Q4 2020 Marathon Oil Corp Earnings Call
Before today at this time all participants are in a listen only mode. Later, we will conduct a question and answer session during which you can dial star. One if you have 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.
Yesterday after the close we issued a press release of slide presentation, and Investor packet that address our third quarter results. Those documents can be found on our website at marathon oil dot com.
Joining me on today's call are Lee Tillman, our chairman President and CEO, Dane Whitehead executive VP and CFO, Pat Wagner Executive VP of corporate development and strategy, Mitch Little Executive V. P advisor to the CEO and Mike Henderson Senior VP of operations.
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. Today will also refer to some non-GAAP financial measures and reconciliations to the nearest corresponding GAAP measure can be found on.
On our website 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 short intro I'll turn the call over to Lee who will provide his remarks, we'll then open the call up to your questions.
Thanks, Guy and good morning to everyone joining us on the call.
I wanted to start by again thanking our employees and contractors for their continued resilience and dedication as we manage through the ongoing COVID-19 pandemic.
Safe and environmentally responsible operations are central to our company values into our commitment to our stakeholders.
<unk> of our people is my top priority.
I'm pleased to report that our year to date safety performance as measured by total recordable incident rate is the best in our company's history.
I am proud of our people they of residence of the challenge in a demanding year.
Rest assured we will continue to manage COVID-19 risks diligently through our business continuity and 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 I'll mention his wise counsel and guidance of CEO and wish him all of the best as he transitions to the next chapter in life. Thank.
Thank you and best of luck to you and Sandy.
It goes without saying that the macro environment for E&ps and for energy companies more broadly remains challenging amidst this historic down cycle, but now is not the time for panic, but rather of time for healthy companies to press their advantage and not prematurely react to what does it best of distorted and transitory Maher.
<unk>.
While global inventories have been drawing they still remain well above historic levels.
And with uncertainties characterizing both the demand and supply side of the equation the range of potential outcomes for future commodity prices remains wide and difficult to predict.
As I, often remind our team we can't control of the macko at macro and we certainly can't predict the oil price.
Prudent operators like ourselves won't be distracted by external forces, but we'll focus on the elements of our business within our control how we allocate capital how we manage our cost structure and how we execute.
In the face of this uncertainty the M. P industry must remain disciplined and recognize that at least in the near term the world simply does not need additional supply.
At Marathon oil, we have a long standing working definition for what capital discipline looks like.
It's allocating capital with the right priorities in mind to improve corporate returns and to generate sustainable free cash flow across a wide range of commodity prices its taking investor friendly actions with that free cash flow prioritizing debt reduction and return of cash to shareholders.
And its differentiated execution by managing our cost structure to improve our resilience and delivering peer leading capital efficiency that underpins free cash flow breakeven among the lowest in our industry.
Essentially continuously improving all aspects of our business, while meeting our commitments to all stakeholders.
It's also leveraging the flexibility of our multi basin portfolio and further strengthening our investment grade balance sheet to weather volatility.
Third quarter results all of our strong proof points against this framework as we generated $180 million of free cash flow and made important progress on both returning capital to our shareholders and improving our balance sheet.
But this is not of strategy, just a quarter or two in the making of nor is it simply going with the trend of the day.
Heading into 2020, I believe our company had uniquely establish a track record of delivering on exactly this brand of capital discipline demonstrated by multiple years of free cash flow generation and significant return of capital back to shareholders.
More specifically as highlighted on slide four of our earnings deck across 2018 in 2019 through a disciplined development capital reinvestment rate of 77%, we generated significant free cash flow and returned 23% of our cash flow from operations or one.
$4 billion back to our shareholders.
Of this track record of actual delivery is unique to our space, but not new to marathon.
2020 has unquestionably been a transitional year for us and for the industry. However, we have successfully leveraged the supply demand crisis to further optimize and enhance our business model.
Not only have we pull the necessary levers to protect our balance sheet liquidity and to generate free cash flow. This year in a difficult environment. We have also materially improved the resilience of our business and have dramatically enhanced our ability to generate robust financial outcomes.
