Q3 2020 Marathon Oil Corp Earnings Call
[music].
Good morning, and welcome to the of our own third quarter earnings Conference call. My name is spread that and I'll be your operator for today at this time all participants for the listen only mode. Later, we will conduct a question and answer session during which you could delve star one if you ask a question.
Please note. This conference is being recorded I will now turn it over to Guy Baber, Vice President Investor Relations you may begin Sir.
Thanks, Brandon and thanks, as well to everyone for joining us this morning, yes.
Measured by total recordable incident rate is the best in our company's history.
I am proud of our people they have risen to the challenge and are demanding year.
Rest assured we will continue to manage COVID-19 risks diligently through our business continuity an emergency response plans.
I also want to extend my thanks to Mitch little for his three decades of service and leadership at our company.
This will be matches last earnings call with us, which I know he is disappointed about as he plans to retire at the end of this year.
<unk> has been an integral part of our team and a driving force behind execution excellence across all aspects of our operations.
And I have every confidence that Mike Henderson will only continue to build on the standard of excellence.
I have personally lane omissions wise counsel and guidance as CEO and wish him all the best as he transitions to the next chapter in life. Thank you and best of luck to you and Sandy.
It goes without saying that the macro environment for Emp's and for energy companies more broadly remains challenging amidst this historic downcycle, but.
Little reinvestment rate of 77%, we generated significant free cash flow and returned 23% of our cash flow from operations or $1.4 billion back to our shareholders. This track record of actual delivery is unique to our space, but not new to me.
Marathon.
2020 has unquestionably been a transitional year for us and for the industry. However, we have successfully leverage the supply demand crisis to further optimise and enhance our business model.
Not only have we pulled the necessary levers to protect our balance sheet liquidity and to generate free cash flow. This year at a difficult environment. We have also materially improve the resilience of our business and have dramatically enhanced our ability to generate robust financial outcomes.
$35 per barrel.
In this downside environment, our key objectives will be to fund our base dividend and protect our balance sheet. It goes without saying that we will continue to prioritize financial returns and.
In a more normalized or mid cycle oil price environment 40 to $50 per barrel that BTI. Our previously disclosed reinvestment rate framework provides clear visibility to compelling free cash flow generation for investor friendly purposes with yields that compete with the broader market market.
And we could achieve our targeted leverage metrics in short order.
We would also be well position for incremental return of capital to shareholders beyond our base dividend.
In a low growth or no growth environment capital efficiency and operating efficiency are the competitive differentiators.
Our ability to deliver peer leading free cash flow and corporate Breakevens is backed by the Eagle Ford and Bakken, which have the best capital efficiency of the US shale plays the competitive data shown on slide six and seven of our deck is entirely source from an independent third party Rice said Energys shale well Q.
Dataset and the graphics include data for over 20000 individual shale wells since 2018.
Why.
The top graphic highlights capital efficiency across industry since 2018 with wells grouped by operator and by County.
Effectively this graphic shows exactly where our Bakken in Eagle Ford sub areas sit on the industry capital efficiency stack.
The key takeaway is at our core extension areas Hector in <unk> in the Bakken and <unk> Gonzalez counties in the Eagle for are among the best and olive industry delivering top decile performance.
Notably our core extension areas have outperformed all major Permian pure play operators on a head to head basis.
Importantly, virtually all of our approximate decade afford inventory in both the Bakken and the Eagle Ford is concentrated in the historic an extended core areas shown on this page.
The concept the best summarizes this slide is sustainability R capital efficiency advantage is sustainable it's underpinned by high quality assets that will enable us to continue executing against our reinvestment rate framework.
Yeah, well operational data points, such as 100 day cumulative production in total will cost are important they.
They ultimately only hold real value when they translate to tangible financial outcome at an enterprise level.
Slide eight shows our company has a track record of delivering on the financial metrics that matter we.
We aren't just committing to a forward looking framework our framework is backstopped by a history of execution.
At the bottom less graphic on the slot as the bottom lift graphic on this slide shows cumulative 2018 in 2019 free Cashflow generation was the best in our peer group equating to approximately 30% of our current market value.
