Q1 2022 Marathon Oil Corp Earnings Call
Dynamics and long term fundamentals are good for energy stability and security the U S consumer and the longer term health of our industry.
At Marathon oil we have conviction that we are pursuing the right strategy for shareholders and stakeholders alike.
It is best summarized by our framework for success on slide four of our debt strong corporate returns sustainable free cash flow and meaningful return of capital to our shareholders through the commodity price cycle, all underpinned by our high quality portfolio, a bullet proof balance sheet and a transparent commitment to copper.
Hence of ESG excellence.
Importantly, first quarter represented another quarter of comprehensive delivery against this framework.
I would like to focus on three key takeaways today.
First we are continuing to build a pure leading track record and quite frankly, a market leading track record of return of capital to our shareholders.
Our cash flow driven return of capital model uniquely prioritizes, our equity investors as the first call on cash flow not the drill bit.
And our continued execution underscores our commitment to our shareholders and highlights the power of our portfolio and a constructive price environment.
Over the trailing two quarters, we have returned around 60% of our CFO are over $1 4 billion to our shareholders to clarify that 60% of our cash flow from operations not our free cash flow.
This actually equates to almost 80% of our free cash flow over the same period.
In total we have now executed over $1 6 billion of share repurchases since last October driving an 11% reduction to our outstanding share count in just seven months.
Those shares were repurchased at a price below $19 a share.
A discount of over 25% relative to today's trading price demonstrating the power of consistent dollar averaging.
We are significantly growing all of the per share financial metrics that matter most to our equity valuation.
Under current market conditions, and given our free cash flow yield we continue to believe buybacks remain an excellent use of capital.
And consistent with that view our board of directors has increased our outstanding buyback authorization to $2 5 billion.
We also just raised our quarterly based dividend for the fifth consecutive quarter.
My second key point is that first quarter was again another quarter of solid consistent execution, we generated $1 3 billion of cash flow from operations and $940 million of free cash flow both before working capital at a reinvestment rate of just 27%.
And we returned $640 million or 50% of that CFO back to our shareholders.
This strong financial performance was underpinned by solid operational execution consistent with the guidance, we provided on last quarter's call, including $348 million of capital spending and 168000 barrels of oil production per day.
Yeah.
My third key takeaway is that marathon will represent a truly compelling investment opportunity.
We have rebased, our 2022 financial outlook to pricing more consistent with the current environment $100, <unk> and $6 Henry hub.
At these prices, we expect to generate over $4 $5 billion of free cash flow. This year at a reinvestment rate of just 20% net.
That translates to a free cash flow yield of about 25% on the current equity value.
That's also a one 5 billion free cash flow uplift versus the initial financial outlook. We provided the market in February net of $100 million of incremental capital inflation and at a lower reinvestment rates.
This uplift highlights our unique toward the higher commodity prices.
Due to our more advantaged cash tax outlook preservation of our upside exposure through our hedge book.
And balanced commodity exposure.
This includes our unique integrated gas position in Equatorial Guinea, where we are raising our annual equity income guidance by $200 million are about 67% <unk>.
I have long said that our company in our sector must deliver truly outsized financial outcomes relative to the S&P 500 during periods of constructive pricing to attract increased investor sponsorship.
We are successfully delivering on this obligation.
I will now pass it off today. So we'll give you a financial update highlighting how most of the free cash flow I, just mentioned, we'll be going back to our equity holders.
Thank you Lee and good morning, everyone on the call.
I'll speak to slide seven to nine of our deck largely focusing my comments on our return of capital accomplishments and outlook.
First off for return on capital framework is summarized on slide seven and remains unchanged.
Uncertain times, we believe the market will reward consistency transparency simplicity and delivery to.
Marathon oil has built is built a hard earned reputation for execution excellence and delivering on our operational commitments with LIBOR is now established with the same credibility and return of capital to our shareholders.
As a reminder, our framework calls for delivering a minimum 40% of cash flow from operations to our equity holders when <unk> is at or above $60 per barrel.
This represents a return of capital commitments at the top of our peer space and is competitive with any sector in the S&P 500.
The overall objectives of our framework are to maintain capital returned leadership versus peers in the S&P 500, maximize our equity valuation.
Downside equity volatility by providing a clear minimum capital return commitments tied to specific commodity price environments.
We also aim to provide the market with transparency around the return of capital while preserving flexibility to deliver that return via the most accretive inefficient mechanism in light of prevailing market conditions.
That mechanism is a competitive sustainable base dividend and a material share repurchase program.
Importantly, as we mentioned a return of capital targets are based on our cash flow from operations, our free cash flow.
