities, putting 20.
We lost a good part of that power. We are you are really breaking up I know the question pertain to E G, but ex that it was very difficult to hear your question.
Yeah I was I was asking if you want each point any significant.
Or maintenance cycle.
In each region.
Got you that was that's much better Pablo Thank you I'll turn over to Miss for that yes, sure Cobble again, we'll disclose more specifics in February when we released our capital budget, but there are some maintenance activities out a couple of the onshore facilities in 2020.
And we'll give a bit more disclosure on that and in February so that it can be rolled in.
Everyone's modeling for the GE asset.
Okay.
And your balance sheet can you kind of de lever.
What's your latest thinking just broadly speaking on hedging.
Yeah, Hey, this is Dave Thanks for asking a question I can answer.
Okay.
You know right now for the balance of this year were about 40% hedged on oil with three ways structures with about a $56 Florida.
Ceiling, a call north of 70.
About half of that volume as we head into 2020 is currently hedged with three ways like 55 to 65.
We have.
Great balance sheet.
Very low breakeven price.
So lots of financial flexibility. So we think of hedging in that context and are very patient.
Got to rush into a flattish to backwardated.
Urban add positions, we've been pretty opportunistic as we look into it and expect us to continue to do that just be very patient, but but mindful that it's nice to have some downside protection as we as we move through 20 and into 21.
All right appreciate it.
You bet pickup.
Thank you and we'll now turn it back to lead children for closing remarks.
Alright, well, we recognize that investors have choices and we appreciate your interest and marathon oil execution excellence leads the way in our company and again I want to personally. Thank all of our dedicated employees and contractors to deliver on that mandate 24, seven quarter end in quarter out. Thank you very much and that concludes our.
Paul.
Thank you ladies and gentlemen, thank you for joining you may now disconnect.