And while this represented a solid financial outcome, we have significantly improved are for free cash flow potential thanks to significant cost reductions and are optimized frameworks.
Assuming are 2021 benchmark maintenance case, we're positioned to generate the same absolute level of annualized free cash flow that we did in 2018 in 2019 at an oil price more than $15 per barrel lower and at reinvestment rates the range from 60% to 80% depend.
Ending on your price outlook.
<unk>.
We're assessing such opportunities.
We will not budge from those criteria and we won't force action near the bottom of a commodity cycle characterized by the elevated uncertainty associated with a crisis driven an unprecedented global demand shock.
Any opportunity must be immediately accretive to our financial returns must enhance our ability to generate free cash flow must be balance sheet neutral at a minimum and must possess clear synergies and compelling industrial logic.
Well the sales are weighted to the fourth quarter.
Third quarter total production was near the midpoint of our implied second half guidance range as we effectively achieved our exit right for oil a quarter earlier than expected fourthquarter, all production will be relatively flat sequentially, establishing a stable baseline for 2021.
Third quarter total oil equivalent production was very strong resulting in a 5000.
Increase to our full year production guidance at the midpoint strong based production management and improving gas capture across our asset base and in the Bakken specifically contributed to the result.
Our low cost structure and enterprise enterprise free cash flow breakeven approximately $35 per barrel wtvr breakeven in 2021, including our dividend assuming gas prices consistent with the forward curve.
Clear visibility to material free cash flow in a mid cycle price environment over $600 million next year at $45 oil.
This represents a free cash flow yield approaching 20% with a commitment to dedicate a significant portion of operating cash flow over 30% in a $45 barrel environment to investor friendly initiatives prioritizing return of capital to shareholders and balance sheet enhancements.
Significant upside leverage to even modest commodity price improvement highlighted by over $900 million of free cash flow in a $50 per barrel environment.
So 2020 has been a stark reminder, that we're price takers in a cyclical business and that we must manage our business conservatively at some point prices will recover and we believe it's important to protect our upside leverage so that investors can benefit from that leverage in the up cycle. Finally, we are well positioned to sustainably deliver on our free.
Anymore supported by industry, leading capital efficiency at both in enterprise and basin level and high confidence high quality forward inventory.
To close with the backdrop of an unprecedented demand shock our underlying business model and framework for success remain intact, and we are positioned to deliver and a more volatile and lower commodity price reality, our proven track record of results combined with our reinvestment rate discipline will enhance our transparency and.
Since going forward.
And our consistent focus on those elements of the business, we control has delivered dramatic and lasting results.
Collectively these actions have repositioned our company for success in the current environment and for the uncertainty of the new normal ahead.
Thank you and I will now hand over to the operator to begin our Q and a session.
Thank you we will now begin the question and answer session.
A question. Please press star one on your telephone keypad, if youd like to be removed from the queue. Please press the pound side or the Heskey just through the speakerphone. Please pick up your handset first before you dialing.
Once again, if you have a question. Please press star one on your telephone keypad.
Please standby for just a moment.
Sure It from Jpmorgan, we have our Rouge I Rob. Please go ahead.
Good morning, Lee and team.
Lee I was wondering if he could start off and give us your perspective on the U.S. election, obviously, we're not done yet perhaps you can give us.
Some of your thoughts on potential implications to the industry MRO from a regulatory perspective, obviously, a lot of things federal acreage pipeline Ziad Idcs, Iran nuclear deal, but I was wondering if you could start there.
Okay.
Yeah, well, certainly I'm not going to provide any prediction this morning or room, but I think we all recognize that that energy policy and energy security really should be and should be nonpartisan right. There.
There should be full alignment on addressing the the dual challenge of meeting growing energy demand and of course, we're reducing the risk of climate change and we also know that the reality is that oil and gas is going to be an integral part of any future energy transition and in fact has provided a pathway for U.S. energy six.
Purity.
I think we have a responsibility to work collaboratively with whomever.
Prevails, So you know at the.
The federal state and local level, so that we can meet.