This is purposeful intended to make clear that our shareholders get the first call on cash generation.
Consistent with our conservative reinvestment rate approach to capital spending and importantly, it represents a stronger commitment to our shareholders in an inflationary environment.
Frameworks and commitments are important.
Believe establishing a consistent track record of delivery quarter in quarter out is ultimately key to building and maintaining trust and credibility in the marketplace.
Over the trailing two quarters returned approximately 60% of our CFO back to equity holders through our base dividend and share repurchases since October of last year. So in just over seven months, we bought back over $1 6 billion numerous stock and reduced our outstanding share count by 11%.
Driving truly differentiated per share growth.
We've also raised our base dividend five quarters in a row for accumulative increase of 167% since the beginning of last year.
System through objectives to pay a sustainable base dividend that is competitive with our peers. The S&P 500, and similarly sized industrial companies.
Turning to the full year of 2020 to outlook on slide nine with no material debt maturities.
Maturities this year constructive commodity price backdrop, and our commitment to capital discipline.
Expected reinvestment rate of just 20%, we expect to continue to meaningfully outperform our minimum 40% CFO commitment.
During the first quarter, we returned approximately 50% of CFO with our pace being somewhat moderated by a negative $200 million working capital impact that accounted for about 15% of our cash flow generation in the quarter.
If the current macro Volta is reasonable to anticipate us returning at or above the 50% level going forward.
To put this into context that would represent a total return of capital of at least $3 billion this year with upside potential.
As I stated, we continue to believe that the combination of a competitive and sustainable dividend along with material share repurchase program makes most sense for our company.
With this view the board again reset our outstanding buyback authorization to $2 5 billion.
Giving us plenty of room to continue to execute comp.
Incoming quarters.
And while our equity value has appreciated since we kicked off our buyback program our free cash flow yield has actually appreciated even more we're trading at about a 25% free cash flow yield at $100 oil.
Even testing buybacks at our current share price against our longer dated forward curve of 60 to $70 of UTI.
Free cash flow yield is in double digit territory.
Buybacks remain a very good use of cash because we believe our equity is fundamentally mispriced as long as that's the case, we'll continue to aggressively repurchase our own stock is the best acquisition, we can make.
We also continue to believe that disciplined share repurchases upper clear strategic advantages. In addition to driving strong underlying per share metrics that are correlated with shareholder value. We also offer clear should synergies with our base dividend.
One final housekeeping topic for me before I turn the call over to Mike and that's U S Federal income taxes.
Key message here is that consistent with what we've said before even at prevailing market prices, we don't expect to pay cash federal income taxes until the second half of the decade.
However, you probably notice that in <unk>, we partially reversed value the valuation allowance we have been carrying on our deferred tax assets and are now book in U S deferred taxes at the statutory rate.
By way of background at year end 2016, we established a valuation allowance for 100% of our net deferred tax asset.
At the time, we have build a cumulative three year tax loss, along with which along with depressed commodity prices was evidence that we may not realize our deferred tax assets in the future. That's why we've been booking at zero percent tax rate in the U S. Since 2017.
In <unk> 2022, or three year cumulative tax loss was a race that is known positives and given the improvement we have recently witnessed in the macro our strong performance and the fact that we expect to continue earning net income we made the decision to reverse the lion's share of our valuation allowance.
In the first quarter.
This just means we're now accruing U S tax expense and normal statutory rate, 21% federal and 1% state.
Sure.
That's important for modeling purposes, because book taxes will have an impact on your EPS estimates.
However, it's important there is no impact on cash flow.
<unk> tax is all deferred and has no direct bearing on the timing of our transition to U S cash tax paying status I will now turn the call over to Mike who will discuss our 2022 capital program and associated financial outcomes.
Thanks, David My key message today is that the priorities for our capital program remains unchanged.
With higher prices, we are staying disciplined in prioritizing free cash flow generation.
Protecting our execution excellence, we feel very confident about delivering free cash flow capital efficiency and operating efficiency very top of our peer group.
Maintaining a bulletproof balance sheet.
First an updated outlook on the financial performance, we expect our program to deliver this year.
We have rebased, our 2022 outlook to reflect the current commodity price environment, $100 oil and $6 Henry hub.
This price deck, we now expect to generate over $4 $5 billion of free cash flow at a 20% reinvestment rate on on an inflation adjusted $1 $3 billion of capital.
We have also raised our EG equity income guidance by $200 million.
This represents a $1 $5 billion of free cash flow uplift from the original outlook, we provided on our lower reinvestment rate net $100 million incremental capital.
Even with this modest incremental inflation about 8% or 2022 financial performance still has the lowest reinvestment rate on the highest capital efficiency our Peters.
