Q2 2021 Marathon Oil Corp Earnings Call
[music].
Welcome to the marathon oil second quarter earnings Conference call. My name is Vanessa and I will be your operator for today's call at.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. With your question you can enter the queue by pressing Star then 1. Please note that this conference is being recorded on.
I'll now turn the call over to Guy Baber, Vice President of Investor Relations.
Thanks, Vanessa and thank you to everyone for joining us this morning on the call yesterday. After the close we issued a press release, a slide presentation and investor packet that address our second quarter 2021 results. Those documents can be found on our website at marathon oil dot com <unk>.
Joining me on today's call are Lee Tillman, our chairman President and CEO, Dane Whitehead executive VP and CFO, Pat Wagner executive VP of corporate development and strategy and Mike Henderson Executive 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 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 and with that I'll turn the call over to Lee who will provide his opening remarks, we will also hear from day and Mike today before we get to our question and answer session Lee.
Thank you Guy and good morning to everyone listening to our call today.
I want to begin by once again thanking our employees and contractors for their continued dedication and hard work in putting together another quarter of outstanding execution.
It is their hard work that makes all of the accomplishments that we will discuss today possible.
The combination of our high quality multi basin portfolio, our differentiated execution and our commitment to capital discipline are driving truly exceptional results for our company.
During second quarter, we generated $420 million of free cash flow, bringing free cash flow generation through the first half of the year to over $860 million.
For our $1 billion full year 2021 capital budget, assuming $65 W. T I and $3 Henry hub, we now expect to generate $1.9 billion of free cash flow this year.
This corresponds to a free cash flow yield north of 20% at a reinvestment rate of just 35%.
And the corporate free cash flow breakeven well below $35 per barrel Debbie Ti.
A powerful combination of results that we believe differentiates us against any company in our sector as well as the broader market.
We are successfully delivering on all of our financial operational and ESG related objectives.
We remain fully committed to capital discipline, and our $1 billion capital program as I've said many times our budget is our budget and we won't raise our spending levels with stronger commodity prices, but will simply generate more free cash flow.
Supported by such strong performance, we have just raised our quarterly base dividend by 25%. This is the second quarter in a row that we have increased our base dividend.
We are also accelerating our balance sheet objectives pulling forward achievement of our gross debt target, which will drive a shift in our return on capital focus toward equity holders.
Further we are enhancing our return of capital framework now targeting at least 40% of our annual cash flow from operations to equity holders and a $60 per barrel, Debbie ti or higher price environment, while still retiring future debt at maturity.
This is 1 of the most significant return of capital commitments to shareholders and our sector.
Perhaps most importantly, everything that we're doing is sustainable the proof point for the sustainability is our 5 year benchmark maintenance scenario.
We previously highlighted that this scenario can deliver around $5 billion of free cash flow from 2021% to 2025, and a flat $50 <unk> price environment with corporate free cash flow breakeven below $35 per barrel throughout the period.
Updating our scenario for a flat $60 per barrel <unk> price deck highlights the power of our balance, but oil weighted portfolio and the significant leverage we have to even modest commodity price support.
At $60 flat <unk>, and an average reinvestment rate of 40%.
We can deliver around $8 billion of cumulative free cash flow through 2025.
Or more than 90% of our company's current market capitalization.
Integrating our updated capital allocation framework with this maintenance capital scenario provides clear visibility to a leading return of capital profile over $1 billion of capital return to equity holders per year, and a $60 per barrel environment.
And this consistent financial delivery is underpinned by well over a decade of high return inventory across 4 of the most competitive U S. Resource plays complemented by our free cash flow generative EG integrated gas business.
Finally, the ongoing pursuit of ESG excellence remains foundational to our strategy.
Safety remains our top priority.
Our first half 2021 safety performance as measured by total recordable incident rate stands at 0.29 and follows on from 2 consecutive years of record setting company safety performance.
We have taken a leadership role in governance, particularly when it comes to reshaping executive compensation.
We have reduced compensation for executives and the board, while also optimizing our framework for better alignment with shareholders and the financial metrics that matter.