That dual challenge my view as failure on either is just not acceptable.
I think the the current uncertainty around <unk> Federal land is a a good reminder of the benefits of our multi basin model asset diversification and capital allocation flexibility.
Certainly we are realistic that where the biden when I'm doing.
Doing business on BLM land will become more difficult and those are his words not not mine, but I just want to remind everyone as far as marathon is concerned we have very limited exposure to BLM lands in fact in our core plays less than 10% of our acreage production and reserves.
Resides on BLM lands.
So overall we.
We don't necessarily view that element of the regulatory environment, having any discernible impact on us.
Clearly.
We would be cognizant of the fact that under a new administration, there will be new regulation that will have to be addressed and I take some solace in the fact, though to to remind everyone that states like new Mexico have a vested interest in having a viable oil and gas industry.
A significant provider of revenue and jobs for a state.
It was one of the highest poverty rates in the U.S. you touched upon you know everything there from from foreign policy to tax policy, but maybe on the tax policy, perhaps maybe I'll kick that over to Dane and just let me on kind of share a few thoughts on how we are we're thinking about that.
Hey room, sorry, you took me up with your tax question.
Excuse me, yes, I do.
I'm not going to predict outcomes, either but it does look like Republicans are going to hold the Senate, Matt should lessen the.
Likelihood of aggressive tax policy changes, but certainly vice President Biden has indicated multiple times that he wants to reduce incentives for energy, which I think will translate to itcs.
In marathons case win.
We're not expecting to be at tax cash tax payer at the federal level until late in the decade, we've got in wells and foreign tax credits.
She told us.
From anything, but the highest commodity price environment.
Certainly at prevailing prices or any of the ranges that we talked about earlier, it's going to be many many years before we get there.
Idcs, we we actually kind of manage our tax strategy.
Strategy toggling between an a wells tax credits in Itcs and frankly, we don't really leaning very heavily on deducting itcs in the current period, if that option went away altogether I don't think it would change our trajectory at all on cash taxes.
That's it's very helpful. My follow up question.
Lee is just.
Regarding how you're thinking about portfolio renewal longer term, obviously I think the first call on free cash flow looks to be the balance sheet, but how do you think about portfolio renewal, but we do seem to be in a somewhat of a buyer's market as you think about a in the low premiums and given your low cost structure.
I would think that you could be a natural consolidator.
You know just given that you know that the fact that you drill your wells much lower than industry averages et cetera.
Yes, I think on the topic of portfolio renewal I kind of take you back to the approach we've we've addressed before which is for.
First it's really organic enhancement in our existing basins I think we showed very clearly how we continue to expand the economic window and enhance the capital efficiency of even our more mature basins in the Eagle Ford and the Bakken. So that's that's one element of it.
You know, we'll continue to assess smaller acquisitions and trade that we believe are accretive and fit within our footprint. We always want to be open to those types of opportunities, but whether those opportunities are small medium or large they still have to really address that that criteria that.
I described in my opening comments, you know financially accretive they have to be generally balance sheet neutral there has to be industrial logic and natural synergies there and then kind of the final element.
The third element that I would highlight would be our continued commitment to our resource play exploration program and I will just mention as we talk about our maintenance capital.
Kind of benchmark case end to 2021 that still does include an element of resource play exploration capital as part of that plan. So we believe that that type of model, where we keep the aperture wide open on those opportunities, but then apply a very exacting criteria that's very rare.
Returns focused that's the that's the right approach for continuing to renew the business and grow our resource base.
Great. Thanks, a lot lately. Thanks.
Thank you.
From Barclays, We have Jeanine Wai. Please go ahead.
Hi, good morning, everyone. Thanks for taking my questions.
Good morning, Janine Good morning, I'm glad you didn't hear me is my first is actually off I have nothing works.
[laughter]. My first question is on the breakeven and my second question is on inventory so on that tiny tiny one maintenance breakeven that's slightly improved in last night update can you discuss what assumptions are baked into that updated breakeven I know you mentioned natural gas price is strengthening but also in particular you're well.
