Q3 2022 Marathon Oil Corp Earnings Call
Welcome to marathon Oil's third quarter earnings call. My name is Cheryl and there 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. If you'd like to ask a question you can do so by pressing zero one.
On your Touchtone phone.
As a reminder, the conference is being recorded I will now turn the call over to Guy Baber, Vice President of Investor Relations. Sir you may begin.
Okay.
Thank you Sheryl and thank you as well to everyone for joining us on the call. This morning.
Yesterday after the close we issued a press release slide presentation, and Investor packet that address our third quarter 2022 results alongside those standardized materials. We also issued a separate press release and slide deck addressing our acquisition of Ensign natural resources Eagle Ford assets.
All of those documents can be count on our website and 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 strategy, and Mike Anderson Executive VP of operations.
As a reminder, 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 the presentation materials as well as to the risk factors described in our SEC filings.
We will also reference certain non-GAAP terms, and todays discussion, which have been reconciled and defined in our earnings materials.
With that I'll turn the call over to Lee and the rest of the team who will provide prepared remarks. After the completion of the remarks, we will move to the question and answer session. So in the interest of time, we ask that you limit yourselves to one question with a follow up please.
Thank you Guy and good morning to everyone listening to our call today.
To start as always I want to first thank our employees and contractors for their dedication and hard work as well as their commitment to our core values, especially safety and environmental excellence.
We are a results driven company, but we are equally focused on how we deliver those results.
Proud of our entire organization.
As Guy mentioned in addition to our standard quarterly earnings materials.
Also very excited to discuss our acquisition of Ensign natural resources Eagle Ford asset.
A truly compelling opportunity for our company.
Further each and every one of our core strategic objectives.
While there is no shortage of highlights from our third quarter financial and operational results. Our continued return of capital leadership is certainly near the top of the list.
Fact, our third quarter shareholder distributions set a new record for our company.
Dane will start there and provide a bit more context around our return of capital success, and then Mike will walk us through our third quarter financial and operational results and outlook in more detail.
We will then spend the balance of our opening remarks on our material expansion in the Eagle Ford.
Needless to say, we have a lot of ground to cover today, So let's get started over today.
Thank you Lee and good morning, everybody.
Returning a significant amount of capital towards shareholders through the cycle.
Foundational element of our value proposition in the marketplace as we've consistently highlighted we believe our capital.
Capital framework is differentiated in that space uniquely calibrated to operating cash flow not free cash flow prioritizing our shareholders first call on our cash generation.
This is especially important in a market characterized by inflationary headwinds and represents a strong commitment to our shareholders and during the third quarter.
Pleased to announce that we built on our return of capital leadership by setting a new quarterly shareholder distribution record for our company correspondence over 80% of our CFO and essentially 100% of our free cash flow to equity holders.
Third quarter shareholder distributions amongst $1 billion translating to an annual distribution yield of around 24%.
Yield is not just at the top of the E&P peer space, but at the very top of the S&P 500.
While we had guided third quarter return of capital to at least 50% of our CFO due to strong operating and financial performance, our financial strength, including workplace cash balance and favorable market conditions, including clear value in our stock price, we saw an opportunity to materially step up the pace of repurchases.
We bought back $1 $1 billion of stock during the third quarter.
Timing of our decision proved beneficial.
Third quarter buybacks were executed at an average price of around $24 a share well below current trading levels.
Our commitment to an operating cash flow driven return of capital model remains differentiated.
Our commitment to significant ongoing share repurchases and the cumulative benefit of this approach has become pretty hard to ignore.
Kicking off our share buyback program last October we've read.
Purchased three $4 billion of our stock driving a 20% reduction towards outstanding share count at just 13 months contributing to significant underlying growth in all of our procurement metrics.
We continue to believe buying back stock is a good use of capital with current market conditions consistent with disbelief. Our board has again topped up our outstanding buyback authorization to $2 $5 billion.
Looking ahead to the fourth quarter, we expect to execute around $300 million of share repurchases and we will ensure we fully meet our commitments to the market to return at least 50% our full year 2022, CFO to equity holders. This will represent a peer leading 2022 annual distribution yield.
Dialing back the pace of buybacks a bit at the end of the year will allow us to build some additional cash in the fourth quarter, enabling us to increase the cash funding portion of the insight acquisition, which as Youll hear in a minute will contribute to a higher level of shareholder distributions in 2023 and beyond.
In addition to increasing our buyback authorization. Our board has also approved another increase to our base dividend demonstrating the important synergies that exist between our base dividend and accretive buybacks.