This includes the elimination of all production and growth targets as well as the introduction of a cumulative free cash flow target and our long term incentive program.
And last but not least we remain hard at work to reduce <unk> emissions, we continue to make progress towards achieving our GHT intensity reduction target of 30% in 2021, a metric hard wired into our compensation scorecard as well as our goal for a fifth.
The percent reduction by 2025, both of these relative to our 2019 baseline.
With that brief overview I would like to turn it over to Mike Henderson, Our executive Vice President of operations, who will provide an update on our 2021performance.
Thanks, Lee second quarter operational results were outstanding demonstrating that we remain firmly on track to achieve or outperform all of the key 2021 financial and operational objectives that we established at the beginning of the year.
First and foremost our consistent operational execution is translating to strong financial outcomes, $1.9 billion of free cash flow generation, assuming $65 <unk> on $3 Henry hub.
Our reinvestment rate of approximately 35% on a corporate free cash flow breakeven well below $35 per barrel double UTI operationally, we remained disciplined and focused on delivering on all of our commitments as Lee mentioned there is no change to our $1 billion full year 2021 capital Budge.
Raising our spending levels is simply not a consideration.
We are however, raising our full year U S oil equivalent production guidance by 5000 barrels per day or approximately 2% our full year oil production guidance remains unchanged.
While full year guidance for Capex on for oil production remains unchanged I would like to address the production profile for the second half of the year.
We now expect third quarter oil production to be relatively flat with the second quarter oil production of 170000 barrels per day before an increase during the fourth quarter towards the high end of our annual guidance range.
The flat trend in third quarter is largely the result of deferred Bakken production. As a result, we are taking advantage of our multi basin model on moving up a few Oklahoma and Permian wells on our schedule.
This action is returns on free cash flow accretive, especially in the current price environment.
Will be accomplished within a $1 billion capital budget on contributes to the 5000 borrowed the increase to our annual oil equivalent production guidance.
Our second half capital spending will be heavily weighted to third quarter schedule shifts gnomic this quarter, our peak quarter for completion activity, including our Rex multi well pads in the Texas, Delaware oil play.
As well as our enhanced return of capital framework.
Thank you, Mike and good morning, everybody.
My key message today is that we're clearly delivering on our top financial priorities, we're generating significant free cash flow bullet proofing, our already investment grade balance sheet, and returning significant capital to our shareholders, starting with our balance sheet strong operational and financial performance for enabling us to accelerate all the objectives. We previously.
We highlighted.
This includes our 4 billion gross debt target, which will now be achieved in early September when we close the full $900 million make whole redemption of the 2025 maturity.
With this balance sheet improvement, we're shifting our return on capital focus toward equity holders to be clear we have already made strong progress. This year on returning capital to shareholders, while simultaneously, reducing our gross debt. It really has not been an either or proposition.
We've increased our base dividend in each of the past 2 quarters or by 67% over this period, the annualized cash interest and interest expense savings from this year's $1.4 billion gross debt reduction with.
We will largely fund our last 2 based dividend increases, allowing us to keep our low corporate free cash flow breakeven on a post dividend basis effectively unchanged at $35 a barrel.
Importantly, we are now at a key inflection point, where we can accelerate the return of additional capital to equity holders above and beyond our sustainable and competitive base dividend.
Our commitment is underscored by our enhanced return of capital framework, which now features a target to return at least 40% of our cash flow from operations to equity holders, assuming a $60 per barrel WTS <unk> or higher price environment.
While also retiring future debt as it matures.
To put this commitment into perspective at a $60 price and with a maintenance level capital program. This equates to a return of over $1 billion to equity holders per year.
And equity return equivalent of more than 11%, 11% of our current market cap.
So it's premature to discuss the 2022 capital program at consensus.
At consensus operating cash flow per marathon in 'twenty, 2 our target return of capital to equity holders would be over $1.2 billion. This equates to a 13% return of capital yield.
A leading return on capital profile, among e&ps and indeed across the energy sector at large.
I'd like to emphasize that 40% of cash flow from operations is a minimum equity return target and so theres upside potential.
At $60 a barrel on a maintenance scenario, we'd still be building cash on our balance sheet, given our low projected reinvestment rate.