Now, let me address the inflationary backdrop in more detail.
As a background, we come into 2022, assuming 10% to 15% inflation based on a price.
$80, <unk> and $4 Henry hub.
What was baked into our original $1 $2 billion budget.
We opted to provided deterministic budget estimate based on this pricing outlook as opposed to a broad range.
We are now assuming a $100 price environment and its not price environment. This is Steve we're going to see some incremental costs tuition inflation north of 50% and closer to the 20% range.
Secondly, today's update of one $3 million reflects.
One $3 billion is all in capital, reflecting our total projected capital spend and a 100 dollar price model.
Part of that increase is commodity driven largely fuel and chemicals, which trend with double UTI as well as steel.
It also reflects our efforts to protect the execution of our 2022 program.
Prices are high labor pools on supply chains globally on U S economy white are very tight.
We are therefore focused on securing established and trusted service providers to protect our execution excellence and deliver our business plan.
And we feel confident about.
About 90% of our remaining rig time for 2022 is now secured a long term contracts running into 2023.
The majority of our pressure pumping needs are now tied down as well.
Feel very good about access to both sound and steel.
As mentioned, we do have some open steel pricing in the fourth partner, which we've now accounted for.
To be clear.
We are only updating our budget incremental inflation, assuming a sustained 100 dollar world we.
We are not adding any growth capital due to higher prices.
Staying disciplined prioritizing free cash flow on protecting execution.
Additionally, our full year guidance for both oil and oil equivalent production remains unchanged.
<unk> some significant winter weather impacts in the Bakken during April , but essentially shutdown for the Williston basin.
With respect to the near term outlook, we expect second quarter oil production to be flat relative to actual first quarter oil production or about 160000 barrels per day.
<unk> is primarily due to the reference severe winter storms in the Bakken during the month of April .
Which will likely have a negative second quarter impact of just over 4000 barrels of oil per day, and a similar impact on oil and equivalent production.
Thus.
Relatively flat quarter on quarter oil production with no change to the full year range for oil <unk> is a solid outcome given the magnitude of weather challenges in the Williston basin.
We do expect oil production to recover into the third quarter with second half 2022 output expected to average above the midpoint of our annual guidance.
On capital spending.
First quarter Capex was consistent with the guidance, we provided last quarter.
Also consistent with what we indicated last quarter. This year's budget will be slightly <unk> comfortably with approximately 55% to 60% of our full year capital spending expected during the first half.
There is no change to planned wells to sales overall are at a basin level.
I will now turn it back to Lee, who will close out our prepared remarks.
Thanks, Mike.
Before we move to our question and answer session I want to wrap up with a compelling investment case for marathon oil.
Recent shocks to the global energy market are outside our control and we will test our sector's ability to maintain discipline, while also being part of a long term solution for the U S and our allies.
Our camp being energy security without a viable U S independent E&P sector.
And for that to happen as publicly traded entities, we must offer an investable thesis that competes with the broader market.
We fully recognize that investors have options some line MRO.
First we have instituted a transparent capital framework that uniquely prioritizes our shareholders as the first call on cash flow generation. Our framework is complemented by a track record of delivering 60% of CFO to equity holders over the last two quarters.
And it's my expectation that we will lead our peer space and returning capital to shareholders in 2022.
Second when it comes to growth our focus is not on growing production. It's outgrowing the per share metrics that matter, most and we have already driven underlying per share growth of 11% in the last seven months with more to come.
Third due to our balanced production mix low corporate free cash flow breakeven attractive hedge book and advantage U S. Federal cash income tax position, our company retains a differentiated upside leverage to commodity outperformance. We will continue to protect the upside for our investors that is <unk>.
<unk> in the one $5 billion uplift to free cash flow guidance for 2022, including a $200 million increased to EG equity income.
And finally, we believe the peer leading financial and operating results. We are delivering today are sustainable underpinned by over a decade of high quality high return inventory by our five and 10 year benchmark maintenance scenarios and by our commitment to comprehensive longer term ESG X.
<unk>.
The continued responsible development of oil and gas is crucial to protecting the standard of living we have all come to enjoy and quite frankly take for granted and.
And just as importantly, it's central to elevating the current standard of living for billions of people around the world many of whom are in developing countries living and energy poverty.
Access to responsible reliable affordable energy is the great social equalizer and the foundation upon which the world's modern economy is built.
We are proud to play our role as a responsible global supplier.
Also supporting U S energy security, which protects the U S consumer and serves as a powerful tool of foreign policy, providing options for both the U S and our allies with that we can open up the line for Q&A.