Hi seem to be improving every quarter and you're anticipating further reductions sequentially. In Q4. So we're just trying to quantify how that breakeven could trend over the next few quarters and then any commentary on productivity would be appreciated as well yeah.
Yeah, no absolutely Jane Thanks for the question, Yes, maybe just starting with those underlying assumptions and what has really changed in first of all just reflecting back on my comments I want to be really clear that that 2021 benchmark maintenance case does not benefit from some outsized up drawdown.
It is a basically on an unhedged basis and it does still include some modest resource play exploration spending now in terms of the improving improvement trend that you take note of that is on the back really.
US continuing to bake in actual performance in both operating efficiency and capital efficiency. So thats one element and then as you know since we're essentially in these scenarios were holding WT our pricing constant the gas price does have an impact in our early.
Your mate.
Maintenance cases breakeven cases that we disclosed we had assumed nominally get to 50 gas scrap price given the forward curve outlook, we have bumped that up two to $3 and so when you kind of roll all that in there in essence.
This 2021 benchmark maintenance case, where we're spending a basically a $1 billion to hold our fourq 220 production flat, that's delivering essentially at $33.
Per barrel that BTI breakeven $35. If you include our dividends.
If I could I'll, maybe shifting to to your inventory question in.
I'm sorry.
Yes, you need to do you have a follow up on inventory is specific question. There yeah. So I guess, we notice a new slide in the presentation, which are great and very helpful.
On you discussed in the past of having about a decade of good inventory in the Bakken Eagle Ford I think you mentioned it again today that could probably be maybe even a little bit longer given slower growth. So can you provide any color on the criteria that you use to get to that decade of inventory number and I think.
Specifically, if you have any commentary on what return threshold that you use that a certain oil price to count good inventory and if you've got 202 in that decade, and maybe any assumptions around spacing would be helpful. Too. Thank you.
Okay that theres lot in that question, let me try to ultra.
I'll try to try to unpack. It you know maybe first of all let's start you know just just going back to some of that third party public data.
That we shared when we look at the Bakken and Eagle Ford by these objective measures.
They're not just among the best I mean, they are the best from a capital efficiency standpoint, and even as we step away from what we would consider the historic core areas. We continue to see those ranking as the best from a capital efficiency standpoint and.
You know and so when we look at that 10 years of inventory across both the Bakken and the Eagle for that is high return high quality inventory and without getting into hurdle rates and things all of that inventory, we would view and certainly within the price bands that we just addressed as being very.
Accretive to our overall corporate returns.
From a from a spacing standpoint, I mean, there are no I would say aggressive assumptions as it comes to spacing.
Within the Bakken and the Eagle Ford, we have very well established spacing designs across the zones and within the various geology that exist in the place we tend to look at both maximizing PV as well as returns within a given DS you and Thats really again supporting this.
10 years of of inventory, so theres theres nothing in.
And I say this analysis that is aggressive as it pertains to spacing. The other thing I would just add is that we continue to see both on the cost and the productivity side ways to move the needle there.
From a cost standpoint, we continue to drive down our completed well costs and on the completions and productivity side, we continue to optimize our designs and and if you look again at our productivity data.
If you normalize for geology, we continue to see an improving trend there as well. So all the vectors are in the right direction. So I'll just pause there to date and see if I touched upon most of your your question.
Definitely that was very helpful. Thank you.
All right. Thanks Jeanine.
[noise] from tier one securities we have Neal Dingmann. Please go ahead.
One of the least could you speak you guys sounded confident in the prepared I guess in the press release I should say on your inflection point comment and it does sound like you are certainly trending that way I'm. Just wondering maybe could you give some more color on just the confidence either you from your side of the data from the finance side, which you have that you have turned that corner.
To generate yield more consistent free cash flow and that inflection.
Yes, Neil will certainly when you look at third quarter performance and bear in mind. This was on essentially a $40 W. T I kind of.
Marker pricing, when we're able to generate that level of cash flow and that type of environment, particularly as we kind of land.
Going a bit earlier on our exit rate expectations, I think that really tells the whole story and and so as we continue to move throughout.