And importantly, we don't necessarily have to wait until 2022 to get started.
With the progress we've made in our balance sheet and assuming continued strong free cash flow generation. It is reasonable to expect that we can begin making incremental returns of capital to our equity holders during the second half of this year in 2021.
While we want to be clear and transparent regarding our commitment to deliver a peer leading percentage of cash flow from operations back to shareholders. We will retain flexibility regarding the exact mechanism market dynamics change over time and this flexibility ensure that we're returning capital in the most efficient and most valuable way possible.
For our shareholders.
Specific return on cash mechanism is something we'll continue to discuss with our board and with our shareholders, while both buybacks and variable dividends are on the table. We certainly believe that with the free cash flow yield north of 20% and equity valuations disconnected from commodity prices.
<unk> looked like a very accretive option with the potential to significantly improve our per share metrics. As a reminder, we have $1.3 billion of share repurchase authorization currently outstanding.
I'll now turn it back to Lee who will provide his closing remarks.
Thank you Dan.
To close I would like to briefly reiterate a few of the key takeaways from our second quarter and year to date results.
It should be clear that we have successfully positioned our company to deliver strong financial performance not only relative to our E&P peers, but relative to the broader S&P 500, as well and we can now deliver the strong performance at a wide range of commodity prices, we are price takers, not price predictors and must be prepared to not only.
Survive, but to thrive in a volatile commodity environment.
We are proving this year, we can deliver outsized financial performance versus the broader market. When we experienced commodity price support highlighted by an expected $1.9 billion of free cash flow generation this year.
Yet, perhaps more importantly, we are positioned to deliver a competitive free cash flow yield with the S&P 500 at much lower prices than we see today, all the way down to $40 per barrel that ATI oil price.
Such is the power of our sustainable cost structure reductions, our capital and operating efficiency improvements, which combined to generate our sub $35 per barrel breakeven.
To use <unk> term, we have further bullet proofed, our investment grade balance sheet accelerating both our gross debt and net debt leverage objectives and with this balance sheet improvement. We are now at an inflection point for capital return to equity holders supported by an enhanced framework that provides clear visibility.
A peer leading return of capital profile.
And all of this is sustainable.
Highlighting by $8 billion of free cash flow through 2025, and our $60 per barrel maintenance scenario with the majority of that free cash flow going back to our equity investors consistent with our capital allocation priorities.
To close our company was among the first to recognize the need to move to a business model that prioritizes returns sustainable free cash flow balance sheet improvement and return of capital. We have also led the way and better aligning executive compensation to this new model and with Investor expectations.
We are positioned to deliver both financial outcomes and ESG excellence that our competitive not just with our direct E&P peers, but also the broader market.
With that we can open up the line for Q&A.
Thank you we will now begin our question and answer session.
A question. Please press Star then 1 on your Touchtone phone, if you wish to be removed from the queue. Please press the pound sign or the hatch P. If youre using a speakerphone you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question. Please press star then.
Then 1 on your Touchtone phone, please standby, while we assemble our queue.
And I see we have our first question from Scott Hanold with RBC capital markets. Please go ahead.
Thanks, Good morning on.
I think.
The updated shareholder return plan is pretty interesting exciting frankly, if I'm an investor.
And Dean I think you had made mention of look it's something you all don't have to necessarily wait on until 2022 can you can you give us a sense of like how you think about timing as this more more.
More likely like look once you guys get.
Net debt reduction done in September that's when you would look at it and just kind of curious on the go forward plan is this something you.
Evaluate once a quarter has done what the prices were what the cash flow is to make that determination.
Is there any kind of structure of just getting a sense of.
How we're connecting that.
Ultimately that that return with with the commodity price environment.
Yeah.
Thanks Scott.
So the short answer to the question I said in my opening comments is we feel like we can begin this enhanced return to equity holders in 2021, but let me give you a little more context than that so.
Understand kind of where what I'm looking at as to when we start doing that and then I'll get onto your question about how do we execute it.
So.