Thank you we will now begin the question and answer session. We ask that you. Please limit yourself to one question and one follow up if you have a question. Please press zero one on your phone keypad. Please note it is zero.
<unk> if you'd like.
Q you may dial zero too if.
If you're on a speakerphone. Please pick up your handset first before I die like once again, if you have a question. Please tell us zero one on your phone keypad.
And from Jpmorgan, we have a really Jacob please go ahead.
Yes, good morning, gentlemen, Lee I was wondering if you could provide some thoughts on the broader LNG strategy.
And how does the company plan to take advantage of what could be a pretty strong LNG cycle post the unfortunate Russia, Ukraine situation I do believe that Youre EG gas today.
Today is priced off of Henry hub.
Shifts in late 'twenty three in late 'twenty four.
The Big question, we're getting is what type of operating leverage.
Do you see you guided to $500 million of.
Equity income this year.
If you are able to price that guess.
Global.
Marker.
And also thoughts on potentially.
Opportunities that you may have to increase.
The throughput of that plant obviously, the chevron assets are on the block, but love to get some some thoughts on EG LNG.
Yes sure Ryan.
Well first of all I'd, just like to say at an enterprise level, Brian we do have a very balanced exposure.
Two to the commodity space, meaning and we're about 50% oil, 50% natural gas and Ngls are big component, obviously is at 50%.
Gas and Ngls is our very unique asset in an EEG and as you described it clearly that asset is well positioned to take advantage of not just the elevation in Henry hub pricing, which is the index contract that we have today on the Alba production.
But via via land.
Opportunity. We are also able to take advantage of both tariffs through the plant as well as <unk>.
Profit sharing which is linked to TTS. So today, we are experiencing uplift by participating in the broader I'd say global LNG market up kind of stepping back and looking to the future a bit and we've been very clear on this one.
With regard to E. G. This is a very unique asset.
The set of World class infrastructure gas plant LNG plant methanol plant storage offloading sitting in one of the most gas prone areas of West Africa. We are certainly a natural aggregator of gas and our vision is that similar to our success with the <unk> project and will.
<unk> defined enhanced opportunities to baseload the train that we have there at <unk>.
That puts a europa and continue to have that exposure to the tcf market and obviously the European gas market.
Great great, Okay, and just a follow up Lee.
You have a very even rewarded I'd say for your cash return strategy.
We're turning a lot of cash to shareholders.
The question that we get from the buy side is whether the cash return strategy is too.
Pro cyclical.
60, 70% of CFO and how do you think about balancing cash return with portfolio renewal.
Yes, Thanks, Ryan I'm going to maybe let Dave take that one hi, everyone. Good morning.
We obviously like you to monitor.
What our peer companies are saying about cash return programs.
And I feel for you.
Just trying to understand because with all the kaleidoscope of different language.
It's out there.
Tried to be really clear about ours.
Maybe I could just for everyone's benefit maybe just go through some of that again just to make sure. It's clear when they get directly to your question around pro cyclicality.
<unk>.
So obviously, we are positioned to generate a significant and sustainable.
A free cash flow our balance sheet is in great shape will continue to pay down debt as those maturities come along and our intent is to return significant.
Capital to shareholders.
Really want that to be competitive we have chosen the vehicles of a sustainable and increasing over the last five quarters base dividend, along with significant share repurchases, which we execute ratably and I mean gateway ratably and have been doing that.
Over the last seven months now.
And our minimum target.
The commodity price environment over $60, a barrel was 40% we've been obviously, beating that.
The commodity price environment, that's quite a bit above $60 a barrel we have built a lot of flexibility as to how we approach this return to shareholders and so.
Really consistently beat that minimum and we expect to continue to do that in.
Q4 of 2021, we've returned 70% of cash flow to shareholders.
Out of this quarter was 50%.
The pace was tempered a little bit from Q1, because we had a working capital.
If you will of about $200 million and that was caused by a mature everyone experienced that was caused by the significant increase in oil price between February and March in that uptick in accounts receivable that turned into cash in April was actually look like a deduct from cash flow in the first quarter.
So last week, we announced our fifth increase in the base dividend.
Over the last seven months, we've purchased $1 6 billion in stock and taken out of a 11% of our shares so to your pro cyclicality point. We think this is kind of undeniable.
The fact that we traded a free cash flow yield of 25% which is.
Should not existent talk about ICU. This should not exist in nature that kind of a free cash flow yield, but it does which means our stock it's mispriced.
In this commodity price environment, and so we feel like it's a very efficient way to return capital to shareholders and thrive per share growth.
Over the really the most important metrics that matter to share price.
We'll note that over the past couple of quarters, we've been building a little bit of cash about $100 million a quarter.