As we look ahead, our long held core priorities won't change, but we recognize the environment has our challenge is to deliver the same or better shareholder friendly outcomes. As we did in 2018, and 2019, yet and a lower and more volatile commodity price world.
Slide five of our earnings deck highlights, how we have repositioned our company to meet this challenge.
Our capital allocation priorities are clear and we are singularly focused on what adds shareholder value, while offering a combination of downside commodity price resilience of <unk>.
Alongside outsized leverage to even modest price support.
We have used our 2021 benchmark maintenance scenario to hold oil production flat to fourth quarter 2020, as a reference point.
Note that this maintenance scenario is not reliant on any outsized advantage associated with drilled but uncompleted well drawdown is on an unhedged basis and even includes a modest level of resource play exploration spending.
Based on public disclosure this benchmark maintenance case delivers capital efficiency superior to our peers.
In a more challenging oil price environment call. It below $40 per barrel of <unk>, we will lean on our industry, leading free cash flow breakeven.
Our corporate breakeven for 2021 under our benchmark benchmark maintenance scenario is less than $35 per barrel of Debbie Ti in fact, assuming gas prices consistent with the current forward curve, we could fund both our maintenance capital budget of about $1 billion.
And our base dividend at an oil price of approximately $35 per barrel.
And this downside environment are key objectives will be to find our base dividend and protect our balance sheet. It goes without saying that we will continue to prioritize financial returns and a.
Normalized our mid cycle oil price environment 40 to $50 per barrel of <unk>. 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.
At the middle of this range of $45 of UTI, our maintenance scenario would deliver over $600 million of free cash flow in 2021, a yield of almost 20% on our current equity value.
We have a target of reinvestment rate at or below 70%, making available 30% or more of our operating cash flow for investor friendly purposes, prioritizing our base dividend and balance sheet.
Even at the low end of this price range more consistent with the current forward curve, our reinvestment rate would not trend above 80% and we would generate robust free cash flow for shareholders.
And a higher oil price environment $50 per barrel or higher our core priorities won't change we will maintain our focus on corporate returns on free cash flow generation production growth will remain an outcome, but will be capped at approximately 5% underscoring our commitment to capital discipline and to our.
<unk> free cash flow and an improving commodity environment.
Our upside leverage to higher oil price is among the best in our peer group and something we will protect so our shareholders can participate in the eventual up cycle.
At $50 per barrel of <unk>, our maintenance case could deliver over $900 million of free cash flow in 2021 for a yield approaching 30% and thats environment, given the magnitude of potential free cash flow balance sheet enhancement would be accelerated and we could achieve our targeted leverage metric.
In short order.
We would also be well positioned 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 breakeven is backed by the Eagle Ford and Bakken, which had the best capital efficiency of the U S. Shale plays the competitive data shown on slide six and seven of our deck is entirely sourced from an independent third party <unk>.
<unk> Energy's shale, well cube dataset and the graphics include data for over 20000 individual shale well since 2018.
We highlight here of simplified capital efficiency metric average per well of 180 day production on a 20 to one energy equivalent basis relative to total well cost.
While not a perfect proxy for capital efficiency and financial returns. It has a sound and transparent approximation that is easy to calculate and that can be consistently applied across basins.
From slide six the key conclusions from this independent third party data are fully consistent with our own bottoms up industry analysis first actual data for productivity and cost illustrates that the Eagle Ford and Bakken are the two most capital efficient basins in the U S second our perform.
<unk> is at the top of the pack in each of these two advantage basins and strongly exceed top quartile performance across all other U S shale plays slide.
Slide seven shows that we are not only delivering this industry, leading capital efficiency from the historic core of the Bakken and Eagle Ford Myrmidon in Karnes County, where we have a hard on and well recognized track record, but we are also delivering industry leading results across our broader acreage position in both of these.
Place.
We have talked quite a bit about organic enhancement in core extension in recent years.
These two graphics illustrate why.