Our priorities are clear, we haven't changed those generate corporate returns with significant sustainable free cash flow bulletproof already investment grade balance sheet and return a significant amount of capital to shareholders well ahead of schedule on our balance sheet plan and assuming continued commodity price support.
Free cash flow.
We think we can start to make incremental returns above our base dividend to equity holders in the second half of this year.
<unk>.
On the base dividends on touch on that for a second.
We've increased that twice now this year the <unk>.
Cumulative impact of that is a 67% increase year to date at the same time with accelerated growth debt reduction by $1.4 billion.
And there's a synergy there the annualized interest savings from the gross debt reduction will essentially pay for the dividend increases so our post dividend enterprise breakeven its release holding flat at $35 a barrel as a result of that synergy so getting the returns to equity holders and improving the balance sheet I'd say walking.
Chewing gum mission accomplished.
But more to come.
So strong operational and financial performance year to date and commodity prices allowed us to really accelerate the balance sheet to get to what I laid out on our last quarterly call as my bogey, which is $4 billion gross debt target.
We we gave notice to the trustee on.
On those 2025 bonds, the $900 million maturity yesterday that we intend to exercise the make whole on the entire amount it will close on September <unk>.
And so after we do that make whole redemption on September 3rd I would say it'll take a bit of time.
On to rebuild cash.
To a level, where we can manage interim months sort of working capital swings without having to lean too heavily on our credit facility, but given the commodity price support we're getting right now that should happen pretty quickly.
And so with our balance sheet goals goals achieved and continued.
Supportive commodity prices, we're right there at the inflection point, where we can start.
Moving ahead and like I said once.
Once we get.
Reasonable cash level I think of like $400 million is probably a reasonable amount.
And then we can move forward.
In terms of how do we execute on this thing and we've done share repurchases historically and.
Have really approached it.
On sort of a ratable basis thinking about it maybe a quarter at a time.
Set aside an amount of cash flow that generally that we've already generated that.
That we want to use to purchase repurchase shares over that.
Period was 60 or 90 days.
And then just execute ratably sort of dollar cost averaging into it.
And you can do that seamlessly it allows you to 2.
Manager.
Repurchase share repurchase limits more easily daily limits more easily when you do it that way as opposed to try and.
Outsmart the market and buy in bulk on big.
In big chunks.
Okay, and then just I mean part of that was <unk>.
You had different payout thresholds.
Depending on the commodity price outlook and I was just kind of just like how do you determine like this is a.
We're now looking at a 40% payout versus a 30% payout because you know obviously commodity prices right now.
Really point to more of a 40%, but obviously things can fluctuate so is it on the.
The quarter that was just a crude or the year. There was a crude or just you know the dynamics at work that are kind of currently in the marketing.
I think you all have a high class problem in sort of my second question is that when you look over each year, you've got $1 billion of cash that could come back to equity holders.
<unk>, 1.3 billion your dividend base dividends $1.50, so like.
You've got to do a lot more in terms of like giving money back to shareholders and so obviously, there's a lot of different mechanisms you can look at but like how do you think about what the best way to incrementally get back and I know, it's probably a little premature for that but if you can give us some structurally on on how you think about that high class problem of like giving money back.
Yeah.
Yeah. So I think Scott what was your second question as its share repurchases or.
Or variable dividends, yeah, I'm, sorry, just to be clear it's <unk>.
Like if you look over 3 to 5 year period your.
Multiples in excess of what your buyback is right now and your base dividends. So theres a lot of room to do a lot more right and so like as you know as an investor and analyst how should we think about like how you guys are thinking about the incremental ways of giving money back.
Yeah, Okay well.
Talk about that first and.
And then we can come back to are we targeting 40% or 30% based on fluctuations in commodity price so buybacks versus variable dividends, obviously, something we have discussed.
Frequently with our board.
We engage with shareholders about that on a regular basis.
The bottom line is our clear commitment is to be.
Delivering pure leading returns back to shareholders, regardless of the vehicle both options are on the table and there are pros and cons to each and here's how we think about them.
In the case of buybacks.
With energy equity valuations, so disconnected from commodity prices and our free cash flow yield at north of 20% buyback certainly it looked like a very accretive option for shareholders.
