Q3 2021 Marathon Oil Corp Earnings Call
Okay.
Welcome to the marathon oil third quarter earnings Conference call. My name is Cheryl and I will be your operator for today's call. 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. If you ever question. Please press Star then one on your Touchtone phone.
Please note that this conference call is being recorded.
I'll now turn the call over to Guy Baber, Vice President Investor Relations you can begin sir.
Thank you Sheryl and thank you as well 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 third quarter 2021 results. These 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 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.
The SEC filings with that ill turn the call over to Lee who will provide his opening remarks, we'll also hear from Mike Dana Pat before we get to our question and answer session.
Thank you Guy and good morning to everyone listening to our call today.
I want to start once again thanking our employees and contractors for their continued dedication and hard work their commitment to safety and environmental excellence and for their contributions to another quarter of outstanding execution and financial delivery.
While I get the privilege of talking about our company's impressive results and outlook today. It is their hard work that may followed as possible.
Third our commitment to capital discipline, and our differentiated execution, we are successfully delivering outsized financial outcomes for our shareholders highlighted by more than $1 $3 billion of free cash flow year to date.
For our $1 billion full year 2021 capital budget at forward curve commodity pricing, we now expect to generate well over $2 billion of free cash flow. This year at a reinvestment rate below 35% and a free cash flow breakeven below $35 per barrel <unk>.
Hi.
We are successfully delivering on all of our financial and operational objectives and achieving bottom line results that we will put head to head against any other energy company and against any other sector in the S&P 500.
This strong financial performance has enabled us to pull forward our balance sheet targets.
And this further improvement to our already investment grade balance sheet has given us the confidence to dramatically accelerate the return of capital to equity holders.
Under our unique return of capital framework, our shareholders get the first call on cash flow.
Mhm are 40% of our total cash flow from operations in the current price environment.
Consistent with our commitment to shareholder returns and our objective to pay a competitive and sustainable base dividend, we have raised our base dividend by 20% this quarter.
This is the third quarter in a row that we have increased our base dividend representing a cumulative 100% increase since the end of 2020, a sign of the increased confidence we have in our business.
We are also targeting approximately $500 million of share repurchases during the fourth quarter with $200 million already executed.
At a free cash flow yield north of 20%, we believe our equity offers tremendous value. Additionally.
Additionally, there remains a dislocation between our equity and strengthening commodity prices, coupled with a more mature business model that underwrites repurchases through the cycle.
Further buying back our stock for good value provides the added potential of significantly reducing our share count meaningfully improving all of our per share metrics, even under a maintenance scenario and increasing our longer term capacity for continued per share base dividend increase.
Looking ahead, the fourth quarter, including our base dividend and planned share repurchases. We expect to return approximately 50% of our total cash flow from operations to equity holders fully consistent with our return of capital framework that prioritizes the shareholder first.
Our financial flexibility and the power of our portfolio in the current commodity price environment provided the confidence for our board to also increase our total share repurchase authorization to $2 $5 billion to ensure we can continue executing on our return of capital plan as we progress.
Through 2022.
And perhaps most importantly, everything that we're doing is sustainable backed by our five year benchmark maintenance scenario and our ongoing pursuit of ESG excellence through top quartile safety performance significant reductions to our <unk> intensity and best in class corporate governance.
With that brief overview I will turn it over to Mike Henderson, our executive VP of operations, who will provide an update on our execution relative to our 2021 business plan.
Thanks weak third quarter, our operations were again solid demonstrating that we remain on track to achieve or outperform all of the key 2021 financial operational and ESG related objectives that we established at the beginning of the year.
First and foremost our consistent execution is translating to outsized financial outcomes highlighted by over $2 billion expected free cash flow with a material sequential increase expected in the fourth quarter, our full year 2021 reinvestment rate 35%.
Full year corporate free cash flow breakeven with $35 per barrel those ti.
Gas capture during third quarter also exceeded 99% as we continued to reduce our emissions.
Emissions intensity.
There is no change to our $1 billion full year 2021 capital budget, raising our spending levels. This year has never been a consideration consistent with our commitment to capital discipline.
There is also no change to the midpoint of our full year total company oil or total company oil equivalent production guidance.
We're also raising our full year 2021, EG equity method income guidance for the second consecutive quarter.
New range of $235 million to $255 million due to stronger commodity prices.