The increase of the dividend was entirely funded through year to date share repurchases.
To summarize we've been clear about our commitment to returning us to return significant capital to shareholders.
We believe our operating cash flow driven framework is a strong commitment to our shareholders protecting distributions from the impact of capital inflation, our consistent execution of accretive buybacks is driven purely being per share growth of 20%.
We've built one of the strongest return on capital track Records in the entire S&P 500 over trailing four quarters.
Fully committed to extending this leadership with our 2023 distribution profile further enhanced by the highly accretive insight acquisition.
I'll now turn the call over to Mike, who will briefly walk us through our third quarter performance and outlook.
Hi.
Thanks, Tim and good morning, everyone.
Third quarter was yet another strong financial and operational quarter highlighted by over $1 billion of free cash generation and our reinvestment rate was just 29%.
Our oil and oil equivalent production increased sequentially to 176000 barrels oil per day.
352000 barrels of oil equivalent.
Outperforming our guidance provided last earnings call driven by achieving the high end 400 wells to sales guidance.
And new well performance in both the Eagle Ford and Permian.
In the Permian specifically.
Turning to our highest level of activity since 2019.
We brought 13 wells to sales, including eight two mile laterals.
Which are more representative of the go forward program for this asset productivity for those extended laterals was very strong, including three Red Hills wells deploying our latest completion design, but delivered an average IP 30 over 3800 bottles.
Purdue.
The future for our Permian asset is bright.
By our success in the Texas, Delaware oil play.
The Woodford and Meramec with our initial four well expected to deliver first oil in early 2020.
Stepping back a bit to the updated full year 2022 financial and operational outcomes.
<unk> remains compelling.
We released our EG equity income guidance by another $70 million to over $600 million.
EG equity income guidance is now more than double what it was at the beginning of the year.
Due to strong operational performance on upside in pricing, especially for European natural gas.
The exposure remains underappreciated.
And while we are we already have differentiated European LNG price exposure that has contributed to stronger financial performance. This year.
We will see a significant increase to our global LNG price leverage in 2024.
Our legacy Henry hub linked LNG contract expires.
<unk> will potentially drive a step change increase in Bgs financial performance.
As we have more equity molecules exposed to the global LNG market.
We also raised our 2022 capital spending guidance to $1 4 billion.
An increase of $100 million from prior guidance.
Combination incremental inflation and targeted efforts to protect our execution and operational momentum into 2023.
We expect this additional capital to set us up for success next year protecting our production profile early in 2023, mitigating our execution risk and improving operational continuity.
Yes.
Despite this increase in our capital budget, we still expect to lead our peer group in 2020 to recast will you.
Reinvestment rates and capital spending per barrel production as depicted in slide 11 of our earnings deck.
In other words, our delivery against the metrics to monitor remain intact.
Looking ahead to 2020, while it is.
Too early.
Guidance.
Optimizing our plants marquee to integrate ensign assets.
Our case to be remains a maintenance program in order to deliver maximum free cash flow significant return of capital and continued per share growth.
While maintaining our investment grade bonds.
Under this maintenance scenario on incorporating the targeted efforts we are already taking in 2022, we would expect to mitigate the year over year increase to our tree and signed 2023 capital spending to the 10% to 15% range.
I'll now turn it over to Lee to discuss strategic.
The strategic rationale Ensign acquisition.
Thank you Mike.
Hopefully you've all had a chance to review our dedicated Eagle Ford acquisition press release and associated slide deck.
I'm, especially excited to talk to you today about the strategic rationale for this transaction as it satisfies each and every element of the exacting acquisition criteria that you've heard me and the rest of the team talk about on these very calls.
While we've assessed each and every opportunity that has come to market in recent years in our core basins. We truly believe this asset offers a superior risk adjusted return profile, especially given our experience and knowledge in the Eagle Ford.
While striking the right balance between immediate free cash cash flow accretion and future high quality development opportunity.
This is a truly unique asset.
Going back to our M&A framework this transaction checks all the boxes.
Mediate financial accretion and return of capital accretion accretion to inventory life in quality and industrial logic with enhanced scale, all while maintaining our financial strength and conservative balance sheet and shareholder return commitments.
Because they bought through each of these key points.
First this deal is immediately and signet significantly accretive expected to drive double digit accretion to all key financial metrics.
More specifically, we are modeling an approximate 17% increase to our 2023 operating cash flow and a 15% increase to our 2023 free cash flow.
Accretion is even stronger on a per share basis and will only improve as the additional cash flow generation will support a higher level of share repurchases further reducing our share count and driving incremental per share growth.
