Q2 2019 Earnings Call
My name is change I'll be your operator for today's call.
At this time all participants are in listen only mode. Later, we will conduct a question and answer session.
During the Q and a session. If you have a question. Please press star one on your phone.
And also note this conference is being recorded.
I'd now like to turn the call over to Guy Barbara about labor excuse me.
Oh God you may begin.
Thanks, James and thank you to everyone for joining us this morning.
Yesterday after the close we issued a press release slide presentation, and an investor packet that address our second quarter results. Those documents can be found on our website at marathon oil dot com.
Joining me on today's call are Lee Tillman, our chairman President and CEO , Dane Whitehead executive VP and CFO , Mitch Little executive VP of operations, and Pat Wagner Executive VP of corporate development and strategy.
As always today's call will contain forward looking statements subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.
I'll refer everyone to the cautionary language included in the press release and presentation materials as well as to the risk factors described in our SEC filings with that I'll turn the call over to Lee who will provide his opening remarks. We will then open the call up to Q and a.
Thanks, Guy and thank you to everyone joining us this morning.
Second quarter featured truly exceptional execution, not just across our advantage multi basin portfolio, but across all aspects of our business.
This consistent differentiated execution against a transparent framework for capital discipline is driving compelling bottom line operational and more importantly financial outcomes financial outcomes that compete not only against our independent DMP peers, but against the broader market as well.
We are consistently and comprehensively delivering against our framework for success.
We are driving significant bottom line corporate returns improvement, we're generating sustainable free cash flow at conservative pricing.
We are returning a considerable portion of that free cash flow back to our shareholders through dividends and share repurchases.
And we are improving our capital efficiency cost structure and resource base through differentiated execution.
Our strong operational and financial performance is powered by a transformed portfolio and a top tier balance sheet, providing the foundation for continued execution success through the commodity cycle.
Turning to second quarter highlights the enterprise level proof points speak for themselves and signal a continuation of a trend that is now well established over multiple quarters.
It all starts with our returns first orientation.
During second quarter, we realized an annualized cash return on invested capital 20%.
Consistent with the prior year quarter, despite a 12% decline in Wi Fi price and meaningful weakness in secondary product pricing.
The underlying improvement in our corporate returns underscores our success across multiple dimensions portfolio management concentrated capital allocation more efficient operations high margin oil growth cash cost reductions and lower completed well costs.
Second is our commitment to sustainable free cash flow generation at conservative pricing.
For many this objective remains an aspirational, but our track record on this front is now well established with six consecutive quarters of positive organic free cash flow post dividend.
We are just talking about free cash flow or forecasting it for the future.
Janet free cash flow post dividend for our shareholders.
Our annualized organic free cash flow yield is about 55% year to date and 8% since 2018, placing us competitively not only with our GNP peers, but also with the broader market.
Our portfolio is resilient and capable of generating free cash flow below current pricing with a peer leading enterprise breakeven oil price.
Yes, we also retain significant upside leverage to even modest oil price support.
And rest assured any higher pricing, we realized we will translate directly to higher free cash flow not higher activity through our commitment to capital discipline.
Importantly, our underlying free cash flow minute momentum is improving over the second half of 2019 and into 2020.
Driven by strong productivity declining well costs and cash cost reductions across our asset base.
Third we continue to return significant capital back to our shareholders through our dividend and share repurchases.
Year to date, we have repurchased $250 million of our own shares with $230 million executed during two Q as we took advantage of our attractively valued stock.
Almost 90% of the over $1 billion in post dividend free cash flow generated since the beginning of 2018 has been returned back to our shareholders through share repurchases, reducing our outstanding share count by over 6%.
In combination with our dividend, we have returned over $330 million to shareholders year to date and $1.2 billion since the beginning of 2018 equating to 25% of our operating cash flow.
We have a well established track record of returning capital to our shareholders to underscore that commitment. We are the one of the only Ian piece that has incorporated a return of capital metric into our executive compensation scorecard, and we are well positioned to build on this track record with our board's recent decision to increase our outstanding share repurchase authorization to one and a half billion dollars, we're generating free cash flow in the current environment at a time when our share price remains significantly disconnected from its fundamental value.
We therefore believe that the discipline repurchase of our own shares funded entirely by our organic free cash flow is one of the highest return uses of our capital and represents a somewhat unique counter cyclical opportunity.