As a 30% increase from the guidance, we provided last quarter on a 120% increase relative to our initial guidance at the beginning of the year.
Our full year production of EG equity method income guidance truly contemplate an unplanned outage, we experienced in EG late in the third quarter.
Looking ahead to fourth quarter, we expect to finish the year strong with our total company oil production increasing to between 176 and 180000 barrels of oil per day in comparison to 168000 barrels of oil per day during the third quarter.
Quarterly production volumes are always subject to some normal variability associated well frame, but thats more significant sequential increase is due largely to deferred Bakken production associated with third party midstream outages strongly well performance and solid base production management.
We also expect our fourth quarter total company oil equivalent production to be similar to the third quarter at 345000 barrels of oil equivalent per day with a sequential increase in the U S. Offsetting a sequential decrease in Equatorial Guinea associated with previously.
And studies.
I will now turn it over to Dane Whitehead, EVP and CFO, who will discuss our strong operations are contributing to an improved balance sheet and an acceleration in return of capital to equity holders.
Thank you Mike.
As I noted last quarter, our financial priorities are clear and unchanged generate strong returns with significant and sustainable free cash flow bulletproof are already investment grade balance sheet and return significant capital to shareholders.
In the third quarter, we retired $900 million in debt, bringing total 2021 gross debt reduction to $1 4 billion and achieving our targeted 4 billion gross debt level.
With this milestone we no longer feel the need to accelerate additional debt reduction and going forward, we plan to simply retire debt as it matures and please note that we have no significant maturities in 2022.
This balance sheet repositioning was achieved well ahead of our original schedule, which opened the door to begin returning a significant amount of capital to equity holders.
Clear these are returns beyond our base dividend, which we just increased for the third consecutive quarter. Our base dividend is actually up 100% over that time period now at <unk> share quarter in the $50 million of annual interest savings will realize students or groups that will help fund the significant portion of the.
Speech dividend.
Our equity return framework.
Costs were delivering a minimum of 40% of cash from operations to shareholders <unk> is at or above $60 a barrel.
This is a peer leading return of capital commitment.
Also competitive with any sector in the S&P 500.
Our fourth quarter is shaping up to be an exceptionally strong free cash flow quarter due to a combination of higher commodity prices and oil volumes quite a bit stronger third quarter.
At recent strip pricing, we could take our operating cash flow to approximately $1 1 billion or about a 25% sequential increase versus the third quarter.
Add to that an expected increase in dividend distributions from EG and lower capex relative to the third quarter peak in fourth quarter free cash flow could almost double to north of $850 million.
So in Q4, we expect to have lots of flexibility to exceed our 40% of operating cash flow minimum thresholds for equity returns in fact through our base dividend and approximately 500 million share repurchases. We expect to return approximately 50% of our operating cash flow to investors during the fourth quarter while further.
We're improving our cash balance and net debt position.
As we also mentioned, we believe that buying back our stock in a disciplined fashion makes tremendous sense. There are many opportunities in the market right now that provides a sustainable free cash flow yield north of 20%.
Stepping back the full year 2021 financial delivery is exceptional.
$140 million in base dividends, $1 4 billion in debt reduction and $500 million of share repurchases, representing a total return to investors combined debt and equity of over $2 billion for over 60%.
Our expected full year operating cash flow at strip commodity prices.
Our actions in 2021 have successfully repositioned the balance sheet and kicked off a strong track record of equity returns going forward, we're going to stay laser focused on our financial priorities and a return of capital framework, taking into account our cash flow outlook, when making return decisions.
Because our framework is based on a minimum percentage of cash flow from operations and not free cash flow the equity investor will have the first call on cash not the drill bit.
I'll now turn the call over to <unk> EVP of corporate development strategy for an update on the resource play exploration program.
Thanks, Thanks, Dave We recently completed our 2021 rigs drilling program, which was focused on the continued delineation of our contiguous 50000 net acre position in our Texas, Delaware oil play.
As a reminder, this is a new play concept for both the Woodford and Meramec that was secured through grassroots leasing.
Very low cost of entry and with 100% working interest.
It is essentially an exploration colt hub that is complementary to our already established position.
In the northern Delaware.
We brought online our first multi well pad during the third quarter and while it is still very early initial production rates in both Woodford and Meramec are exceeding our pre drill expectations.