It's also accretive on a debt adjusted per share basis.
The cash consideration paid for the asset is attracting attractive at just three four times 2023, EBITDA with a 17% 2023 free cash flow yield.
Highly accretive relative to marathon oil standalone metrics at the same price deck.
Second this transaction is accretive to our return of capital profile as the additional cash flow generation will go straight to our shareholders consistent with our unique and transparent operating cash flow driven framework.
Simply put we remain committed to returning at least 40% of our CFO to shareholders in 2023 and beyond at prices above $60 at UTI.
But we will now be delivering this return of cash from a higher base of CFO .
Therefore, the 17% cash flow accretion I, just discussed will translate to an increase in our shareholder distribution capacity by an equivalent to 17%.
Additionally, we plan to raise our quarterly base dividend by another 11% post transaction close to <unk> 10 per share taking full advantage of the cash flow accretive nature of the deal.
Third this transaction offers compelling industrial logic and is accretive to our inventory line with locations that immediately compete for capital enhancing our cash flow sustainability.
We're adding 130000 high working interest operated net acres adjacent to our legacy position.
<unk> fully leveraging our knowledge experience and operating strengths and a high confidence capital efficient basin, where we have a demonstrated track record of execution excellence.
Acquiring more than 600 undeveloped locations, representing an inventory life greater than 15 years with locations that immediately compete for capital in the marathon oil portfolio.
Not an easy bar to clear by any means.
Finally, we are executing this deal while maintaining our investment grade balance sheet with our net debt to EBITDA expected to remain below one and our financial strength firmly intact.
Importantly, our valuation was based on a nominal one rig maintenance program.
Allison synergy credits and no redevelopment re frac upside.
With that overview of the strategic rationale I will turn it over to Pat to discuss the inventory depth and quality of this asset, which we believe is an especially critical and differentiating element of this deal.
Thanks, Lee I will focus my comments on slide six of our acquisition.
Specifically to the inventory quality of this asset.
It's a differentiating factor compared to recent asset packages being evaluated.
As Lee mentioned, we've assessed every asset that's come to market is on a core basis in recent years, especially in the Eagle Ford Bakken. We believe this asset has truly unique given its attractive combination of immediate cash flow accretion and future development opportunities.
Due to the unique history of this asset Theres been limited drilling activity since 2015, effectively preserving the high quality inventory.
Additionally, the ESI team has done an excellent job of cleaning up some legacy midstream contracts consolidating operator ship at ownership ventures.
The end result is a high margin, 99% operated 97% working interest 130000 net acre position in the core of the Eagle Ford.
Difficult high return drilling inventory.
Our technical teams have spent significant time and effort analyzing each and every day issue on this acreage.
<unk> effort bottoms up effort to truly understand the quantity and quality of unsold inventory.
We came away from this process impressed assigning value to over 600 on drilled locations, representing an inventory life in excess of 15 years, using conservative spacing and development of substance.
We see value in this position across all three phase windows condensate wet gas and dry gas with significant inventory that immediately competes for capital, especially in the condensate and wet gas phase windows.
The <unk> condensate inventory as a potential although there is some of the best returns and highest capital efficiency in the Eagle Ford and therefore, the entire lower 48.
And the economic dry gas inventory enhances our longer term development Optionality further strengthens our underlying resource base.
A simple analysis of external third party data validates the quality of that size of inventory as shown in the charts on the right hand side of.
Slide six in our deck.
Screening all wells brought online since 2019 inside of 12 months oil equivalent productivity on a 15 toward value basis, instead of the very best in the Eagle Ford.
It's not a capital efficiency basis, analyzing 12 month cumulative production relative to total well costs.
So it has proven to be one of the most capital efficient operators in the entire U S. Outperforming every large cap E&P peer group.
It's worth highlighting the DSI acreage also includes 700 existing wells many of which are pre 2015 early generation under stimulated completions, which likely less substantial recoverable resource P&I.
We therefore see upside potential associated with Redevelopments <unk> re fracs on the acreage, especially considering our track record of high return successful development on our legacy position.
Peers have been successful re fracs on the effort on offsetting acreage inside and outside of this recently brought online three refract tests of the road with encouraging early results.
Thirdly, all of this represents pure upside for us as we assigned no redevelopment re frac upside in our valuation of the asset or in our inventory count.
I will now pass it over to day to discuss financing and a return of capital objectives.
Thanks Pat.
I'll be short and sweet.
My key point is that we're executing on this accretive transaction, while maintaining our financial strength.
That's a great balance sheet and conservative leverage profile.