Finally differentiated execution is the engine that powers, our delivery against our commitments, both operational and financial.
Our culture is built on continuous improvement and our capital efficiency and our operating cost and in our resource base.
And to that end second quarter was truly a standout from an execution perspective.
Hi margin us oil production exceeded the top end of our guidance and was up 17% from the year ago quarter.
Our total company production exceeded the top end of our guidance range as well.
I've said, it multiple times and I'll say it again, our budget is not a suggestion. It is a commitment our teams understand this and we have spent exactly one half of our development capital at the midpoint of the year fully consistent with our plan. We are solidly on track to deliver on our original $2.4 billion annual development capital budget, while also achieving our key 2019 objectives and ensuring operational momentum into 2020.
Importantly, we are driving a declining trend in completed well cost per lateral foot in each of our basins.
We also continue to drive continued to drive a declining trend in our cash costs as US unit production costs were down 14% from the year ago quarter. The lowest since we became an independent DNP in 2011. Similarly, our international unit cost is also the lowest it has been since we became an independent.
Following the successful divestment of our interest in Kurdistan and the UK, our ninth and 10th country exits since 2013.
Our portfolio of assets has never been stronger simplified to our high performing U.S. resource plays and our free cash flow generating integrated business in AG.
And all this is supported by a balance sheet that is investment grade at all three primary ratings agencies with upgrades from both Moody's and S&P this quarter.
Turning now to the asset specific highlights that are driving the enterprise level success I just highlighted.
In the Eagle Ford.
We are delivering financial returns and free cash flow that compete with any basin across the lower 48.
Second quarter was highlighted by record well productivity as measured by average IP 30, Despite a majority of our quarterly activity concentrated outside of Karnes County, demonstrating the strength of the expanded core and the value in acreage that just a few years ago was viewed as lower tier we delivered excellent results across our Eagle Ford footprint, we established a new IP 30 pad record in Karnes County, we delivered tremendous results from 15 wells across the oil window of Addus goes the county.
And we successfully applied enhanced completions and Gonzales County.
Specific area last tested by us over two years ago, as we continue to uplift the inventory quality across our Eagle Ford acreage.
Most importantly, the Bottomline capital efficiency of the Eagle Ford continues to improve with 2019 productivity tracking ahead of the prior year, while completed well cost per lateral foot are on a declining trend.
And the Bakken.
We are delivering bottom line results that build on a well earned reputation as best in basin.
Our industry, leading productivity is well established and conclusively validated by public data.
On a 90 day cumulative oil production basis, we now account for 20 of the top 25 wells and 60 of the top 100 wells in the Williston basin. Despite accounting for only 9% of total wells drilled we are relentlessly focused on capital efficiency with year to date completed well costs down 15% from the 2018 average and half of our second quarter wells delivered at an average completed well costs of $5 million or below a number not thought possible just a few years ago.
Additionally, extended production history is validating critical prior year core extension test highlighting the strength of our broader acreage footprint as well as our operational capability.
Turning to Oklahoma.
With a firmly established foundation of strong and predictable results and optimize spacing designs and supported by another quarter of productivity outperformance. Our team has been focusing on improving capital efficiency and their efforts are paying dividends, most notably our two most recent over pressured stack infills achieved industry, leading drilling and completion cost.
These six wells were delivered at an average completed well cost of just $6.3 million normalized to a 10000 foot lateral.
Over the second half of the year, our Oklahoma activity will be overwhelmingly concentrated in the oilier areas of the play, including the Springer formation, where we plan to leverage our own operated success. In addition to our learnings from others.
In the northern Delaware, we're protecting our leasehold delineating our position and improving our margins all while delivering significant early development drilling success.
Specifically, we saw our upper Wolfcamp wells and Malaga deliver an average IP 30 of 340 Boe d. per lateral foot.
As further evidence of our improving margin profile, our cash costs were down 10% sequentially during second quarter.
100% of our produced water was on pipe and our oil on pipe is that 70% and rising.
Stepping outside of our four us resource plays our commitment to portfolio optimized optimization continued with our international portfolio now streamlined to our free cash flow generating integrated business in EG.
With the two most recent country exits from Kurdistan in the UK, we have reduced our asset retirement obligation from $2 billion in 2014 to less than $200 million today.
In summary, second quarter was truly exceptional with every asset contributing to our bottom line success.