Specifically one of the Woodford wells achieved an IP 30 of almost 2100 barrels of oil per day, and an oil cut of 66%.
This appears to be the strongest woodford oil well ever drilled in any basin.
And while we don't yet have 30 day rates for the other two wells early indicators, including IP 20 fours are all very positive.
Our primary objective of this three well pad was to execute our first spacing test in the play to date, we are seeing no evidence of interference between the Woodford and Meramec consistent with our expectations due to over 700 feet of vertical separation between the two zones.
As I stated, it's still early and we need more production history to draw charter conclusions, but we're certainly encouraged by the initial results from this first spacing tests, including the record Woodford productivity.
The second objective was to continue to progress our learnings and cost improvements completed well costs, we expect.
Ultimately deliver well costs comparable to those achieved in the scoop and are aggressively leveraging our substantial experience Oklahoma to that Ed.
In total we have now brought online nine wells since play entry sort of successfully delineated our positions six wells with longer data production have collectively demonstrated strong long term oil productivity oil cuts greater than 60%.
Low water oil ratios below one and shallow declines.
Looking ahead to 2022, you should expect us to continue to integrate our learnings and progress our understanding of this promising play however.
However, we will do so in a disciplined manner and within our strict reinvestment rate capital allocation framework.
I will now turn the call over to Lee who will wrap this up.
Thank you Pat.
I will close with a quick summary of how we have positioned our company for success and a preview of what to expect from US in 2022 spoiler alert there will be no surprises in 2022 and no compromise with respect to our capital return framework.
If we can put some focus on the financial benchmarks that matter, we are delivering top tier capital efficiency free cash flow yield and balance sheet strength.
Our 2021 capital rate of sub 35% and capital intensity as measured by Capex per barrel of production are both the lowest in our independent E&P peer group.
Strong validation of our leading capital and operating efficiency.
We are also one of the few E&P is expecting to deliver a 2021 reinvestment rate at or below the S&P 500 average.
We're also delivering top quartile free cash flow yield this year, among our peer group and well above the S&P 500 average.
And we are doing all of this with an investment grade balance sheet at sub one time net debt to EBITDA at 2021 leverage profile also well below both our peer group and the S&P 500 average.
In short we are successfully delivering outsized financial performance versus our peer group and the broader market with the commodity price support we are experiencing this year.
Yeah, perhaps more importantly, we are well positioned to deliver competitive free cash flow and financial performance versus the broader market at much lower prices than we see today, all the way down to the $40 per barrel <unk> range.
This is the power of our sustainable cost structure reductions, our capital and operating efficiency improvements and our commitment to capital discipline, all contributing to a sub $35 per barrel breakeven.
Looking ahead to 2022, our differentiated capital allocation framework that prioritizes the shareholder at the first call on cash flow generation will not change.
Our commitment to capital discipline, we will not waver with maintenance oil production the case to be as we finalize our 2020 budget.
We believe the right business model for a mature industry prioritizes sustainable free cash flow and low reinvestment rates and meaningful returns to equity investors not growth capital.
Recall that we introduced a unique five year maintenance scenario earlier. This year that featured one to $1 1 billion of annual spending $1 billion of annual free cash flow at $50 Ti and a 50% reinvestment rate.
Given we are no longer living in a $50 per barrel environment and that prices are currently north of $80 per barrel. It is both prudent and reasonable to consider some level of a limited inflation up to about 10% that would yield modest pressure on the maintenance scenario capital range.
Importantly, this modest level of inflation pales in comparison to the uplift to our financial performance in the current environment.
With a 2022 maintenance scenario free cash flow potentially on the order of $3 billion at recent strip pricing or nominally three times the $50 benchmark outcome.
And under such a maintenance scenario, we are positioned to lead the peers once again with a 2022 free cash flow yield above 20%.
Are in excess of the S&P 500 free cash flow yield of approximately 4%.
Our minimum 40% of cash flow target translates to about $1 6 billion of equity holder returns next year.
But that is a minimum and we see significant headroom to drive that number higher at.
At the expected <unk> run rate of 50% of CFO 2022 equity holder returns would increase to approximately $2 billion.
While still improving our cash balance and net debt position.
Even at a more conservative $60 per barrel oil price environment, our minimum 40% of cash flow targets still translates to about $1 1 billion of equity holder returns in 2022.