<unk> going to deliver on our return of capital commitments to equity holders, who says you can't have it all.
Plan to fund this acquisition with a combination of cash on hand, our credit facility and new pre payable debt.
Our financing approach will give us the optionality to pay off the acquisition debt quickly without incurring additional costs.
<unk> would be incremental debt, we expect our net debt to EBITDA ratio remained below one times at the forward curve and even testing our leverage against some more conservative price deck of 50 to $60 per barrel go Upi, we remain the ZIP code of one five time leverage by the end of 2023.
We've received constructed constructive feedback about the deal from the ratings agencies, given the improvement to our scale and sustainability, coupled with the limited impact to our leverage profile.
We also believe that tangible assets acquired in this transaction are eligible for full expensing in 2022 contributing to our income tax optimization efforts. Another positive aspect of this deal that could defer our exposure to AMC.
Bottom line, our balance sheet remains rock solid, giving us the financial flexibility to do an attractive deal like this and pay down our acquisition debt in short order, while simultaneously enhancing our return of capital to equity holders.
Additionally, as we've already stated our commitment to return on capital framework remains steadfast in 2023 and beyond our objective remains to return at least 40% of our CFO to equity holders and potentially more if market conditions are supportive.
Driven by a higher base of cash flow consistent with the financial accretion of the inside insight deal.
Back to Lee for wrap up.
Thank you Dan.
Consistent with earlier remarks, it remains too early to offer up any detail 2023 capital spending guidance as we are still working our plan and optimizing the integration of an accretive new asset.
Yes, I can say that our strategic object objectives will remain unchanged to continue delivering peer and market, leading free cash flow generation and return of capital to shareholders. All of which is further strengthened by this Eagle Ford acquisition.
Our case to be for 2023, and the maintenance program that efficiently and expeditiously integrate the inside Eagle Ford assets and that continues to focus on growing our per share metrics.
Now I've reiterated my view that for our company and for our sector to attract increased investor sponsorship, we must deliver financial performance competitive with other investment alternatives in the market as measured by corporate returns free cash flow generation and return of capital.
More S&P less E&P.
Today, we are successfully delivering just that kind of performance. Our challenge now is to prove that our results are sustainable quarter in and quarter out year in and year out there.
Up for the challenge are.
Our compelling investment cases, simple capital discipline sustainable free cash flow protecting commodity price upside market, leading return of capital to shareholders and per share growth and.
And we have a track record of delivery underscored by this quarter's record setting shareholder distributions.
Our multi basin U S portfolio has only been strengthened with the announced Eagle Ford acquisition, and our complementary integrated gas business in EG brings a growing and differentiated exposure to the global LNG market that is unique among our peers.
To close our call today I want to reiterate how proud I am of how we position our company.
We're delivering financial outcomes at the very top of the S&P 500, and just as important we are doing so while adhering to our core values.
Supporting the continued responsible development of much needed oil and gas.
Absolutely critical to furthering global economic progress lifting billions out of energy poverty and protecting the standard of living we have all come to enjoy.
With that we can open up the line for Q&A.
Thank you we will now begin the question and answer session. If you'd like to ask a question. Please press zero, one and you touched on phones. As a reminder, please limit your question to one question and one follow up again, if you'd like to ask a question. Please press star one on your Touchtone phone.
Our first question comes from Neal Dingmann from <unk> Securities. Your line is now open.
Good morning, guys. Congrats on the deal it looks it looks quite good my question is on the enzyme deal.
You gave a lot of color around this guys, but I'm just wondering.
Sort of broad strokes, how are you thinking about obviously comes with some great PDP, but also so you mentioned lease some really nice.
Drilled inventory and I'm, just wondering number one how do you sort of think about value in between the two and then secondly.
Now with almost 300000 in the Eagle Ford.
Well a good bit of this.
Focused on drilling the new enzyme next year in your Eagle Ford activity.
Yes, I think just on the value component Neil when we when we think about the valuation I would say in general we would kind of put it almost kind of 50 50 between PDP and future drill development opportunities I think that was.
One of the unique aspects of the deal was that it it really hit the sweet spot between immediate and significant cash flow accretion with.
Inventory life accretion with inventory that competes immediately.
Capital, So that really stood out to us and made the steel.
Quite quite unique in terms of how we view it I mean, obviously, where we are.
Still in the midst of going through our detailed budget for our 2023.
We modeled this from evaluation perspective, as a maintenance program that would layer on top of an enterprise maintenance program that that we're thinking about for 2023, we.
We believe that the bulk of these locations and ensign compete for capital in today's portfolio and so.