The top graphic highlights capital efficiency of cross industry since 2018 with wells grouped by operator and by County.
Effectively this graphic shows exactly where our Bakken and Eagle Ford sub areas fit on the industry capital efficiency stack.
The key takeaway is that our core extension areas, Hector and Ajax and the Bakken and out of Scotia, and Gonzales counties in the Eagle Ford are among the best in all of 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 of forward inventory in both the Bakken and the Eagle Ford is concentrated in the historic and extended core areas shown on this page.
The concept of best summarizes this slide is sustainability or capital efficiency advantage is sustainable it's underpinned by high quality assets that will enable us to continue executing against our reinvestment rate framework.
Yes, well operational data points, such as 100 day cumulative production in total well cost are important day.
They ultimately only hold real value when they translate to tangible financial outcomes at an enterprise level.
Slide eight shows our company has a track record of delivering on the financial metrics that matter.
We arent just committing to a forward looking framework our framework is backstopped by our history of execution.
At the bottom left graphic on this as the bottom left graphic on this slide shows cumulative 2018 in 2019 free cash flow 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 our forward free cash flow potential thanks to significant cost reductions and our optimized frameworks.
Assuming our 2021 benchmark maintenance case, we are 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 that range from 60% to 80% depending.
On your price outlook.
The slides of that highlighted support my confidence in our company's competitive positioning and the sustainability of our organic business model. This.
Of this confidence is underpinned by differentiated financial outcomes that are compelling relative to our peers, including recently announced combinations as well as relative to the broader S&P 500.
Industry consolidation is clearly topical and overall as a positive for the structure and long term health of our sector.
And while our focus this year has rightly been internal we will always remain mindful of strategic opportunities in the marketplace that build upon our already outstanding financial outcomes.
That is our job.
Yet with such a strong organic outlook our business model is not reliant on M&A for success and any strategic action can be considered on our own timeline.
With scale. So often quoted is the rationale for consolidation we need to be clear that it has to be the right type of scale.
We aren't looking to get bigger we are looking to get better getting bigger for the sake of getting bigger is not sufficient rationale for a combination.
Any consolidation must first and foremost deliver improve business outcomes and we have a well defined criteria for assessing such opportunities.
We will not budge from those criteria and we won't force action near the bottom of of commodity cycle characterized by the elevated uncertainty associated with the 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.
Any transaction would have to make us a better company by improving our ability to sustainably deliver strong financial outcome and that is of very high bar with a decade of high quality inventory and the two most capital efficient U S basins of the Eagle Ford and Bakken complemented by the Optionality of competitive opportunities and <unk>.
Oklahoma and northern Delaware.
Self help in making our organic business stronger is a benefit whether we're going it alone or considering path to improve business performance and enhanced scale via consolidation.
These are not mutually exclusive alternatives and we can and must test all options that enhance shareholder return, but equally reject those that erode the underlying strength of our organic business model.
Transitioning to slide nine I'll briefly cover our third quarter results since.
Since the beginning of the pandemic and commodity price collapse. This year, our focus has been consistent on.
Optimize our capital allocation and improved capital efficiency reduce our cost structure and protect our investment grade balance sheet and liquidity third quarter results, including $180 million of free cash flow generation, along with the dividend reinstatement and gross debt reduction our tangible proof points that our efforts are.
Paying off.
Briefly hitting the third quarter highlights.
Third quarter Capex came in below our expectations on strong execution contributing to very strong free cash flow further well cost reductions were a primary driver.
Our average third quarter completed well cost per lateral foot was down more than 25% relative to the 2019 average we expect to realized further well cost reductions on both the Eagle Ford and Bakken in future quarters.
It is important to note and consistent with prior guidance second half 2020 gross company operated wells to 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 rate per oil a quarter earlier than expected fourth quarter oil 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 Boe.
Increase to our full year production guidance at the midpoint of <unk>.
Strong base production management, and improving gas capture across our asset base and in the Bakken specifically contributed to the result.