Yep.
On one hand and provides us flexibility to do things like deal with working capital swings, we funded a small bolt on in the fourth quarter of last year in May we're going to pay down our only debt maturity in the year, it's a little of $40 million.
That maturity, but we can pay it off with cash easily that's got almost a 10% coupon on it. So good returns really happy to get that one out of the portfolio.
So.
Our intent is not to continue to build sizable amounts of cash our intent is to return cash to shareholders in through that.
Share repurchase vehicle will be the primary vehicle as long as our share price remains dislocated as it appears to be two parts.
In terms of.
What you can expect.
I'll just make the other point to that.
I think we're very free cash flow efficient not just because of our cost structure, but our hedge positions are extremely low drag.
It's certainly compared to some of our peers and we don't have any U S income taxes for years to come.
So we're really in good position to execute this strategy to put a range around the cash return potential for the full year of 2022, we're kind of now assuming $106.
Nice environment.
If we return it to 50% level that could be at least $3 billion of cash returns for the full year.
On the more aspirational and if we go back and we could do this but we're going to kind of monitor conditions as we go through the year.
We will repeat what we did in Q4 2021.
Returning 70% of CFO to shareholders that would represent $4 $2 billion of.
Of returns or north of 20% of our market cap, so very substantial impact.
On shareholders.
And we think stock price as a result of that kind of strategy.
Thanks for the fulsome answer.
Also Arun I think he mentioned as well kind of balancing against resource opportunities as well.
I would probably address that by first of all just restating that we do have more.
And then a decade of capital efficient high return inventory at kind of a maintenance pace and that's really based on a pretty conservative price assumptions, and obviously that inventory would move north of that inventory life at least north of them under the current pricing environment and Thats, even before taking credit for things like our success in the Texas.
All of our oil play.
We have largely replaced all of the top tier inventory and we consumed over the last few years through organic enhancement initiatives and if you recall, we dedicate nominally 10% of our capital program each and every year, so embedded in that $1 3 billion.
<unk>.
Investment to continue that organic enhancement initiatives as well as to continue to progress things like the four well pad that we're doing.
And the exploration play in the Texas, Delaware oil, which is the Woodford Meramec play. So we don't view this as an either or proposition. We're looking at continuing to reinvest in organic opportunities, but also being very aggressive with our return of capital back to shareholders.
Alright, Thanks Lee.
So from tourists Securities we have Neal Dingmann. Please go ahead.
Good morning, Neil.
Neil you might be on mute.
We're not hearing you Neal you may be on mute.
And Brandon maybe just go to the next.
Sure from Bank of America, we have Doug Leggate. Please go ahead.
Okay. Thanks, everybody can you hear me I just wanted to check that disconnect.
Okay.
Yes. Thank you.
Loud and clear Doug.
Excellent. Thanks Lee Thanks for taking my question. So I wanted to I wanted to have a good clean.
This <unk> question a different way.
I think you know we've been real interested in trying to understand the operational leverage.
But I wanted to ask the question a little differently.
You've got the whole industry's got windfall cash right now and it seems.
It seems to us.
So is the logical buyer of the Chevron assets, clearly you mentioned yourselves being a consolidator.
It could potentially transform in our opinion.
For that business.
But really bolstering the logo.
Gas.
Virginia LNG facilities. So my question is this.
Whether you of not being prepared to talk about the commercial terms.
The tolling agreement.
<unk> only got us organically, we didn't make a material difference to the free cash flow.
You too.
You said the value of the acquisition potentially hundreds or noncash who didn't need to material difference to the free cash flow net to you.
Okay.
Yes, yes, yes. Thanks for the question Diana I think first of all I appreciate the recognition of the.
The contribution that we get from the EG asset and obviously when I think the dynamics that we're seeing in the global gas market I think.
The value of the GE has has really bumped that even ahead of maybe where we might even have placed it.
Maybe I'll start by just addressing kind of just.
The M&A kind of element of your question.
First and foremost I think for US we are going to view all opportunities through the lens of.
Our high confidence organic case that deliver significant free cash flow and really a market leading return on capital and of course as we just talked about it's underpinned by this over a decade.
High return inventory so when we assess opportunities. The bar is very very high it's going to have to be accretive to that organic case. It is.
We're going to have to compete.
When the suite of opportunities that are are very high quality and very high returns. So the bottom line is the same discipline that we've been talking about and our organic program certainly that's going to apply in the inorganic space as well.
On EG, specifically I think we have we.
We have always noted EEG as a core element of our portfolio. We've always noted that there is opportunity in <unk> to drive more gas to this very unique world class infrastructure.