Throughout fourth quarter, we're still very confident that that trend of consistently and sustainably generating free cash flow will remain in place and and that confidence is really underpinned.
On that enterprise breakeven that we've worked so hard to drive as low as reasonably practical impact and just as a reminder, in the second half of 2020, our breakevens really for the second half of this year are in the low thirtys right. So I just want to remind.
Everyone of that so I think we're on the right trajectory. It's building on our track record that we firmly established before I think we had this.
Black Swan event at the beginning of this year, we were delivering on all of those metrics that matter in 18 and 19, we had returned $1.4 billion back to our shareholders in that period and obviously when you look at the delivery of free cash flow from our model, whether it's kind of it.
Kind of our view of mid cycle pricing, it kind of $600 million of free cash flow or with even just modest pricing improvement towards $50. You can see the outsize torque that we have to the oil price would that number going up basically to $900 million.
And then it kind of touched into my just my follow up just seems like the cycle times and you guys continue improve can you maybe just discuss Eagle Ford bottom cycle times is certainly just continued improvement is that.
Do you have flexibility on on when you're when you're looking at this plant.
Yeah, well certainly cycle times is an integral part of the overall, well economics, just slight well cost and productivity and it's our ability to really minimize that time for when we start on the well until we actually start making money and so maybe I'll just kick over to Mike and just let him talk about we continue.
To see improving trends in both the Eagle Ford and Bakken on those points yes.
I'll just build on that a little bit in New York I think.
It was touched on some of this during his comments was probably three or four is that.
We're particularly focused on and we're seeing the benefits I think and the well design area as well as the cycle claims our emphasis is maximizing volumes as well as returns.
Think is helping the another big area and this came out in the deck was just execution efficiency I.
I think our teams have a relentless focus on just driving further improvements there.
The third area, probably highlight would be supply chain optimization, we have a we have we have modeled should cost model. So we have a good understanding of.
How much things should cost and.
And we really use that to drive our sourcing strategies and then the third or the fourth element would just be commercial leverage and really comes in the form of deflation. What I would say is the first three are more structural in nature, and that's where our teams spend most of our time.
Very good thanks, Lee Thanks, Mike Thanks.
Thanks Neil.
From Scotia Bank, we have Paul Cheng. Please go ahead.
Thank you good morning.
Good morning, Chris.
Thank you two questions one is sort in one maybe is a little bit critical of.
This one is that with the number of wells coming on stream.
Coming in my in the pool.
A quick one would have thought you'll production should be up somewhat from the third quarter that boom in oil and.
And you are a threat according to your.
Guidance.
Just simply a timing on those wells coming on stream or the us and they are the reasons.
The second question is that one of your competitors.
Thank you.
And mostly that.
Size does method in terms of.
The attractiveness to your Investor and things that you are the lowest certain signs.
Probably less than 10 billion that you invest that will just like loaded and not even on the way to screen and just curious whether you agree with that assessment and also that what the how you take that into consideration and support looking at M&A opportunities and that when we're looking at.
Mm Hmm.
Is the one time deal merge.
Merger partner that from your standpoint from a they use on you said that they will be operating on loan of synergy in the existing basin or diversification is a benefit. Thank you.
Okay, Paul I'm going to I'll start trying to tick through those but thank you. Thanks for the question now first of all maybe I hope on the short answer your question.
For the number of wells Onstream in fourth quarter. Those we do have a higher well count in fact, we have about double the wells to sales between third quarter to fourth quarter, but those are arriving relatively late in the quarter and therefore, you don't necessarily see the full impact.
Of those barrels coming online in fourth quarter, and even though obviously, we talk about our business on a quarterly basis, we are managing our business.
Through the quarters and looking ahead to already to 2021 as well.
On your on your second question you know just around you know speculation around you know what what generates investor relevant first of all all maybe just start off by saying the sector.
Must certainly mature and part of that maturity will probably be consolidation that ensures assets getting the hands of the most efficient and financially healthy operators.
Having done all the repositioning that we've done for our company significant and sustainable free cash flow shareholder friendly actions.
Track record dating back to 2018, we certainly believe we are one of those operators at the end of the day.