With respect to our cost structure, we drove U S unit production costs down 13% versus from 2019 average while international unit production cost achieved a record low for the segment, we reduced full year U S unit production expense guidance by more than 5% and international guidance by more than eight.
Percent.
We are exceeding our overall cash cost savings target for 2020 and are now forecasting $300 million of savings this year versus a prior expectation of $260 million.
This strong execution across all elements of our business drove the robust $180 million of free cash flow during the quarter.
We not only expect to generate free cash flow during again during fourth quarter, but we expect to be free cash flow positive for the full year.
And we are putting this free cash flow to good use advancing our dual objectives of returning capital to our shareholders through our base dividend reinstatement and improving our balance sheet through a $100 million gross debt reduction while cutting our 2022 maturity tower in half importantly, both the fourth quarter dividend.
Reinstatement and gross debt reduction were fully funded by actual third quarter free cash flow with our company well positioned for sustainable free cash flow going forward. We will continue advancing both of these important objectives.
To close out my commentary I will again take you back to our capital allocation framework summarized on slide 17 in our deck.
It concisely summarizes our value proposition by using our 2021 benchmark maintenance scenario as a reference point.
Impressive downside resilience as evidenced by our low cost structure and enterprise enterprise free cash flow breakeven approximately $35 per per barrel WT at 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 of free cash flow yield approaching 20% with a commitment to dedicate a significant portion of operating cash flow over 30% and of $45 barrel environment to investor friendly initiatives prioritizing return of capital to shareholders and balance sheet enhancements sit.
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 are 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.
<unk> supported by industry, leading capital efficiency at both on enterprise and based on 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 in a more volatile and lower commodity price reality, our proven track record of results combined with our reinvestment rate discipline, while enhance our transparency and.
<unk> 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&A session.
Thank you we will now begin the question and answer session. If you ask a question. Please press star one on your telephone keypad.
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Please standby for just a moment.
Yes.
<unk> from J P. Morgan we of Arun Jairam. Please go ahead.
Good morning, Lee and team.
Lee I was wondering if you 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 pipelines of yet I D. CS.
Nuclear deal, but I was wondering if you could start there.
Yes, well certainly I'm not going to provide any predictions. This morning of room, but I think we all recognize that.
Net energy policy and energy security really should be should be non partisan right.
There should be full alignment on addressing the dual challenge of meeting growing energy demand and of course, 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.
<unk>.
I think we have a responsibility to work collaboratively with whomever.
Prevails at the federal state and local level. So that we can meet that dual challenge. My view is failure on either is just not acceptable.
I think the current uncertainty around federal land is a good reminder of the benefits of our multi basin model asset diversification and capital allocation flexibility.
Certainly we are realistic that with of Buyten win.
Doing business on BLM land will become more difficult and those are his words not not mine.
I just want to remind everyone as far as marathon is concerned we have very limited exposure to BLM lands are in fact in our core plays less than 10% of our acreage production and reserves resides on BLM land.
So overall.
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 regulations that will have to be addressed and I take some solace in the fact, though to remind everyone that states like new Mexico have a vested interest in having a viable oil and gas industry.
We are of 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 day in and just let him kind of share a few thoughts on how we're thinking about that.
Hey, Arun sort of your choke me up with your tax question.
Yes, I do.
I'm not going to predict outcomes, either but it does look like from Republicans are going to hold that should lessen the.
Likelihood of aggressive tax policy changes, but certainly.
Vice President Biden has indicated multiple times that he wants to reduce in <unk>.
<unk> energy, which I think we all translated to Idc's.
In marathons case.
We're not expecting to be of tax cash taxpayer at the federal level until late in the decade.
We've got Nols and foreign tax credits.
Shield us.
From anything, but the highest commodity price environment.
Prevailing prices or any of the ranges that Lee talked about earlier, it's going to be many many years before we get there.
Adcs.
We actually you kind of manage our tax.
Strategy toggling between Nols and tax credits in <unk>, and frankly, we don't really leaning very heavily on deducting IDC from the current period, if that option went away altogether I don't think of would change our trajectory at all on cash taxes.