I cant comment obviously, specifically on opportunities that may be or may not be in the market, but clearly to the extent that we control our own molecules that are flowing through.
Hunter your roadmap that will generate incremental value for the company.
So similar to I would say the <unk> project, which again are third party molecules in this case or not equity molecules like Alba, but the <unk> molecules are very accretive and even though we are from an outlet perspective may be on a long life low decline there with.
Accretive addition, like a land we're able to continue to generate very strong financial outcome, even though our equity production may be on a bit of a decline.
I know, it's a tricky one to answer.
So let me just get to the root of my question. So it would be positive if you own the asset so.
Well I think I would just look at it like this just like we talk about bolt ons in the U S and existing basins, where we have execution competence and experience and international bolt on in an area, where we already own and operate assets clearly we have high confidence in our ability to drive value.
Okay, Okay, sorry for Florida.
My follow up as well.
Obviously gas in the U S. I'm curious how this changes your thoughts on.
Ample allocation.
Inventory that specifically in the Anadarko, obviously, we're facing a very different gas environment today than perhaps you originally planning assumptions and I'll leave it there. Thanks.
Yeah, no. Thanks Ed.
Yes, I'll go back to a few of my earlier comments, which is one of the positives we have in our portfolio. Today is that we do have broad exposure across the commodity complex.
50% again of our exposure is in gas and Ngls, obviously some of that domestic some of that through the EG asset we are allocating about 25% of our capital this year.
To the Permian and Oklahoma.
Up significantly relative to last year.
This is a I think this is the time, though where the commodity complex is really lifting all boats, so oil and gas or both.
Which has the net effect of uplifting the economics of the whole portfolio not just the combination play that might be more reliant on natural gas, but clearly those opportunities look very very strong and back to my earlier comments that when we talk about our inventory and inventory life, that's typically predicated on that.
Very conservative view of forward pricing think about it more in terms of $50, a DTI $3 Henry hub and so to the extent that we were to apply a different.
Price deck to that obviously, the top tier component of that inventory would increase and we would likely bring more inventory and to the economic window. Even on projects like for instance are the work that we're doing today in the Woodford Meramec in the Texas, Delaware oil play and I want to emphasize that yet.
Oil play.
Obviously, it's high pressure and we associated gas that comes with it but that's a great example of another opportunity that was already moving to compete for capital, but now in the current commodity pricing will be even that much stronger and may allow us to even drive more inventory from that opportunity.
Thank you so much we appreciate your answers.
Thank you Doug.
Okay.
From Barclays, We have kidney Lake. Please go ahead.
Good morning, everyone. Thanks for taking our questions.
Good morning. Good morning. Good morning, My first question, maybe for Lee or Dean hitting back on the cash returns.
You provided a lot of helpful color.
Sponsor runes question and we just wanted to dig a little bit further into the parameters of getting to that full 70% upside case, you mentioned that you are going to monitor conditions and based on our free cash flow forecast marathon can continue to build a healthy amount of cash even after paying out of the 70% level. So just kind of.
Just to know if you had any more color on the parameters that might get you to that 70% Keith.
Yes Jeanine.
Crack at that and we may want to chime in as well.
We are certainly I think part of your question is are we responsive to macro conditions and business conditions.
And how we can kind of throttle our share repurchase program and the answer to that is yes. We are we saw a significant uptick in.
And cash flow.
In Q4 and felt comfortable taking it all the way up to that 70% level.
In the first quarter of this.
This year as we guided.
We kept it at 50% we did experience that impact of the.
The working capital Ddos, if you will so we kept that in mind.
If you look at the pace of repurchases year to date is 900 million Shannon in Q1 proper it was $592 million that will imply that.
Increased the daily pay some purchases in the second quarter in response to.
Operating cash flow improvements in commodity prices and other things that are driving that so it will be will be responsive to macro conditions and also other considerations along the way and that's why we're not being we try to be pretty formulaic in pretty specific to get you to that 50% guidance and let you know clearly there is upsell.
To that.
Can't paint.
More of a pipeline to the 70% and all the considerations.
Are very committed to consistent strong returns to shareholders through share repurchases, though.
Clearly demonstrated that we started with Q4, yes, jeanine, maybe if I could this is lee.
I think you should expect that theres going to be some natural variation quarter to quarter and delivery against that percent.
As Dave mentioned, we're going to be forward looking at where the commodity prices are headed.
We're going to think about the unique features of that quarter for instance, as they mentioned fourth quarter, we definitely had some tailwind that helped us.
When you think about that was the peak oil production for the year.
A significant dividend in the fourth quarter.