That's just going to be part of the the detailed allocation process that we're going through today, but for US the case to beat remains maintenance capital and Ensign would in essence be layering on top of the enterprise.
Great Great details and then maybe just a follow up second one for Mike maybe on the Delaware.
Now with all the activity now that you've had recently the Delaware I'm. Just wondering if you have any different sort of thoughts or expectations on that play than you had obviously earlier this year prior to really stepping up activity there.
Yes.
So I'm going to pick up in particular on a data. Thank you.
The results that we've seen this year the vision been impressive 30 wells to sales.
Obviously in the quarter, another five or so coming on in the fourth quarter.
Most of those wells that we're bringing online this year might want five two milers.
What's pretty exciting as we look forward to next year 'twenty, three we're probably only going to bringing on two more two mile or so when you look at the third quarter 2022.
Very strong well performance and execution from the team I think we mentioned it in the deck.
13 wells to sales eight two mile laterals I think mentioned more representative of the go forward program.
Again, as we touched on those wells averaged over 27 2700 barrels of oil equivalent per day.
<unk>.
72% oil cut than probably most exciting where the three Lea County wells that we brought online those are our latest design up space larger completions and look to be some of the best Delaware basins.
That would be brought on this year. It is 30 <unk> hundred <unk> volume.
<unk>.
So I kind of share all of that.
Well for next year.
We were.
We're probably going to be similar next year in terms of about 70 30 split on capital with 30% of the capital going to go into the Permian, but I think you teed it up well for next year.
The team got back hit the ground running.
Yes, we're pretty excited about what future future brings in the northern Delaware for Us and I would just add to that Neil the team continues to do some really good blocking and tackling to get.
Give us the ability to do extended laterals through trade et cetera across our position and that was always.
Kind of our theory, when we made the original acquisition that over time, we would continue to build a more contiguous position, which will give us more access to extended lateral drilling and thats exactly what the team has delivered.
Great details guys and again congrats on the deal sort of looks positive.
Thank you Neil.
Thank you. Our next question comes from Scott Hanold from RBC capital markets. Your line is now open.
Yes. Thanks.
In touch based on the.
The insight acquisition, a little bit obviously, you guys made a pretty good case said, it's got very strong.
Economics, especially in the condensate window, but could you give us a little color on how you think about that.
That acquisition Holistically. It does have a little bit more balanced hydrocarbon mix I think traditionally marathon is very had a very much higher oil cut focus. So how do you think about that as you layer on this within the total Corporation and.
When you talk about maintenance activity next year, I think you've historically talked about it on a.
Barrels of oil kind of.
Thought process does that change a little bit because that again is a little bit more of a gas mix.
Yes.
Great question Scott let.
Let me, let me start a little bit on.
If you will the product mix first.
First and foremost, we're driven by returns and economics and.
The ensign inventory is extremely competitive within our portfolio in terms of delivering economic returns, which in essence, then translate into our sustainable free cash flow and return of cash model.
That's what that those locations will underpin for us so.
I wouldn't say, we're agnostic to product mix, but we're much more focused on the economic returns in the competitiveness of these locations. So the if you will the one third one third one third mix that we see at Ensign.
That to us in and of itself.
It's a bit arbitrary and we're more focused again on on returns.
When when we think about maintenance going forward.
Certainly oil is still what we're flattening on I mean, we still have when we talk about maintenance or referring to oil production and the positive there is that ensign will contribute to.
Two continuing to hold that maintenance level of oil production, but now at a higher level.
Just to maybe even step back when you think about even ensign coming in to the enterprise portfolio.
We still masa maintenance are around 50% oil I mean, we may drop down a little bit with ensign and the mix, but at an enterprise level, we still have balance between nominally 50% oil nominally 50% gas and Ngls now as Eagle Ford at a base of <unk>.
<unk>, we will be getting a little bit more gassy, but the reality is it's still 50% plus oil and the Eagle Ford, even with bringing the ensign asset into play.
I appreciate that context.
If we could pivot a little bit to shareholder returns.
Buybacks.
This past quarter was was pretty impressive the level that you guys were able to accomplish.
And now thinking about this acquisition and obviously.
That youll have to take on for this acquisition should we think about at least in the near term until.
I guess, obviously visibility on on.
I guess commodity prices is a little bit better into next year.
<unk>.
Obviously, you still hit your commitment, but maybe tempered from from existing your recent pace and also does this hedging your thoughts on hedging different now.
Since you've taken a little bit more leverage.
Hey, Scott This is Dan I'll take a first cut at that.