That's very helpful. My follow up question Lee.
He is just.
Regarding you know how youre thinking about portfolio renewal of 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 of renewal, but we do seem to be.
Somewhat of a buyers market as you'd think about A&D low premiums and given your low cost structure on the things that you could be a natural consolidator.
Just given that you know that.
But the fact that you drill your wells much lower than industry averages et cetera.
Yes, I think on the topic of portfolio of renewal I kind of take you back to the approach we have addressed before which is.
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.
We will continue to SaaS.
<unk> acquisitions and trades 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.
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.
On the third element that I would highlight would be our continued commitment to our resource play exploration program and I will just mentioned as we talk about our maintenance capital kind.
A benchmark case into 2021 that still does include an element of resource play exploration capital is 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 returns.
Focused.
That's the right approach for continuing to renew the business and grow our resource base.
Great. Thanks, a lot Lee.
Thank you.
Yeah.
From Barclays, We have Jeanine Wai. Please go ahead.
Hi, good morning, everyone. Thanks for taking my questions.
Good morning Jeanine.
I'm glad you didn't hear me is my first day back in the office of nothing works.
My first question. My first question is on the breakeven on my second question is on inventory. So on the 2021 maintenance breakeven that slightly improved in last night update can you discuss what assumptions are baked into that update of breakeven I know you mentioned natural gas price and strengthening but also in particular.
<unk> they seem to be improving every quarter and youre 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, no absolutely Jeanine and thanks for the question.
Maybe just starting with those underlying assumptions and what has really changed anything first of all just reflecting back on my comments I wanted to be really clear that 2021 benchmark maintenance case does not benefit from some outsize DUC drawdown.
It is of basically on an unhedged basis and it does still include some modest resource play exploration spending now in terms of the improvement improvement trend that you take note of that is on the back really of us continuing to bake in our actual performance.
And both operating efficiency and capital efficiency. So that's one of element and then as you note a sense of essentially in these scenarios were holding wty pricing constant the gas price does have an impact in our earlier.
Maintenance cases breakeven cases that we disclosed we had assumed nominally get $2 50 gas price given the forward curve outlook, we have bumped that up two to $3 and so when you kind of roll all of that in there in essence this.
This 2021 benchmark maintenance case, where we're spending of basically $1 billion to hold our <unk> 'twenty production flat, that's delivering essentially of $33.
Per barrel that'd be Ti breakeven $35. If you include our dividend.
If I could maybe shift and aimed to to your.
Inventory question and.
I'm sorry.
Yeah Jeanine did you have a follow up on inventory is specific question there.
Yeah. So I guess you know we've noticed of new slides of my presentation, which are great and very helpful.
You've discussed in the past of having about a decade of good inventory in the Bakken and Eagle Ford I think you mentioned it again today that could probably be maybe even a little bit longer given some of growth.
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 on a certain oil price to count good inventory and if you've got to on tier two in that decade.
And maybe any assumptions around spacing would be helpful. Thank you.
Okay. That's there's a lot of in that question, let me try on.
I'll try to try to unpack. It you know maybe first of all let's start 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.
And so when we look at that 10 years of inventory across both of the Bakken and the Eagle Ford.
That is high return of 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 Ah 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 plays we tend to look at both maximizing P V as well as returns within a given D su and Thats really against supporting this.
10 years of of inventories so there's there's nothing in <unk>.
I would 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, I mean, we continue to drive down our completed well cost and on the completions on 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 of the vectors.
Or in the right direction, so I'll just pause there Janine and see if I touched upon most of your question.
Oh definitely that was very helpful. Thank you.
Alright, Thanks Jeanine.
From <unk> Securities we have Neal Dingmann. Please go ahead.
Good morning Lee.
Could you speak you guys sounded confident in that.
I guess on 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 used from your side of data from the finance side, but you have that you have turned that corner to generate a yield of more consistent free cash flow on that inflection.
Yeah.