And apply in 2022 consensus estimates to the return framework disclosed our peers only confirms our leading return of capital profile with a double digit cash distribution yield to our equity investors in 2022.
The confidence in this outsized delivery is further supported by recent board action to increase our share repurchase authorization to $2 5 billion.
To ensure we have sufficient runway.
To continue delivering on our return of capital commitment next year.
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.
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 successfully executing on our model today, delivering both financial outcomes and ESG excellence Theyre 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 the question and answer session. If you have a question. Please press Star then one on your Touchtone phone.
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Once again, if you have a question. Please press star one on your Touchtone phone.
Our first question comes from Jeanine Wai from Barclays. Your line is now open.
Hi, good morning, everyone. Thanks for taking our question.
Good morning, Bonnie.
Good morning, My first question, maybe for Dan can you walk us through the mechanics.
How youre determining the buyback conscious it look.
Looks like it could be on a concurrent quarterly basis, but we just wanted to kind of get some more detail on that and how did you decide on the 50% level of returns for <unk> 'twenty one other than it meets the criteria of more than 40% and I guess, what would make you change that number quarter to quarter.
Yes, great questions.
I think theres kind of a couple of different aspects to it one is a little more tactical about how we execute the share repurchases so briefly on that.
We execute.
Under short sort of 30 to 60 day can be 501 program. So we've kind of set those emotion and execute them over a short period of time and that because of that short duration. It allows us to really calibrate return percentages were on a real time basis based on what we're seeing in the business whether.
Its capital spend levels commodity prices other aspects.
What's going on it also gives you the advantage it can be 501 on Friday through blackout periods.
And so we do that.
Sort of stepping back a little more context for the the decision process about.
When do you exceed the minimum.
We are.
Our systems are always grounded in our financial priorities, which we talked about on a regular basis generate corporate returns significant sustainable free cash flow bulletproof.
Our balance sheet, and then returned significant capital to shareholders. We just talked about what we've done year to date generate generated significant operating and free cash flow Q4 looks like by far the best quarter, yet from a financial perspective.
Balance sheet is really strong.
Retired $900 million patent.
September 1 billion for year to date. So we're at our $4 billion gross debt target ahead of schedule and that really opens the door for much more substantial returns to equity holders if the conditions warrant.
We also bumped the base dividend for the third time this year, it's up 100% over that period.
And it feels competitively positioned right now and also very sustainable through cycles at the current level.
So we turn to the capital return framework calls for returning a minimum of 40% of operating cash flow.
Hello to shareholders when <unk> above $60.
We look at Q4, not only this WTO well above $60 all the commodity complex is high.
Oil volumes should be quite a bit stronger than they were in Q3.
We expect an uptick in dividend distributions from EG and lower Capex versus Q3, which was sort of a high point of our burn rate through the year on the capital side.
We expect to have lots of flexibility to exceed 40%.
We also have a desire to continue to add some level of cash to the balance sheet as we go through the year ultimately our plans are to pay off debt future debt maturities.
Mature.
And they arent significant in the future, but what's nice to have that level of flexibility and in the process reduce our net debt. So all of this I think it's a great example of our shareholder return framework and action. It's it's based on a minimum percentage of operating cash flow, but we have the ability.
<unk> and latitude to make real time decisions to exceed those minimums when conditions are right sure appear to be in Q4. So there's a little bit of judgment involved is it 50, 55% or whatever that is but we just need to make a call on over time.
Having the ability to modulate that accordingly.
Okay, great. Thank you for the detailed answer for you appreciate it.
But maybe my my second question maybe for Mike.
Cost per foot decreased quarter over quarter in the Eagle Ford and the Bakken and would you characterize those decreases as sustainable for 'twenty, two and any color on current inflation on your outlook for 'twenty two would be helpful. For example, one of your peers mentioned earlier this week that they would adjust 22 activity if inflation warranted it and I believe.
Lisa just now in his prepared remarks that 10% cost inflation will put pressure on the maintenance scenario and I didn't catch whether that meant.
1.1, capex or if that meant on activity. Thank you.
Yes, Jeanine I'll take a start.
To start with.
Expectations on the well cost for 2022 what.
What I'd say is we're still working.
Our bottoms up planning and obviously as we noted the macro environment is pretty dynamic at the moment.
Highlighted third quarter being the lowest quarter of the year.
Turning to CWC per foot cost in both the Eagle Ford and Bakken, where actually year to date.