Yes.
Thank you.
Acknowledging the fact that we blew the doors off of share repurchases.
82%.
<unk>.
CFO .
Share repurchases in the quarter, notwithstanding a high watermark for us historically, but I think really demonstrates our commitment to driving that high return when we have capacity to do it.
We also reloaded the share repurchase authorization in the quarter. The board viewed two 5 billion, which should be a strong signal that post enzyme we're going to continue with that kind of a <unk>.
Aggressive share repurchase strategy the acquisition itself is 17% accretive to.
<unk>, our CFO so the quantum of cash available to return to shareholders is greater.
About it as pre ensign.
50% return equal as opposed to enzyme 40% return so it's a significant increase in.
The quantum of cash that we can allocate to shareholders.
We certainly are going to be meeting our minimum 40% returned to shareholder threshold, that's our minimum.
We've shown the ability to exceed that.
Up to this point pretty consistently and we would look to do that opportunistically going forward.
The debt that we're going to be taking on.
Is not.
Our leverage is going to be in pretty good shape.
Post close and I think our ability to service that debt is going to be we'll have lots of flexibility around that and thats why we are using new pre payable debt.
And credit facility. So that we can really have a lot of flexibility at the pace that we repay that.
Priority, obviously, we're going to what kind of feedback yet.
Appropriate timeframe, but the priority in our framework.
Given our strong balance sheet is going to be returns to shareholders. So we're going to stay focused on that.
You might have asked one other hedging question in their past that you want to take that yeah sure I would just say in general that our philosophy Hasnt changed hedging is just one part of commodities.
Yes.
Managing that at some day and talked about the balance sheet, our balance sheet is still going to be strong.
<unk>.
Net.
I think it's important to focus on are really low free cash flow breakeven of $35.
Good shape.
Any range of commodity prices. So we don't see a need to just go into the market and hedge because we did this acquisition that fit will be very opportunistic as we have been in the past if we see some.
Some <unk>.
<unk> that would provide us a little downside protection.
But we don't feel compelled to do that unless the market shows or something.
Yes, I think it's very important that.
Cause of our leverage profile and where it sits that.
Future debt retirement, and achieving our capital return to shareholders. Those are not mutually exclusive we are going to be doing both of those things.
How we gauge those will obviously be dependent on commodity price, but.
The way we've modeled it is that we're doing both of those over time and if things stayed with the 17% uplift and CFO by virtue of the Ensign track transaction.
40% minimum is kind of now 50% in other words 40 of the new 50. If you will so we are seeing that accretion and our ability to get return back to shareholders.
I appreciate that thanks.
Thank you. Our next question comes from Jeanine Wai from Barclays. Your line is now open.
Hi, good morning, everyone. Thanks for taking our questions.
Maybe just good morning, Dave maybe just following up on a couple of your comments. There. So buybacks are expected to be $300 million in Q4, which will help rebuild the cash balances.
In terms of how the deal impact 'twenty three and can you provide a sense of the rough split envision between the cash revolver and the new debt for funding the deal and whether your view on cash levels has changed for 'twenty three.
Yeah, So I think.
I would think about their cash versus debt.
To be cash roughly 45% of them.
Funding and the balance from a mix of.
Revolver borrowings and new pre payable debt, which could be term loans or go to debt capital markets to get that we're still assessing the most advantageous approach there.
<unk>.
Yes.
Yes.
Yes, sorry about that so obviously, we're going to we're going to dial back share repurchases towards the end of the year will use <unk>.
A portion of the.
Kind of doing six or so that we forecast at the end of the year.
For the acquisition as we head through next year, I still think there's sort of $3 million to $500 million cash balance to enable us to.
Manage.
A month working capital is a good number to work with.
And within that quantum of cash that we're generating we will be able to service the debt.
Make the shareholder distributions.
Like we have historically been at a higher point them.
Okay, great. Thank you for all that detail.
Maybe pivoting to another asset in the portfolio here in EG. There is certainly upside to EG income starting in 2024 relating the striking the new contract as you mentioned in your prepared remarks.
In terms of other upside I think that.
LNG plant was originally meant to have a footprint so that it could be twins and just wondering if that's on the horizon anywhere on your radar and maybe in the medium or longer term. Thank you.
Yes, Jimmy Yes, there is a tremendous value proposition for us and EG, we've talked about as it relates to two areas. One of course is the Alba gas condensate field, our equity production there and then there's this world class infrastructure that we have there in <unk>.
Europa the LNG plant storage offloading as well as the gas plant and the methanol plant.