Yeah, Neil will certainly when you look at third quarter performance and bear in mind. This was on essentially of $40 of WT I kind of marker pricing when we're able to generate that level of cash flow in that type of environment, particularly as we kind of land even a bit earlier on our.
Exit rate expectations, I think that really tells the full story and and so as we continue to move.
Throughout fourth quarter, we're still very confident that that trend of consistently and sustainably generating free cash flow will remain in place and that confidence is really underpinned our on that enterprise breakeven that we've worked so hard to drive as low as reasonably practical and <unk>.
And just as a reminder, on the second half of 2020, our breakeven is really for the second half of this year or in the low thirties right. So I just want to remind everyone of that so I think we're on the right trajectory. It's building on a track record that we firmly established before I think we have.
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.
<unk> kind of a niche kind of of our view of mid cycle pricing at kind of $600 million of free cash flow or with even just modest pricing improvement toward $50. You can see the outsized torque that we have two of the oil price of that number going up basically to $900 million.
And then kind of touch into my just my follow up just it seems like the cycle times and you guys continue to improve can you maybe just discuss Eagle Ford Bakken cycle times, they suddenly just continuing improvement as 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 like well cost and productivity and it's our ability to really minimize that time from 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.
I'll just build on that a little bit of.
I think.
Lee touched on some of those hearings Coleman who's probably three or four areas that.
We're particularly focused on and we're seeing the benefits I think in the well design area as well as the cycle claims our emphasis on maximizing volume as well as returns I think is helping the another big area. On this came out on the deck was just execution efficiency.
I think our teams of our relentless focus on just driving further improvements there.
The third area I'd, probably highlight would be supply chain optimization. We have a we have we have modeled should cost models. 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 the fourth element would you speak commercial leverage and really on it comes in the form of inflation. 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 Neil.
From Scotiabank, we have Paul Cheng. Please go ahead.
Thank you good morning.
Good morning, Chris Corp.
Thank you two questions one is sort of in one maybe of some really critical.
One is that.
With the number of wells coming on stream.
Coming at night.
The fourth.
One would have on your production should be up somewhat from the third quarter natural oil.
U S threat of clothing to your kind.
Guidance.
That's just simply a timing of those oil coming on stream oil and they are the reasons.
The second question is that one of your competitor.
Thank you in the merchant amongst them on that.
Hi, Joe Smith on you in terms of.
The attractiveness to your investments and think that if Europe, you've always sort of been signs.
Lumpy and less than <unk> been in that Investor will just a low again and not even on the weight of screen and just curious whether you agree with that assessment and also that what the how you take that into consideration Linda.
Looking at in the M N.
Eh opportunities.
On that when we're looking at them in a.
So what tayo of ideal.
With your partner that from your standpoint from a base line is it that.
That day will be operating on one of scene of G&A existing basin all of diversification yes.
Thank you.
Okay, Paul all of the all star try to tick through those but thank you. Thanks for the question. So first of all of maybe I hope on the short answer question.
For the number of wells on stream in fourth quarter, though we do have a higher well count in fact, we have about double of 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.
Those barrels coming online in fourth quarter, and even though obviously, we talk about our business on a quarterly basis, we're managing our business.
Through the quarters and looking ahead to already of 'twenty 'twenty, one as well.
On your on your second question just around you know speculation around you know what what generates investor relevance you know first of all maybe just start off by saying the sector.
Certainly mature and part of that maturity will probably be consolidation that insurers assets getting the hands of the most efficient and financially healthy operators.
Having done all of the repositioning that we've done for our company.
<unk> and sustainable free cash flow shareholder friendly actions.
Track record dating back to 2018, we certainly believe we're one of those operators at the end of the day per.
<unk> on sustainable E&P companies that deliver on the financial metrics that matter are going to attract investors irrespective of size.
<unk>, obviously is an element, but if you have a profitable company that generate strong free cash flow across of lower and more volatile price deck and that takes investor friendly actions. My perspective is that as an investable thesis I mean, our belief is that an E&P company should be judged on its financial outcomes on profitability.