And 12% from where we were in 2020.
Average so what I'd say is file that's probably going to be our starting point for 'twenty two.
Similar to what you've seen in 'twenty, one will continue to progress opportunities to improve our cost structure.
As we noted we could we should start to see some inflation in 'twenty two.
On the inflation question, maybe a little bit more color. There, let me start with 'twenty, one I would characterize dark inflation very much in check for 'twenty, one it's been largely confined to steal in CTG.
We have fully accounted for that in our capital our $1 billion capital budget as noted we're working through 'twenty two at the moment.
It seems reasonable to assume modest inflation I think I would highlight that we are looking to take some actions to for example, we secured some of our Reg track Frac sand on CTG requirements for for next year.
Maybe the area, where there's quite a bit of uncertainty is labor.
That's probably a broader eschewed economy wide so as we noted.
Could see up to 10% inflation I think that will depend on activity levels, but again similar to 'twenty, one we're going to be working hard to mitigate and offset.
Any of those cost pressures.
Okay. Thanks, Jamie.
Yesterday, maybe just surround outages for clarity as I mentioned in my remarks, when you think about the benchmark case being predicated on really $50 DTI and that capital range that we've provided that one to one one I think kind of applying that kind of up to 10% to that ranges when at least kind of gets you in the current.
ZIP code.
Under a maintenance scenario for 2022.
Perfect. Thank you.
Thank you Judy.
Thank you. Our next question comes from Arun <unk> from Jpmorgan. Your line is now open.
Yeah good morning.
Mike.
And perhaps Lee I wanted to get your thoughts on how you plan to lean on some of the basins outside of the Bakken and Eagle Ford, obviously in a lower commodity price environment that you guys are really focused on your core the core inventory in both those plays but how should we think about it a much better environment for <unk>.
Oil gas and Ngls kind of the capital allocation.
Place such as Oklahoma.
In the Permian.
Yes, Brian This is Lee I think consistent with how we've talked about in the past, we do expect to be increasing our Oklahoma and Permian allocation up to kind of that 20% to 30% range under again, a maintenance scenario for reference those two basins accounted for more.
Like 10% of our allocation in 2021 this year.
<unk>.
Clearly all of the commodity prices are moving in a very constructive direction, which really has the net effect of really lifting all boats, even in our black oil in place of.
The Bakken and the Eagle Ford and I think where we're really seeing the benefit of having that strength across the commodity complex is the fact that we have this very balanced portfolio already with about a 50% exposure to oil and a 50% exposure to natural gas and NGL. So.
There is no our thinking hasn't changed we believe there are extremely strong and competitive opportunities and both Permian and Oklahoma, the strengthening and NGL and gas is only served to elevate those further but oil has also elevated the returns in our other basins.
As well so we feel the strength of the balanced portfolio gives us that great exposure across the commodity complex.
Yes.
Great great.
My follow up is maybe just to get some a.
A bigger picture question for you.
Glenn just U S resource.
Basins.
You know two of your larger peers in the Bakken at Orion and Harold have announced it.
The large multibillion dollar transactions in the Permian and I wanted to get your thoughts on what this says about the Bakken there two of the larger operators in the in the Bacon.
And that basis pardon me.
And just how you're thinking about portfolio renewal Pat gave us an update on the Rex program, but you do have some other inventory expansion opportunities within your existing base.
See how youre thinking about portfolio renewal and some of the moves of some of your key.
It appears in the basin.
Yes, yes, Arun first of all I would just start off by saying any any transaction any M&A work, whether it be large or small we're always point of view that through the lens of our very compelling organic case, our peer leading financial delivery and really a strict criteria that's.
Predicated on financial accretion and so that's really the filter that we are going to view any type of opportunity. The same discipline that we apply to our organic opportunities. We certainly are going to apply in the inorganic space.
We believe obviously that the Bakken continues to offer exceptional returns. If you look at some of the material within our earnings deck, you'll see that certainly in some of the appendix slides just how competitive.
Market is relative to the other plays here.
And the east west, but for us it really anything that we would look at inorganically, but have to offer significant value. It would have to come in and move our full cycle returns in the right direction and that quite frankly is a very high bar today.
You could argue that the M&A market has become a little bit more of a seller's market today with the commodity prices that we're experiencing.
And with over 10 years.