Profitable and sustainably and P. companies that deliver on the financial metrics the matter are going to attract investors.
Irrespective of size any size, obviously isn't isn't element, but if you have a profitable company that generates strong free cash flow across a lower and more volatile price deck and that takes investor friendly actions. My perspective is that's an investable thesis I mean, our belief is it an empty company should be judged on.
Its financial outcomes and profitability scale alone does not secure financial performance and I'll, just maybe just leave it there.
Yes.
Thank you.
From Goldman Sachs, We have Brian singer. Please go ahead.
Thank you good morning good.
Good morning, Brian.
First question is with regard with regards to a return of capital and leave it to the analyst community.
Upon your re initiation of a dividend to ask about incremental return of capital, but I guess, we'll go there anyway.
Can you just talk philosophically about your framework.
The clear about the reinvestment rates are the prioritization of the base dividend and the balance sheet enhancement getting down to one to one and a half times leverage weird as incremental return of capital fit into that does leverage need to get down to one to one and a half times before the base dividend or any other return of capital can go up or is there some middle ground.
Well, I think and I'll kick over to today and in just a second here to to maybe build on on on your question, Brian but the reality is that I think what we demonstrate in the last quarter as we can do both we can walk and chew gum, meaning that we can we can address our balance sheet as well as be focused on return of cash to shareholders.
Beyond the base dividend I think clearly we're going to have to see achievement of some of our balance sheet goals, which we view as kind of mid term goals, but maybe I'll kick over to Dane and just let him talk a little bit about the prioritization of free cash flow, which by the way is a great problem to have.
Yeah, Hey, Brian Yes.
Good question that Youve returning capital is obviously to shareholders is obviously a top priority for us.
And that's why we went ahead.
When we got confidence in our free cash flow generation ability at these price levels and reinstated that base dividend. We're very confident that we can support that and then we conducted a series of liability management transactions were designed to do a couple of things one to cut that billion dollar 2022 maturity in half.
And two to accomplish a starter step toward deleveraging and we accomplished both of those goals so that.
2022 maturity is very manageable, we de levered by $100 million I would say first call on cash near term will be incremental deleveraging and we've got lots of levers in our future maturity towers to do that we don't have to wait to maturity dates to take care of it as we just demonstrated.
And in a modestly improving commodity price environment, I think that opens up the aperture for doing.
Both doing more return of capital to shareholders, while while we de lever.
So I think that the fact that we're positioned as such a strong free cash flow generator.
Gives us a lot of Optionality, there and we'll exercise that optionality, but near very near term it will be balance sheet first and then we'll keep an eye out for returning capital to shareholders.
Great Great. Thank you and then my follow up is to continue on the M&A threat here and you are pretty clear about the criteria that needs to make the company better.
And not just solely solely for scale, but I wondered if you could characterize the market today and whether those opportunities.
Exists or whether in your mind is just more more more theoretical and then if you look across your portfolio you highlighted the inventory that you have in the Bakken and Eagle Ford in particular is that is there more or better opportunity to pursue incremental skills there versus to try to bring up the Permian or Oklahoma.
Two maybe compete from a size or scale perspective relative to the Bakken and Eagle Ford.
Yeah.
I think Brian just to maybe reiterate our stance.
Because it is obviously I think the topic does your.
We have confidence in our organic model.
But it's not at the exclusion of strategic options that could enhance our financial outcomes and and part of the path to get there may in fact be be scale.
And as you stated to that end, we do have a very well defined criteria.
I wouldn't say, it's purely theoretical what I would say is is very exacting because we are already generating such strong and compelling financial outcomes. When you look at our Breakevens. When you look at the capital efficiency of our portfolio.
When you look at the free cash flow yields that we can generate at today's pricing as well as even with modest price support.
We have to be very confident that any strategic option that we were to pursue would in fact be additive to delivering against those those financial outcomes.
In terms of specific preference to basins.
Although that today, Bakken and Eagle Ford or certainly receiving the lion's share of.
Capital allocation again, I'll take you back to that capital efficiency chart, Thats whats driving that we're going to the highest return most capital efficient elements of our portfolio.