Alrighty scale alone does not secure financial performance and I'll, just maybe just leave it there.
Thank you.
From Goldman Sachs, We have Brian singer. Please go ahead.
Thank you good morning good.
Good morning, Brian My first question is which we got with regards to our return of capital and leave it to the analyst community right. 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, you've been very clear about the reinvestment rates.
Prioritization of the base dividend and the balance sheet enhancement getting down to one to one five times leverage weird is incremental return of capital fit into that does leverage need to get down to one to one five times before the base dividend or any other return of capital can go up or is there some middle ground.
Well I think in all of the kick over to day in and just a second here to maybe build on on on your question, Brian but the reality is that I think what we demonstrated on 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 shareholder.
Beyond the base dividend I think clearly we're gonna 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 day in and just let him talk a little bit about the prioritization of free cash flow, which by the way is of great problem to have.
Yes, Hey, Brian.
Good question returning capital is obviously to shareholders is obviously a top priority for us.
And that's why we went ahead.
When we've got confidence in our free cash flow generation ability of 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 are designed to do a couple of things one to cut that $1 billion 2022 maturity in half.
And two to accomplish a starter step toward deleveraging and we accomplished both of those goals.
So.
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 of that opens up the aperture for doing.
Folks doing more return of capital to shareholders, while while we delever.
So I think that the fact that we're positioned as such a strong free cash flow generator.
It gives us a lot of optionality, there and we'll exercise that optionality, but 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 thread here and then you were pretty clear about the criteria that it needs to make the company better.
And not yet fully fully per scale, but I wondered if you could characterize the market today and whether those opportunities are.
It exists or whether in your mind, it's more more theoretical and then if you look across your portfolio you highlighted the inventory that you have in the Bakken and the Eagle Ford in particular is it is there more of a better opportunity to pursue incremental scale, they're vs to try to bring up the Permian or Oklahoma.
To 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.
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 it is very exacting because we are already generating such strong and compelling financial outcomes. When you look at our breakeven when you look at the capital efficiency of our portfolio.
When you look at the free cash flow yields that we can generate that.
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, our Bakken and Eagle Ford are certainly receiving the lion's share of of capital allocation again, I'd take you back to that capital efficiency chart. That's what's 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 and 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, we'll certainly we would.
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 erode the <unk>.
Strength of what is already a compelling organic business model.
Great. Thank you.
Thank you Brian.
From Wells Fargo, we have the teen Kumar. Please go ahead.
Hi, Good morning, Lee and team Thanks for taking my question.
Good morning, good morning.
Maybe I wanted to ask on M&A.
One thing I noticed was in tubes.
Okay.
You have managed to keep your production relatively flat on.
Post six months with no.
View of activity of new activity.
Kind of curious what's driving that is there some kind of a base management or something that we should be thinking of.
Yeah excellent observation in 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 you know clearly Oklahoma did see some shut ins during the peak of the crisis and so as we brought some of those wells back on line. We did in fact see some elements of flush production, but I think overall there is a more moderate decline that exist and in much of the Oklahoma portfolio.
<unk> just due to the nature of those of those reservoirs and so yes, Oklahoma has been of great success on I also want to just shout out to that team is despite having de minimis D&C 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 thats what youre seeing.
<unk> and that and that decline curve in Oklahoma.
Thanks, Lee and then I guess theater question, which has been asked but I'll ask it a little bit differently I guess you're on.
Moving to exit the year with.
On a few more completions and obviously this has been a challenging year one of the things you're focused on in the past, it's been readability of your spending and activity.
How soon do you think you'd get back to that.
In 2021 of maybe later.
Yeah Yeah.
I think you probably need to differentiate activity, perhaps between when wells to sales come on line 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 youre seeing.
As obviously as wells come online from pad drilling they do tend to come on in batches. You know if we have if we have of pad that has exceptionally long lateral of it'll take a bit longer to get it online and so I think what youre seeing is some natural variability in the activity I think probably the best way to look at it will be the.