Extremely strong inventory, we simply don't see the need to do anything dramatic in the market certainly not do anything it would be dilutive to our exceptional financial delivery, but however, having said that I'll portfolio renewal.
We have talked about in the past is that embedded in that that capital budget that we talk about each and every year, we have kind of up to about 10% of that dedicated to what we consider to be organic enhancement opportunities that that could be things like redevelopment opportunity than the <unk>.
It'll hurt in the Bakken it can be things like the Texas, Delaware oil play that Pat addressed in the opening remarks, and we want to make sure that we continue those programs on a consistent and sustainable.
Acs.
As we look out in the out years and make.
Best attempts to continue to to replace and replenish our inventory I think the Texas, Delaware oil play is a great example of something that we were able to get into for very low entry cost.
And now it certainly we see today, a very clear path for that to compete for capital allocation.
We still have some work to do in terms of getting some longer dated production information from the spacing test and we want to drive some learnings into the D&C program, but there is definitely a path there for that asset now to compete head to head with some of the best in our current portfolio.
<unk>.
Hopefully I addressed all of your questions around did I Miss anything.
Just maybe a quick follow up Lee in terms of the Texas, Delaware just on this topic of portfolio renewal are you aware of any of your peers, which are testing.
The play at this point.
Hi, Ron this is Pat.
There have been some other tests, specifically to the south of Veracruz, and some Woodford test, but that area is a little bit lower pressure thick and then all the eastern side of the platform. There's been some merrimack tests as well, but some of them have been okay, but again.
Not as good a pressure as ours, we think we absolutely have the best sweet spot of the play where we have both Woodford and Meramec stack.
With good separation between them.
We've had good results to date obviously.
Great. Thanks, a lot.
Thank you. Our next question comes from Scott Hanold of RBC capital market. Your line is now open.
Thanks, Good morning all.
I was wondering if you you provided some good framework for 2022, and just to clarify a couple of things one obviously, you're having a big uplift in oil production here in <unk> should we think about the baseline maintenance cases your average <unk>.
21 oil production or should we look more to the.
The exit rate of where you might be this year and then on the capital spending.
Concept can you remind me within that circle one to one.
$1 billion in Capex.
Where does Rex.
Capital fall within is that included in that or would that be in addition.
Yes.
First of all on your first question Scott, Yes, you should think about or a maintenance scenario 2022 being calibrated to our average 2021 oil production.
All of us experienced some variability quarter to quarter in our production numbers Thats natural in the short cycle investments that FCC that natural variability, but again, we'd be looking in a maintenance scenario to drive toward that notional 172000 barrels of oil per day.
Your second question Scott around our capital spending number even in a benchmark case of 111.
That number is all inclusive and include.
All of our investments, including racks as well as in any other organic enhancement opportunity just as the $1 billion budget did this year.
One of the reasons that we saw a little bit of peak capex in the third quarter was the impact of bringing the three well pad online in the Texas, Delaware oil play. So that is should be looked at as an all in number theres nothing carved out and put on the side.
Okay. That's that's great appreciate that and kind of pivoting back to shareholder returns I mean, you guys, obviously have a very robust buyback.
Sitting in front of us and it seems like that plus.
Goosing up that fixed dividend over time.
Is the plan.
No. The answer is probably going to be let's wait until we see.
Harvest some of this free cash flow, but as we look forward.
Even with the increased buyback authorization I mean, it looks like youre going to eat through that pretty quickly next year. If these commodity prices hold out and as you kind of continue to look forward is the buyback still going to be you're likely primary outlet for that or do you see any other opportunities going forward such as <unk>.
Or variable dividends in.
In the mix as you look kind of longer term bigger picture.
Yes, Scott this is being lumpy.
First kind of that at least.
I think where we sit today.
Kind of a no brainer when you look at the valuation of our stock and the fact that its yielding in excess of 20% free cash flow.
Yes.
A place to go with the excess distribution.
Distribution to shareholders, because great value and if that persists then they'll still be the first call on incremental cash above the base dividend, but we haven't said that's the only thing we will ever do obviously over time they have to keep your options open it's manage manage through its prospects.
The $2 5 billion.
Authorization there truly no.
No magic to that number because it was clear to us as of yesterday when that authorization in place. We had $1 1 billion of remaining authorized capacity and Q2, a chunk of that getting through this fourth quarter.