We are also governing that investment by this reinvestment rate criteria and so.
There are very competitive opportunities that reside in both northern Delaware in Oklahoma, and we clearly see those competing for capital as we as we move forward in time.
Would we obviously look in our more mature basins of the Eagle Ford and Bakken given our our operations excellence in those basins will certainly we would but.
But we would not limit the aperture to just those two basins I mean to to really to meet that criteria. I think right. Now you do have to keep that aperture wide open and but still rigorously test against it because we certainly don't want to take action that would again a road this.
Strength of what is already a compelling organic business model.
Great. Thank you thank.
Thank you Brian.
From Wells Fargo, we have the team Kumar. Please go ahead.
Hi, good morning lean team. Thanks for taking my question.
Good morning, good morning.
Maybe I want to ask about M&A.
One thing I noticed was in the.
Okay.
You can manage to keep production relatively side weve almost six months is no.
Deal activity or new activity, just kind of curious look what's driving that is there some kind of base management or something that we should be thinking.
[music].
Yeah excellent observation and question and the way I would think about Oklahoma is first of all as we kind of wrapped up the drilling and completion program in Oklahoma. We had some very successful wells that came out of that program. In addition to that clearly Oklahoma.
We did see some shut ins during the peak of the crisis and so as we've all some of those wells back online. We did in fact see some elements of flush production, but I think overall there is a more moderate decline that exist and much of the Oklahoma portfolio, just due to the nature of those.
Those of those reservoirs and so yes, Oklahoma has been a great successor, and I also want to just you know shout out to that team is despite having de minimis DMC activity their focus on uptime reliability and that type of performance has just been outstanding and our most profitable barrels.
Are the ones that we've already invested in and so you see that that team taking it to a whole new level and really being focused on keeping those existing barrels online and ensuring that everything from gas lift optimization to keeping our surface facilities.
Up and running so I think that's what you're seeing in that and that decline curve in Oklahoma.
Thanks, and then I guess the other question, which has been asked to tell us a little bit differently I guess.
You exit the year.
Few more completions and obviously this has been a challenging year one of the things you focused on in the past and readability of your spending and activity. How soon do you think you'll get back to that.
In 2021 or maybe later.
Yes, yes.
I think you'll probably need to differentiate activity, perhaps between when wells to sales come online actually our activity is very ratable in many respects in the third and fourth quarter, meaning that we have two frac crews essentially running basically six drilling rigs running what you're seeing is.
As obviously as wells come online from pad drilling they do tend to come on in batches. We have if we have a pad that has exceptionally long laterals that will take a bit longer to get it online and so I think what you're seeing is some natural variability in the activity I think probably the best way to look at it will be the case.
On a look through third and fourth quarter and kind of put those two together and kind of look across the average of that half year and that really delivers what is I think a more indicative ratable capital spend recognizing there is going to be variability on when wells are delayed.
I heard I mean again, we don't we're not tailoring those wells to hit at certain points in a quarter. I mean, we're we're driving that sick those six rigs in those two frac crews to maximize efficiency and of course, the wells comes to sales as they come to sales.
Great. Thank you for your answers.
And from Bank of America, we have Doug Leggate. Please go ahead.
Thanks, Good morning, Lee good morning, everyone.
Good morning, Doug.
Leo who are doing well.
I admired the continued to disclosure on the free cash flow, which is obviously what everyone's focused on my question is longevity.
What do you thinking today when you look at when you talk about a billion dollars sustaining capital.
What's the longevity of the portfolio with Rex at this point on I guess.
If you could share also maybe it's the second question.
It should also what proportion about cost will create custom currently is coming from EG.
Thanks.
Yes, I'll, maybe I'll take the first part on on longevity, and maybe I'll kick over to Mitch talk a little bit about EGI performance and its contribution.
Clearly done for US we believe very strongly in.
The the three elements of resource enhancement that I talked about earlier organic enhancement within basin.
In addition to smaller trades and acquisitions and then of course, the Rex program that you mentioned all of those are embedded in our forward outlook, we don't view that as an either or proposition, we want to ensure that even within our benchmark maintenance case that we're continuing to reinvest.