The current environment, we've executed consistently over time, they have the potential to significantly reduce share count and meaningfully improve all our per share metrics.
We're kind of in a new paradigm, which I think make share repurchases feel a little different maybe than they have historically.
And the new E&P model, where more capital discipline.
Through commodity cycles provides a platform for ratable repurchases over time, whereas previously.
And our price improving price environment the call for growth would have sent the capital to the drill bit or acquisitions as opposed to back to shareholders and the other point is our corporate breakeven has been driven so low that we could.
Continuing to generate free cash flow and execute buybacks at much lower prices and be more counter cyclical than we were in the past.
And of course buyback some more tax efficient from an investment and investors' perspective compared to dividends.
We do I noted in my comments have a $1.3 billion share repurchase authorization outstanding currently so as readily available to us.
In the case of variable dividends.
They are interesting they may conceptual sense in a cyclical industry kind of new unproven concepts in the I guess, you would say across the U S and certainly within our sector the jury's out.
Our minds on whether the stock price of oil will adjust to reflect a higher implied yield and a variable dividend.
Structure, but we do have a couple of pure examples to watch and and we are watching that to see how.
How that works.
So we have flexibility to employ either or both models over time and I would say there is certainly is the potential.
For that to change depending on market conditions, and what looks like the best value for <unk>.
For our investors.
I think the.
The share repurchase in the near term it seems like a clear winner from a value perspective.
And then we also have the flexibility within the base dividend Scott to increase that.
Our target there is to have sort of a 10% of operating cash flow in a pro forma 45 to $50 oil price environment in our base dividend and today, we're probably more like 7% to 8%. So we have some upside on that.
As well and we'll continue to we'll continue to think about that.
The is it a is it a $60.
World and we're returning 40% or is it a $50 world and returning 30% question.
Obviously, we're going to have to take a view we will have.
Quarters behind us when we've generated cash flow on a certain commodity price environment and they'll have a view forward will have a forward curve and also our outlook and I think all of that will inform.
On the levels of which were.
Planning to distribute cash flow and in 1 quarter, we decide we're going to dial it back a tad we can always catch that up later on.
This year, we have been.
Well above our target distribution levels on a combination of <unk>.
Debt reduction and base dividend and.
Did want to emphasize that point in my opening comments, what we're talking about here on a minimum targets not maximums.
That's all great I appreciate the color. Thank you.
You bet.
And Scott, maybe if I could just add a couple of just really quick comments here. Obviously, if we have that excess free cash flow, we can re up obviously our share repurchase authorization.
With.
Approval from our board and we've obviously done that in the past. Additionally, as Dan mentioned there is still is that headroom that resides within our base dividend and you know on the 40% versus 30% question, that's something that's going to be naturally governed by the free cash flow generation.
Given month or given quarter, and we're going to drive that free cash flow back to our shareholders and that the 30, 40% is kind of a natural outcome from that and as Dave stated that's a minimum objective and if you look at the combination of our gross debt reduction of $1.4 billion on $100 million.
So in and base dividend. This year, we're obviously well beyond that 40%. So anyway. It's a framework. It's 1 that we're committed to I think what we're trying to I think give investors is a strong commitment on the quantum we're going to get back to our equity holders and good.
Transparency on on timing around that while also preserving flexibility to get that back in the most efficient manner possible, which as Dan said today when we look at the.
On the facts in the market.
Certainly that would appear to be.
Leaning toward share repurchase.
Thanks again.
And we have our next question from Neal Dingmann with <unk> Securities.
Good morning, I will cut my great details on last question by the way.
Dave My question is really just on the reinvestment rate could you talk a little bit about that it continues to impress and I'm trying to think.
When you go forward for next year is this is this sort of an outcome.
Just based on the plan or is this reinvestment rate kind of something that you're focused on I'm, just wondering how youre thinking about that.
Yeah, Yeah, Hi. This is this is Lee Neil.
Certainly the reinvestment rate is something that we as an input into our planning process and really does reflect not only our commitment to capital discipline and driving corporate returns, but ensuring that we do in fact have that incremental cash flow available for distribution to our shareholders. So that.