We had some natural decline in Capex from an activity standpoint is also over a lot of unique features that allowed us to stretch to net 70% target. Similarly, as I mentioned in the first quarter. We had some some headwinds there we had a bit of a working capital.
Negative that we had to account for.
All of those will be sued in to that or less if you remember the <unk> programs are typically looking ahead 30 to 45 days.
They don't restrict us from doing monthly set that based program, we can still enhance that program using <unk> instruments, along the way as perhaps we do take advantage of some of those tailwind that might present in any given quarter, but we kind of look through the quarter then.
Our view is that we want to be certainly now in the current price environment at or above that 50%.
Going forward through the year, and we're clearly going to look for opportunities to beat that when we see those kind of unique features in a given quarter.
Okay, great. Thank you that's really helpful.
All of our models that we can appreciate.
It's not that simple really.
Okay.
Moving moving to inflation in the current environment, there is inflationary headwinds or supply chain headwinds can.
Can you provide a little more color on how marathon is positioned in both of these in particular like a lot of your peers have given this percent of total well cost that's locked in.
Mentioned, 90% Eric has locked in a bunch of your pressure pumping. So maybe if you have that percentage it would be helpful. For us for comparison and then maybe also how is your planning process for 2023 different from prior years.
Trying to figure out implications for next year. Thank you.
Hey, Jeanine this is Mike I'll take I'll kick start without one.
As we highlighted this morning, we came into the year, assuming 10%, 15% inflation and that was based on that $80 <unk> $4 Henry hub environment again, as we announced what kind of Rebase outlook, we're going to assume a 106 price environment.
Prices are.
Our sustained we're going to see some incremental costs and really that was fully baked into the announcement.
Certainly recognize the market is tight across the board.
It's likely going to speed up we have prices are sustained.
Activity levels, particularly with the private has increased.
Assessing labor has become a real challenge.
I think as a result of that role skin tighter market.
Maybe specific.
B, what I'd say is out of the $100 million increase I would say 50%.
Frankly linked to commodities, so fuel and chemical costs, which have been trending higher with double Upi.
Finally, then there.
We also mentioned we're also anticipating some higher steel costs later in the year, just what's the sustained demand and supply constraints.
I think just given given that backdrop, given the price environment Kevin.
Everything is.
Our focus and our priority is probably shifted to more securing I guess protecting securing our ability to execute I think got a tenant for the additional 50% of the increase that we announced this morning again, we we.
We discussed having 90% of our remaining claim in 2022.
Secured on contracts.
Some of those do run into 2023, similarly pressure pumping we thought the majority of the scope and Ive done there I think it is worth highlighting here that in.
Both of those areas, we are termed up with companies to put content working with so we've got some established relationships and quite frankly do an excellent job for us on the sand front I'd say, we're close to 100% of our new secured for the year.
<unk> mentioned steel we've got capacity secured for all of the year, but there is a little bit it will be priced in the fourth quarter. So maybe how I'd characterize it.
We've lockdown unaccounted, a large percentage of our 2020 to spend but I think you'd go to recognize that the market is fairly dynamic.
Maybe as it relates to 2023 and our plans there.
To be fair to say, we're starting a little bit earlier.
Then maybe we would normally.
Again, I mentioned, we do have some contracts rolling over into 'twenty three so reg.
Steel we've also got some hydraulic horsepower options some of those are <unk>.
Index.
I, certainly do where it makes sense, we're going to look to leverage our 2023 program early to really try to secure access.
Terms.
But I mean, it is a volatile fairly dynamic market, we're cognizant of that so.
It's difficult to predict when things are going to come down, but I think we will and I think it's just therefore important that we do strike the right balance as we look forward into 2023.
I think just as your question around how are we thinking about it differently. Obviously, we haven't been inflationary environment for quite some time and so.
So our supply chain team.
They have leverage stepping into a little bit of 2023.
To help us really secure some of that execution confidence.
And certainty that we need to deliver the 2022 plant. So I think the difference is we're having to step into 2023, a little bit earlier kind of with that maintenance activity mindset.
And start building upon that and getting ready for what we will continue to be a very dynamic market that I think is challenging for anyone to predict right. Now. So the best thing. We can do is get started a bit earlier.
Okay helpful. Thank you.
Okay.
From tourists Securities we have Neal Dingmann. Please go ahead Sir.
Again, good morning, guys.
My first question, maybe for you to Dana on head Jim I'm, just wondering given your ironclad balance sheet youll have appropriate refrain from putting on hedges. However, it's interesting today to see some of the natural gas collars available does this cause you to potentially reconsider the plants.
David This is Pat I'll take that one yes, you probably saw in our release that we did this.
Can we take.