West in elevating in basin performance in basin resource as well as continuing to support rack and have the financial flexibility that if there is a market based opportunity that we can act on that strictly to the longevity, let's just kind of set all that to the side and and even zero that out we.
We have high confidence as you've seen and some of the presentation material that the Eagle Ford and the Bakken are superior to.
To really any of the U.S. shale plays and we have.
A 10 year inventory life in both of those basins that we believe can drive the business to generate consistent outcomes to 2021 in other words, we don't see.
A falloff in that performance as we move forward in time, because we're going to obviously continue to work on cost efficiency and productivity gains et cetera. So we see that model is being consistent and really being complimented then.
Bye.
The more competitive opportunities that we still have access to and Oklahoma and northern Delaware, particularly as we see strengthening and secondary product pricing, particularly gas and Ngls. So we are very confident in the longevity of free cash flow delivery.
And we're also equally confident that we can continue to progress our I'll call at resource enhancement work as part of our reinvestment rate framework.
Maybe I'll just kick over to Mitch for just a minute to share a few thoughts on E G and kind of not only the path to that todays contribution of AG, but kind of what that future contribution may look like.
I appreciate it.
Good morning, Doug.
You know consistent with how we've talked about IGI for a number of years and quarters. It certainly.
A strong asset for us and has historically generated mean.
Meaningful free cash flow this year like the rest of our business you know IGI is certainly not immune to the price pressure that's occurred.
However, as we move in through third quarter and into the back half of the year now we have seen modest price recovery across the board.
We've got a Henry hub index contract at the LNG facility methanol prices have certainly improved significantly and so.
We would expect to return to meaningful dividends.
In the fourth quarter from that business.
Having said that I think more broadly your question you know our us business generates significant free cash flow as well.
And particularly from the Bakken and Eagle Ford assets, where they have a track record of doing that for some time.
So with respect to EG going forward.
I would expect 2020 to be a bit of an outlier on the low side. It's a it's an asset that doesn't require a lot of.
Continuous investment we've got the 11 backfill project is proceeding on schedule coming on in the first half of next year. Soon this a price recovery modest price recovery.
Certainly relative to Q2.
And we continue to progress and pursue additional regional gas opportunities, where we've got this.
Really world class infrastructure lets uniquely positioned with.
Ccs have discovered an undeveloped gas around us in the region.
And are at various levels of maturity with a number of interested parties in trying to.
Enhance and pursue those opportunities further.
Well just to clarify I'm looking at slide eight.
2021 guidance.
Josh I'm, just trying to get a handle those.
Oh proportional song.
Can you tell us what was coming from New York is really the question zones.
Yes, I mean, certainly you Doug we can get more into that when we actually put forward at a physical business plan and talk a little bit more explicitly about the sources of our free cash flow, but the reality is as Mitch pointed out a big proportion of that is coming from the U.S. resource.
Plays and.
And that's really and if you look at the fact that we had obviously some some maintenance et cetera at AG early.
Earlier this year.
So there have been some some impacts that and then coupled with the price dislocation that you know that Mitch referenced you know its contribution has been pretty pretty relevant on a relative sense has been relatively small this year.
As we move more into more constructive gas pricing certainly we would expect AG two to perhaps come back more equivalent to historic levels that we've seen in that asset.
Rewind back to 2000, 1980 was throwing off considerable free cash flow, but for US. There is a obviously this is where the diversity of the portfolio really comes into play.
Because we have that diversity not only across the basin, but also across the various commodity types and in this case EG may have been penalized for gas early in the year, but it could step up as we move into 2021. So I would just say more to more to come as we move from kind of talking about.
Benchmark case to the physical business plan.
Thanks Little films are piece into loans, okay. Thanks, Doug.
Thank you, we'll now turn it back to Lee Tillman for closing remarks.
I wanted to end by recognize our employees and contractors have been so resilient. During these challenging times never losing sight of our core values. Thank you for your interest in marathon oil and that concludes our call.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.
Yes.
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