He is a key input and then of course that drives both the financial metrics as well as quite frankly, the production output that comes from our our financial modeling. So that is the essence of our framework. In fact, that's 1 of the reasons why we tend to look at that return back to shareholders as a percent.
Of cash from operations because that of course is very consistent with our reinvestment rate framework as opposed to say taking a percent of free cash flow for example.
That's a great very notable on the improved continued improvement and then just last 1 quick 1 just you guys continue to be very steadfast on on obviously your spend.
Not not going up does that include what you just any any comment.
Comments, you can make about any sort of cost.
Whether that steel and stuff that we've already seen whether that's other type of in place and all the way to low anything you could talk about cost and if that is already baked into that under that spin.
Hi, Neal, it's Mike here I'll answer that 1 what.
What I would say at a high level, we are seeing inflation I think it's real but maybe as you were alluding to there is it is understood on.
And it's factored into our 2021 guidance.
Maybe looking a little bit farther afield, when we think about 'twenty 2 I would say, it's fair to say, we still got a lot of work to do before we prepare to talk about it maybe coming back to 'twenty..1 I think it is a similar message to what we've conveyed in the past.
We're seeing kind of low single digit inflation. This year than it has been driven primarily by all CTG. So so steel raw material availability and on even capacity constraints are kicking in.
I think the positive from from our perspective is we have pretty much pre committed to the majority of our requirements for the remainder of this year, so not really anticipating any further significant pressure on Dod area.
We have seen a little bit of pressure on other areas like fuels chemicals transportation related services tied to double UTI on.
We're seeing some labor challenges, where its head from time to time, what I would say is we are managing to manage all of those and we're doing that through <unk>.
A couple of areas on.
Just increased competitiveness.
On tendering, so kind of leveraging more competitive tendering and just manage competition.
I'd also say, we're delivering offsetting efficiency improvements in other areas of the business, that's that's helping us.
I think ultimately it's showing up in our metrics. So for example, our completed well cost per foot performance. We're on track to deliver our targets in Eagle Ford and Bakken. This year and then the other 1 would be no change to our capital guidance. So I just think it talks to great job that all of the teams are doing in managing this.
No great comments and been very noticeable nice job guys.
And thank you we have our next question from Doug Leggate with Bank of America.
Thanks. Good morning, everyone. Appreciate you getting me on Lee.
Well, you've given plenty of detail on the cash return on EBITDA, but if you don't mind I'm going to be on this just a little bit more.
And it really gets to the issue the current fashion.
Variable dividends.
That's still a gas part of your consideration.
Just wondering if you could kind of frame for us how you think about it.
Kodak create sustainable value.
In terms of what the market might be prepared to price centers repeatable, because obviously, it's highly subjective versus.
The obvious disconnect between where your stock is trading on.
On the cash flow you are generating right now so clearly it's a buyback question, but I'm just wondering if you could be more definitive about it.
Why 1 on multi other.
That seems pretty old and gallons.
Yes, yes, thanks for the question Doug.
It's a it's a dialogue that we continue to have but certainly when we looked at the the facts as presented today when we look at.
A stock that's generating a greater than 20% free cash flow yield when we look at the fundamental disconnect between the equity and the commodities when we examine I think a more capital disciplined business model, coupled with extremely low breakeven, which kind of take some of the pro cyclicality rich.
Ask out of share repurchases and certainly that would look like the case to be right now.
Variable dividend as Dave stated is something that's relatively new it.
Yes, conceptually at May makes sense for a cyclical industry, but as we focus on financial metrics, particularly per share metrics. There is a natural synergy there obviously.
By going after share repurchase, particularly when those shares are fundamentally undervalued on whether that be on an internal NAV basis or just on macro indicators from from the market side and so thats what were really focused on is in a in a more maintenance type world. How do we continue to improve on.
Our free cash flow yield and our per cash or per share cash flow and we think the strongest mechanism for doing that and something that the market can bake in is a very ratable and consistent approach to thoughtful share repurchases.
I appreciate it on us.
<unk>.
Pretty hard on this call.
Lee So I appreciate the answer.
If I could just a very quick perspective, because I think it is our policy debates going on right now.