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 of more indicative ratable capital spend recognizing there is going to be variability on when wells are delivering.
<unk> I mean again, we don't we're not tailoring those wells to hit at certain points in a quarter I mean, where were driving that signals six rigs on 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.
Good morning, Lee good morning, everyone.
Good morning, Doug.
Lee of hope Youre doing well.
On a monitor the continued disclosure on the free cash flow, which is obviously what everyone's focused on my question is longevity.
What are you thinking today when you look at when you talk about $1 billion of sustaining capital.
What's the longevity of the portfolio without risks at this point on I guess.
If you could share also maybe it's the second question.
It should also what proportion of that cash flow free cash flow currently is coming from EG and I'll leave it there.
Yeah, I'll, maybe I'll take the first part on on longevity, and maybe I'll kick over to Mitch to talk a little bit about EG performance and its contribution.
Clearly Doug for US, we believe very strongly in the.
The the three elements of resource enhancement that I talked about earlier organic enhancement within basin.
In addition to the 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 all of benchmark maintenance case that we're continuing to reinvest.
<unk> in elevating and based on performance and based on resource as well as continuing to support Rex 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 said all of that to the side and even zero that out.
We have high confidence as you've seen in some of the presentation material that the Eagle Ford and the Bakken are superior.
Really any of the U S shale plays and we have.
On a 10 year inventory life and both of those basins that we believe can drive the business to generate consistent outcomes to 2021 in other words, we don't see.
On a fall off in that performance as we move forward in time, because we're going to obviously continue to work on cost efficiency on productivity gains et cetera. So we see that model as being consistent and really being complemented then.
Bye.
But more competitive opportunities that we still have access to and Oklahoma and northern Delaware, particularly as we see strengthening in secondary product pricing, particularly on gas and Ngls. So we are very confident and the longevity of free cash flow delivery.
And we're also equally confident that we can continue to progress on.
Our I'll call it 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 today's contribution of EG, but kind of what that future contribution may look like.
I appreciate it.
Good morning, Doug.
I think you know consistent with how we've talked about EG for a number of years and quarters. It certainly.
A strong asset for us and has historically generated.
Full free cash flow this year like the rest of our business you know <unk> 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 of 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.
In the fourth quarter from that business.
Having said that I think more broadly your question.
Our U S 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.
We would expect 2020 to be a bit of an outlier on the low side.
It's an asset that doesn't require a lot of <unk>.
Continuous investments.
We've got the <unk> backfill project is proceeding on schedule coming on in the first half of next year.
This price recovery modest price recovery of <unk>.
Certainly relative to Q2.
And we continue to progress and pursue additional regional gas opportunities, where we've got this.
Really world class infrastructure, that's uniquely positioned with Tcs of discovered an undeveloped gas around us in the region.
And are at various levels of maturity with a number of interested parties and trying to you know.
Enhancing pursue those opportunities further.
Well just to clarify on I'm looking on slide eight.
2021 guidance on the free cash flow I'm, just trying to get a handle on.
Low proportion of those on.
Free cash flow is coming from in June obviously, we read the question on reserves.
Yeah.
Yeah, I mean third week of Doug, we can get more into that when we actually put forward 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 play.
And and that's really and if you look at.
The fact that we had obviously some some maintenance et cetera at AEG earlier. This year. So there have been some some impacts that and then coupled with the price dislocation that that Mitch referenced.
This contribution has been pretty pretty relative on a relative sense has been relatively small this year.
As we move more into more constructive gas pricing certainly we would expect EG two to perhaps come back more of equivalent to historic levels that we've seen in that asset. If you rewind back to 2000 1980 was throwing off cash.
Considerable free cash flow, but for us there's a obviously this is where the diversity of the portfolio really comes into play.
Because we have that diversity not only across our basin, but also across the various commodity types and in this case <unk> 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.
On a benchmark case to the physical business plan.
Thanks, a lot of films of appreciated two loans okay.
Okay. Thanks, Doug.
Thank you I will 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.