$500 million that we talked about going into the year pretty light. So we just ask the board to top that up $2 5 billion as of today.
And that will give us good running room into next year, and if we need to.
Of that authorization over time, we can certainly do that.
But I do think though Scott currently when you look at the potential financial delivery in 2022, we have.
A unique opportunity just as we did in fourth quarter to not only deliver against the minimum of 40% back to equity holders, but to actually exceed that but again thats going to be calibrated to real time cash flow from operations and that will be something that we'll watch closely I think they did a great job.
Job of laying out the mechanics, but I also wanted to stress one thing we've been really clear on we developed our framework to really give the investor confidence in the quantum the quantum of cash we were going to get back to shareholders and we knew that that would be a.
A competitive and sustainable base dividend plus something else, that's something else clearly today is share repurchases, but we didn't we purposefully and intentionally didn't limit ourselves to a potential delay or potential delivery mechanism. We wanted to keep that flexibility going forward.
But as Jane said in the current environment.
The impact of a.
Steady ratable share repurchase program going forward makes the absolute most sense today.
Okay I agree thanks for that color.
Thank you. Our next question comes from Doug Leggate from Bank of America. Your line is now open.
Hi, good morning, guys.
Thanks for getting me on the call this morning.
So I wanted to ask you about how the.
Inventory view has changed given the growth in the commodity.
What I'm thinking is given gas in particular.
Mid continent.
Does that compete better does it change the view of capital allocation.
What I'm really trying to get to is going back to your comments at the beginning of the year.
I think it was Mike culturally that talked about in the maintenance scenario you would drill half two high quality inventory in five years because at the end of the date on sold completely what's going to dictate how the market perceives your free cash flow yield.
Yes, well I think stepping back from the inventory, we have talked about the greater than a decade of capital efficient high return inventory, Doug It's really been based on on kind of nominally or 50 dollar W. Ti kind of mid cycle.
As Ed as actual prices move around that planning basis, clearly that has an impact on material of those opportunities and may in fact, even bring additional opportunities into the economic window. So it is a very dynamic thing, but we set that planning basis.
Conservatively, so we could give a very conservative and strong view just.
How.
Inventory can deliver in a more modest pricing environment to your question around how does the commodity strengthening particularly in the secondary products of gas and NGL alter our investment decision look we're a return driven company as we look at individual opportunities, we're going to be <unk>.
<unk> Bye Bye economics, I want to say, we're completely agnostic to the product mix, but at the end of the day, it's not about barrels that's about dollars and we're going to be driven by selecting the most economic opportunity across all of our core plays and then putting those into our business plan and execute.
<unk>.
Efficiently against them, so it's strictly an economic decision and Aldo.
I am thrilled that the gas and NGL hasnt recovered I'm equally thrilled that oil is sitting at above the $80 mark as well because that tends to uplift.
All of our portfolio because although.
We have an oil weighted portfolio.
It is a very balanced portfolio and so we are in essence, taking advantage of those secondary product pricing at a portfolio level, but our individual capital allocation decisions are going to be driven by economics.
I appreciate it.
A quick footnote to that Lee.
Guy, perhaps dynamic inventory.
Some visibility on that would be really really helpful. Because.
It would get a lot of folks away from the idea that there was an inventory challenge unsure how that changes with the commodity deck just on maybe.
But some.
My follow up real quick is on slide seven.
Early and very clear about your views on the business model and again I congratulate you on leaving the market.
A couple of your peers.
Nevertheless on slide seven you still talk about and a great <unk>.
$60, a barrel <unk> environment, our production to.
The underscores the commitment to discipline. The issue is the 5% growth is not part of your rhetoric today. So when do you decide does the right thing.
To go into production.
Yes, I think that that that was simply as you stated a way for us to.
Setup, a bright line on the framework that there is a very very high hurdle for growth I mean.
We will always be informed.
By the macro but at the end of the day, it's all about delivering outsized financial metrics when we're above $60.
To the extent that we see that some moderate growth.
Would fit into that financial framework, it would become a consideration, but it still remains more of an output of our financial model as opposed to an input and I think given I think the.
The past history of the sector, it's very important for us to demonstrate clearly that in a very constructive oil price environment that we can deliver outsized financial outcomes relative to alternative investments because the reality is is that we know there will be future volatility.