Number one objective right now is to continue to load the existing LNG train in one of the first steps in that was to bring in some third party gas, which was by virtue of the land.
Development basically the Lind partners brought that gas to our plans essentially they invested in the infrastructure built the pipeline and we've been able to take advantage of those third party molecules through both.
If you all territories through the facility, but also percentage of proceeds hence our exposure.
Two global LNG pricing and so our vision is that there will continue to be opportunities that are not dissimilar to Atlanta, where we will be able to drive more molecules and continue to at least baseload. The current LNG train we're sitting in one of the most gas prone areas of work.
Africa, both in terms of indigenous gas and AG, but also cross border opportunities, including Cameroon, as well as Nigeria as they look for an accretive home their gas molecules as well.
You are correct in that the facility was designed or expansion beyond the base load.
Today, our number one priority is ensuring that we have the gas that can help us love the current train.
Really through the next decade.
Okay. Thank you.
Yes.
Thank you as a reminder, if you'd like to ask a question. Please press zero one on your Touchtone phone. Our next question comes from Doug Leggate from Bank of America Merrill Lynch. Your line is now open.
Thanks, everyone. Thanks for getting me on.
Dan I Wonder if I could ask you a question on cash tax.
And the interesting footnote or comment on the acquisition slide deck about the.
I'm going to.
We're going to get this description of exactly right, but it looks like some of the acquisition cost can help your cash tax position. So I wonder if you could just walk us through how does.
That evolved with the Emt and how does <unk> help you how should we think about cash taxes.
Yeah sure Doug Thank you <unk>.
For GAAP to tax question.
My favorite.
So.
Prior to the inflation reduction act, we were youre not going to be cash taxpayers for a couple of years under the traditional back system with the PRA. There is an alternative minimum tax structure, it's 15%.
So we could be subject to that if we hit a certain threshold. The threshold is a $1 billion of pre tax income on average for the three years 2020 through 2022. So we're still in that measurement living through the end of that measurement period.
Through our forecasting we're pretty close to that $1 billion threshold for that three year averages or kind of a coin flip.
And so you look at that and go too close to call what else can move the needle for us in there. There are a couple of things that we have line of sight to one of which really expands signed but just to give you a little more color on the <unk>.
A whole playing field.
There is a question about whether we can deduct foreign tax credits.
That threshold calculation, we think if we get favorable treasury interpretation on that would be which would be very consistent with precedent.
That we will be able to and that will have apple puts would that threshold calculation.
<unk>.
There's also the possibility of favorable move legislation on the deductibility of intangible drilling costs and that's a big part of our capital program.
That's got to be a legislative change so kind of harder to predict at this point, but a significant needle mover if it does happen.
And then the third one that directly relates to the Samsung tracks transaction.
As the acquired tangible assets not the intangible and tangible asset portion of the acquisition price, which is a fairly significant number.
And if that is that we expect will be eligible for expenses in 2022 for purposes of this threshold calculation.
Assuming we close the deal has been plant this year.
So without really kind of quantifying all of those for you today, Doug Theyre, all moving sort of in the right direction on the margin certainly this ensign deal could help us defer paying AMT taxes until 2024, which would be which would be nice.
That's really helpful I guess.
Kind of what I was trying to get so much you can you can still do it cuts from this transaction. So thank you for that.
I guess my follow up.
Theres so many things.
Try and address today, but I wanted to try and hit the comment about the shell marketing agreement on LNG.
Obviously, there has been there as well.
A lot of moving parts when you go from equity gas to a land gas.
And then this transaction I guess, so the legacy contract rolls over at the end of 2023.
How should we think about the delta if all things were equal.
On LNG pricing lets say flat no change in the commodity <unk>.
Would your exposure shifts.
<unk> 124 versus where it is today given the mix of all of those things that I'll leave it there. Thanks.
Yes, yes.
First of all just a little bit just for clarity on kind of how how things flow today.
The selling back included a chart just because it gets a little complex through all of the equity.
Companies, there, but today of course, a Lan is.
Third party molecules not equity molecules that flow through the gas plant. The LNG plant. They are told through there and then on the backend we receive a percentage of proceeds from that contract that will not change post 2020 for that one the term.
The land production.
Relative to what we refer to as our hotels, which are the remaining Alba production post the current shell contract, which runs its course at the end of 2023 those molecules are open for negotiation into the current marketplace. So we would move from Essar.
<unk>, a henry hub linked contract to more of a global LNG linked contract on those equity molecules that would be flowing post 2024.
Based on today's market conditions, and obviously the arbitrage between something like a TTM to Henry hub, we would expect to see.