<unk> equity volume as you.
Unlevered free cash flow minus unit.
Cash.
Seems to me that when you take cash flow for the balance sheet on.
On a backward looking basis actually reduces your equity volume.
Thank you Bob.
My follow up is hopefully a quick 1.
Then the balance sheet is obviously moving into terrific shape.
Has that changed your thinking about the need for on.
On policy and philosophy around hedging going forward and I'll leave it there. Thanks.
Yes, that's a great question it definitely factors into our thinking on hedging really.
Hedging is.
1 element of our overall enterprise risk management and the less.
Stress your balance sheet can get in a lower commodity price environment.
It kind of takes the the real strong impetus out of being heavily hedged.
It still is still a tool in the toolkit for us we've been fairly circumspect about entering into.
On new hedges in 2022, just kind of dipped our toe into the water there given the shape of the curve.
Just wanted to go in a whole hog and I think thats been.
It's borne out to be a good judgment, so far but expect us to be hedgers, but not heavy hedgers going forward and.
We'll be very methodical about it.
Yes, I would just maybe add to that.
That there are some structural things that allow us to approach our hedge book, a little bit differently and ensure that we can take advantage of upside performance and the commodity I mean, Dan mentioned, obviously, our balance sheet our cost structure. The fact that we do have a peer leading free cash flow breakeven that I'd also mentioned.
Our diversified portfolio not just the multi basin nature of it but the fact that it's a it's a oil weighted but very balanced portfolio, it's pretty much 50% oil, 50% gas and Ngls and so that gives us a very good balance from a market facing standpoint, and all of those things come.
Bind.
Give us a little bit different approach to commodity risk management that does allow us to take a bit more risk on the commodity given our talk to oil.
Appreciate the answers fellas. Thank you.
Thanks, Doug Thanks, Tim.
And thank you.
Our next question from David Heikkinen with Pickering energy.
Still getting used to that thanks, guys for taking the question.
The.
As I was thinking through this interplay between your buybacks and your dividend. So let's say you buy back 10% of your stock you are trying to balance the 10% of cash flow into the dividend should we think about his shares go down your base dividend basically goes up to keep the the total dollars isn't that kind of.
8% to 10% of operating cash flow. So you really are.
On getting a double benefit if you balance that through each year as you go forward.
Yes, David that makes sense, just as you stated it.
The synergy that we got from paying down debt and cutting interest interest expense and being able to redeploy that to base dividend you get sort of a similar synergy when youre buying back shares you are taking shares out of the system. The remaining shares can get a sort of a higher dividend allocated to them. So it all works pretty.
Well once you get a rolling on.
Importantly, David.
And you described it very very well.
That kind of virtuous cycle that you described allows us to keep our enterprise breakeven, even including the dividend well below $40, which is critical again as we just kind of talked about commodity risk management and volatility we want to make absolutely sure that we continue to protect.
That enterprise breakeven and like you said as we reduced the share count the absolute cost of our dividend load goes down which provides us more headroom for those existing shareholders to consider incremental base dividend increases.
Mhm Keith.
Keeps the burden of the dividend 1 of the larger company per ads in the past offset totally makes sense.
Just make sure I was thinking about that right on an annual basis.
The model yes.
That's good.
And I think British Derby from released your line.
No. Thank you that was all.
I appreciate it. Thank you. Thank you thanks David.
And if you have a question you can enter the queue by pressing Star then 1 we will take our next question from Paul Cheng with Scotiabank.
Good morning, gentlemen.
2 question piece first.
First on the taxes, so we source P.
How many wells you're going to bring on stream in the second in the second half and also that given from a stronger balance sheet.
The spending for the exploration program on that Alex day going to be over the next couple of years.
The second question, yes.
Neat.
Hey, guys.
1 of the best operating in Bakken and Eagle pump.
And but that's a limited running room on maybe that do you think that's sufficient.
Do you think that that makes sense for the industry, including you guys too.
To John caused with other people again, some more scale.
Joint venture.
To put all the APR to GAAP are you in those basins.
That's operating at about <unk>.
In Boston the Eagle Ford.