And we have to be able to within that volatility offer competitive returns when prices are lower so it was really just set there to really put it in the framework acknowledge I think today, we would say.
The need to drive to a number even in that 5% range. We just don't see that today and it's hard to see it even in the near future.
Thanks, so much.
Thank you Doug.
Thank you. Our next question comes from Neal Dingmann from tourist Securities. Your line is now open.
Good morning, all.
Push has kind of been asked but I wanted to ask about just on the plan for next year does that basically assume as far as total activity about the same.
Say percentage of Eagle Ford and Bakken activity I know, you've kind of run those two consistent here for the last few quarters and I'm wondering if that's still kind of the plans for next year.
Yes, Neil obviously, we have not released our budget for next year I mean, we're kind of still speaking in hypothetical terms around our maintenance budget, but when you consider the fact that we will have incremental capital flowing to Oklahoma and Permian.
We would expect obviously.
Some of that capital would be coming out of Eagle Ford and the Bakken to make room for that but I would just say stay tuned we will get into a lot more detail at an asset level of allocation.
When we get out to the budget release in February.
Okay no. It did assume that and then just.
To follow up really inquiries like to comment on that slide 14 about the resource play Im just wondering.
Maybe could you comment.
One of the guys as far as how much further do you think you could push this in terms of pad size completions. Some other things obviously the results early results are very encouraging, especially as you all pointed out when you compare them to some of the Delaware.
Just wanted to sort of.
Where we go from here.
This is Pat.
Our primary objective of this test with spacing and so right now we drilled this spacing of.
Four wells per zone, we drilled two in the Woodford and Meramec, So far we're seeing no interference at all between those.
700 foot thickness between the two.
So we're going to give some more longer term production on this pad and see how these wells perform.
So that will or buy for IBD development scenario. However, I think we have some opportunities.
Test that even further.
Obviously.
Drilled nine wells down so we've had a lot of learnings on the drilling and completion side.
Syed.
I'm going to give any details on that but we continue to refine our approach to that I think we will continue to drive our cost as I mentioned in our prepared remarks.
As we go into 'twenty, two we'll continue to progress our learnings.
So I need to do to take this thing.
Thanks, Paul.
Very good thanks Pat.
Okay.
Thank you and our final question comes from Scott Gruber from Citigroup. Your line is now open.
Yes, good morning.
Key equity will come.
It was raised which is great to see expected so good to see.
Cash dividends through June were 47 million, but I believe those lagged the booking of income.
Can you speak to how we should think about cash flow back to marathon for their equity interest.
In the quarters ahead in terms of the pace.
Pace and magnitude.
Yes, Hey, Scott this is Dave.
Yeah, so for our EG <unk>.
<unk> that are accounted for on the equity method.
Excuse me I think over time, it's fair to expect that cash dividends match equity income.
Quarter to quarter. They don't always match the timing can vary, especially in periods, where you have significant changes like a big run up in prices that we saw in Q3 and so in this case dividends lagged earnings fairly significantly significantly in Q3, we expect that to catch up in the region.
The near future.
I think when Youre modeling, it's probably just.
They're going to be equal pretty much equal over time, but you can expect to see some variability quarter to quarter.
Gotcha, Gotcha, Liberty, a point where cash dividend.
In the near term exceed equity income or is it just.
Kind of on a lag basis is there a catch up.
Yeah.
Yeah Yeah.
Certainly can see a catch up where the dividends exceed equity earnings in the next period.
Got you.
And then just thinking about cash taxes, you guys have a large NOL.
Mind US who has the U S cash taxes ramping up within your five year outlook.
Given better earnings out that the front end.
The five year outlook for cash taxes and materially.
Yes, it's good question I'm glad you asked so we do have significant tax attributes in the form of Nols is the big one $8 2 billion.
And then foreign tax credits as well.
Which of course can be used to offset future taxes.
Our outlook even at forward pricing doesn't have us paying federal income taxes until the latter part of the decade.
And that really Hasnt changed the outlook is durable we tested against commodity prices.
Higher corporate tax rates changes to the ITC tax treatments really don't have a meaningful impact on accelerating cash taxability. So.
I think that that answer hasnt changed over the past few quarters.
Got it appreciate the color.
Yes.
Thank you that concludes our question and answer session I will now turn the call back to Lee Tillman for final comments.
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 and responsibly deliver the energy the world needs each and every day. Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.
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