A material uplift there. Despite the fact of course that we are on a.
A decline in the Alba field.
I would expect to see a financial uplift as we make that shift from more of a Henry hub linked to more of a global LNG basis, and those negotiations will be going on.
Starting next year to finalize those new contracts post 2023.
Presumably you quantified it at that time Lee would that be fair.
Yes, no I think just like we've done I think we've tried to give a lot more visibility and transparency on EG by providing equity income guidance et cetera.
As we get and understand what those new commercial terms are going to be like we absolutely intend to share that with the market. So that there is.
Clarity on what that will do to the financials.
That's terrific. Thanks Fellows appreciate it.
Thank you Devin.
Yes.
Thank you. Our next question comes from Paul Cheng from Scotiabank. Your line is now open.
Hey, guys good morning.
Okay.
Two question, one is slipping to apologize for us.
In terms of the new debt that you take on what we're looking at that.
Perfect.
External environment.
Clay you want to Peel.
Yes, the optimum pace of paying at that time.
All of that to get the net debt.
We think that sleeping.
First question.
So if the commodity prices thats good that you hope.
Then how quickly that they want to pay your firm.
The second question on the 600.
And Si inventory.
You have a split.
Between the condensate window wet gas and dry gas.
I'll take a cut at the.
Pace of the debt reduction.
Sort of our base case, if we model this out and just use a sort of backward dated forward curve.
Very comfortable for us to pay this off over say a 24 month period.
The incremental debt.
If we get a tailwind on commodity prices or <unk> things like that it's going to give us much more flexibility to both.
With the debt.
Expeditious fashion, if we want to or <unk>.
Increase shareholder distributions and in a perfect World books.
So there's quite a bit of flexibility with.
Revolver borrowings I guess technically they aren't due until 2027 thats when the bulk revolver has been extended to so we have a lot of flexibility in there, but my my bias I guess my personal bias is to get the debt and the interest cash payments out of the system as quickly as possible without stressing something else like the.
Sure.
This is Pat I'll take the question on the inventory.
Without going into too much specific I would just say that.
The vast majority of the locations that we've described value your entity.
What I would say that wet gas window. It is Lee and I mentioned that those compete very favorably.
Inventory today, and those will be the ones that we attack depreciated years, yes.
And if I could just maybe amplify that.
Besides again that we've taken no credit in that inventory count or the potential upside that exists in redevelopment and re fracking 700 existing wells and and I think I think it was probably jeanine. It also pointed out that the teaser that had come out on ensign original.
Accorded 200 wells and so we're taking a very conservative approach and really putting our own technical view on that inventory. So we feel very confident in the 600 over 600 on drilling locations that we are quoting we believe that to be conservative. It was it was a strong.
<unk> basis, or the valuation that continues to protect potential upside for us as well in the future.
And can I ask whether you guys have any pin nimbly I know, yes, so in the on but preliminary.
<unk> seen the benefit from this deal and what is the opex cost for anti operation.
Yeah, I'll, maybe say a couple of things of that Mike might jump in right. Now we included none of that Paul is the valuation equation, but our expectation is that our excellent Eagle Ford asset team is going to find ways to drive even more value out of this.
Acquisition, and so contiguous to our legacy positioned we believe those savings will will come and Mike you may want to talk a little bit about kind of the unit.
Cash costs that we think we are bringing in with ensign and how that looks relative to the the Eagle Ford and quite frankly, the rest of the enterprise.
Yes.
Surely short answer Im not one Paul.
Opex, we're bringing in is actually more than Eagle Ford means for then the company total of loans.
So that should be.
Net positive.
Maybe give a little bit in terms of just some of the synergies well just the fact that it doubles our footprint increases our size and scale I think that's a positive.
So to the ensign team they've done a great job with some of these recent wells.
Brought online.
I do.
I think just given our expertise on the scale that we can we can continue to optimize both on well productivity and cost.
So there is some potential upside there that again isn't baked in.
Just that increased scale in basin as well is going to help us with the supply chain side of things.
Still a tight market out there. So I think any language that we can we can bring there is there is a pause and then the other one is obviously the potential positive implications.
As regards to Emt that Dave mentioned, a while ago.
Again, I think the positive thing is that we've not baked any of that and thats potential upside for us is to be as we get into the asset appropriately.
So stay tuned on that one Paul I'm sure, we'll be talking more about that in the future.
Thank you.
Thank you we have no further questions at this time I'd like to turn the call back to Lee Tillman for closing 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 now more than ever. Thank you very much.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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