The 1 thing that that was July.
From cost efficiency with that.
That would be the future on the shelf for oil for the industry. Thank you.
Yeah.
Paul I, just want to make sure that we get all your questions and I'll kind of parse them out maybe around the table, but I think your first question was just around kind of the wells to sales profile as we go into the second half of this year and I'll let.
Yeah, and I'll, let Mike address that.
I think your second question was more around just.
Our balance sheet, giving us the ability to look at also more organic enhancement resource capture opportunities and how's that kind of folded into the business and then finally are there kind of consolidation options.
Within the Bakken and the Eagle Ford and does that make sense from an efficiency standpoint.
All right.
Sorry.
Lee on the last question is not so much about M&A, but yes Nate.
Joint venture that you're not losing okay, you just pull the opex to get them.
Yes.
I don't want to lose the ownership on the Opex, but does it make sense, that's a crude off that together as a partner that each 1 still on the answer you just that you'll have the best operator to 1 gets off the base on.
With a much better off that day.
Okay got it well, let's start with maybe the wells to sales question.
Hey, Paul It's Mike here I think you maybe out of Texas, Delaware question in there on the wealth sales. So I will answer that 1 and then I'll give you a little bit of color on the general wells to sales cadence in the second half of the year. So we've got 3 Texas Delaware.
Wells that we're going to be bring to sales in the second half of this year.
More broadly speaking prior full year guidance as you probably recall, we were given 165 to $2.15 was the range of wells to sales that we were looking at so a midpoint of $1.90, we do expect that to be a little bit closer to the 200 range.
We're expecting 50 wells to sales in both the Eagle Ford and Bakken over the second half of the year.
I alluded to in my prepared remarks that is going to be weighted to the third quarter for both assets and with Bakken, probably weighted a little bit more to the third quarter and then with the with the production deferment that we're seeing in Bakken is creating an opportunity in Oklahoma and.
Northern Delaware, So we're bringing a few wells online there as well in the second half of the year hopefully that answers the question.
Okay, well. Thank you thanks, Mike.
On the on the kind of on the balance sheet and resource capture spin I guess, the way that I would think about that.
Is that we continue to reinvest back in the business and even even within for instance, our $1 billion capital program. This year embedded in that of course is the Texas, Delaware oil play activity that that might just highlighted but also within basin. We continue to to do to chase opportunities that we.
We refer to as organic enhancement opportunities that have the ability to either add incremental sticks and or enhance the economics of existing inventory that we have in play and generally speaking we.
We try to allocate something on the order of about 10% of our capital program towards those type of resource capture inventory life type activities and Thats also even embedded in our kind of 5 year maintenance type scenario that same type of approach and again as you saw.
On the balance sheet gives us the platform to take some of that incremental risk on some of those resource capture opportunities.
On the last 1 just around the JV structure Jv's have typically, particularly large scale jv's, particularly in U S. Onshore. We have don't have a lot of really strong positive benchmarks. There they tend to really escalate the complexity we tend to look.
JV or drill code is there may be a smaller scope opportunity to look at acreage that likely is much longer dated for us and that we likely won't get to from a from a value perspective in the near term Lee.
Large scale I think we want to make sure that we're doing just what you asked which is we want to protect.
The operational excellence that we generate in places like the Bakken and the Eagle Ford and certainly would not want to see that diluted somehow in a JV structure, where some of that control maybe rest away from us so not saying that all jv's are bad. It's just that we just can't point too.
A lot of large scale <unk> in the onshore U S that have made a lot of sense for both partners.
So anyway, something that obviously, we will always consider all options anything that allows us to continue to leverage our operational expertise.
We certainly want to consider that but today I would say that's pretty pretty far down our list.
Thank you.
And thank you we have no further questions in queue I will now turn the call over to Lee Tillman for closing remarks.
Thank you for your interest in marathon oil and I'd like to close by again thanking all of our dedicated employees and contractors for their commitment to safely deliver the energy the world needs each and every day and that concludes our call.
And thank you ladies and gentlemen, this concludes our conference we thank you for your participation.
You may now disconnect.
Okay.
[music].
Yes.
[music].
[music].