Some five by 19, two way gas callers and just the market was there for us as a good opportunity to central Florida box, we did that but to your broader.
Question, given our solid financials I think we covered this a little bit last time.
We have intentionally kept debt leverage for our shareholders to the upside so repeatedly hedge.
Particularly compared to our peers kept that helps ensure our stakeholders.
Participate in that and then a bit of oil hedging we have done intentionally.
Linked that to our returning cash framework. So most of our three way collars receptive towards around $60, which ties to a minimum of 40%.
Cash flow from operations back to the shareholders.
We've talked about is just one component of how we look at our commodity risk management.
<unk> balance sheet of outbreak.
So we don't we don't see a need at this point to go.
<unk> got a bunch of hedges I think we can be patient and opportunistic like we were recently.
Yes.
No that's great to hear and then just follow up on EG. The asset continues to generate very strong free cash flow Gil ability to facilities capacity.
The capacity or just could you talk about potential upside further potential upside in <unk>.
Yes, I think for Neil This is Lee I think for <unk> Neil.
So there is clearly to take advantage of what's in the market today I mean, we have the alba molecules essentially linked to Henry hub, but only through the end of 2023, and then we can renegotiate that deal based on market conditions at the time.
Lynn third party molecules are a little bit different we get the tariff uplift plus kind of a percentage of proceeds linked to TTM on the backend of that the goal right. Now really is just to continue to maintain and load.
The train the Baseload the training that we do have.
<unk> LNG in land, we view it as a great bridging project to really load in the interim while we continue to pursue other backfill opportunities, but that infrastructure that we've already invested in its there and so the best use of that infrastructure is <unk>.
Fully loaded and so we're already clearly thinking about what comes after a land what's next to allow us to drive more gas to <unk>.
Ace load LNG trains that we have and so that's that's really the focus Neal.
Great to hear thanks for the details Lee.
Okay.
From benchmark, we had to Bash Chandra. Please go ahead.
Yes, Hi, Lee.
The strategy has been a winning strategy right clearly.
Just trying to I guess reconcile that.
What seemed to be the message in your intro.
Of the more prominent.
Our U.
U S.
Hydrocarbons.
Globally et cetera et cetera.
With this sort of commitment more or less to a maintenance program.
And optimization of our return of capital program. So just trying to understand is is there a point where the curves cross.
That would maybe.
How do you play.
More aggressive role.
In what seemed to be in your commentary.
Yes, no great question I think.
My starting point would be that first and foremost obviously, we strongly condemn the Russian aggression that we are witnessing against Ukrainian people and just to be very clear, we have no operational exposure, our dealings with Russia whatsoever.
But to your point I mean, when we think about our strategy, we think about it more from a long term perspective, the crisis that we're in today as.
Is something that clearly a serious but it is a near term point in time prices and if you recall also in my comments I made the statement that there were already supply and demand fundamentals that we are tightening the market.
In the base case, even before we saw some of these geopolitical events unfold.
Our strategy is going to remain premise on discipline and the reason I think thats important is that.
Without that discipline without having an investable thesis then we're not going to have a domestic E&P business to lean on.
Whether it's in normal times are at a high point in the cycle like we're experiencing today. So I think we do have the right strategy, we do have within our framework and ability to grow up to 5% if that makes sense from a financial delivery standpoint, but clearly.
Lee any action that we would take today would have little or no impact.
On the market that we're experiencing I mean for one thing I mean, obviously our volumes are point of low 2% of the of the global volume So even from a materiality endpoint. They can that move the needle, but also just the practical side of the cycle times, even though we are a short cycle business.
If we start investing today, we're still six months to longer out in time and that investment would be made in a hyperinflationary environment, where we can't really count on labor, we candidly talent supply chain to be able to support that.
And then I think finally, I think that we have to recognize that there's still is a capital intensive business.
We reinvest more of our cash flow than the S&P 500 average just to keep our business flat and I think sometimes that's lost on folks. So even though there is not growth capital per se. There is an incredible amount of capital that has to be put to work just to keep.
The production where it is.
I think stepping back not just marathon I think the positive is that coming out of the pandemic that there is going to be some natural growth.
In the U S.
Liquid space and I think that is going to support markets and ultimately we will help with the price side of the equation, but our expectation is that capital discipline still rules that is the model to be we're going to be focused on that financial delivery and by keeping a healthy company.
And a healthy sector, we are going to deliver that energy security that we've seen really come under threat because of some difficult policy decisions, perhaps Nathan here in the U S as well as elsewhere.
Thanks for the clarity.
Net.
Thank you we will now turn it over to Lee Tillman for closing remarks.
Alright. 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 now more than ever. Thank you very much.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.
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