And while we are frustrated by market volatility and by our sectors equity underperformance, we believe in our strategy and our framework for success.
And within that context, we will focus on what we control, which is our execution and the consistent delivery of compelling bottom line financial and operational outcomes quarter after quarter.
Our challenge is less NP and more S&P, we must deliver financial results that are competitive with the broader market and that are attractive to both generalist as well as energy investors.
While many speak Aspirationally on this point marathon oil is already competing in this broader space with year to date annualized free cash flow yield of 5% and 8% annualized free cash flow yield since 2018.
And since the beginning of 2018, we have returned around $1.2 billion of capital to shareholders through our peer competitive dividend and disciplined buybacks equating to over 10% of our market value and representing about 25% of our operating cash flow all funded entirely by our.
Success is unchanged there won't be any surprises corporate returns first sustainable free cash flow, a conservative pricing returning cash to shareholders and differentiated execution.
Hi value old growth will be an outcome of our rigorous multi basin capital allocation not an objective.
Importantly, our 2019 plan already has us well positioned for both operational momentum and capital efficiency going into 2020, we are delivering against our framework. This is our sixth consecutive quarter of post dividend organic free cash flow.
Our capital discipline, and our peer leading enterprise breakeven are a powerful and winning combination across a wide range of commodity environments. Thank you all for listening and with that I'll hand, it back to the operator to begin the Q and a session.
Very good. Thank you we can now begin our Q and a session. If you have a question. Please press star one on your phone.
If you wish to be removed from the question queue press the pound center the hash key.
And if you are using a speakerphone you may need to pick up the handset first before pressing the numbers. So once again, if you have a question press star one on your phone.
And our first question is from a room joining around.
Of JP Morgan Chase.
Our room are you there.
Our Runoffs is your line muted.
You can you can move to next question Jamie Okay. Our next question from Brian singer Goldman Sachs.
Brian are you there or is your line muted.
Let me.
We might have a problem here, let me check with an excellent.
Scott Hanold of RBC.
Okay.
Okay, Let me restart the culinary Q and perhaps that will take care of this.
Okay.
Okay, Alright are you there JP Morgan Chase.
Okay.
No.
Okay and Bryan singer.
Yes.
All right.
Let me try one more thing.
Sure call Okay, no that's it accumulates network.
Oh.
Nextshares.
Yes.
Our own are you there.
Yes can you hear me.
Yes, I can.
Go ahead. Please all right. Thank you, okay, sorry about the gentleman there there is a little bit of technical issues on our end so apologies about that but Oh. He began all my question.
Okay.
Lee its obvious that the board's action indicates that free cash flow will be plowed back into buybacks I didnt want to get your perspective regarding public market acreage valuations in the Permian, which are now well below historical average transaction levels, including your entry in the basin.
And just your general thoughts on portfolio enhancement, just given the wide disparity in public market valuations relative we've seen recently in the asset market.
Yes, well first of all good morning, apologies to everyone for the technical difficulties hopefully we're back back on track.
You are exactly right around and I think that the.
The reauthorization to one and a half billion dollar mark by the board signals a strong intent for us to continue to.
Deploy free cash flow and to share repurchases and again fundamentally it's driven by the returns that we see there.
Based on the current valuation of our share price.
It's something that we'll continue to look at overtime. We continue of course to have a dividend yield at sitting around 1.5%, which is very competitive within our direct peer group.
I think on your broader question about the the the market and where things are valued currently I think first of all you have to recognize that that might be the value from a market perspective, but in terms of what might actually transact could be very very different than that.
We remain very focused though as we always have been in those core our four core areas looking for those unique opportunities that fit our acreage position hand in glove. So we're very mindful of small bolt ons and and as well as trades that can continue to help to build out.
Our position make it more contiguous increased our working interest give us more optionality for longer laterals. So that is front and center and I think as we continue to see this dislocation in the market.
We want to be opportunistic and I think thats one of the reasons that we want to continue to protect the strength of our balance sheet such that we can be opportunistic and that we can act.
Quickly if the correct opportunity in fact does present itself.
Great Great and just my follow up please.
The results from from the Bakken have been relatively volatile for the industry. There has been some gas processing headwinds that have impacted some of the smid cap players in the basin seems like you were able to successfully navigate some of these headwinds, but just wanted to get.
Your thoughts on what drove call it the differentiated performance and how you're set up in the Bakken for the rest of the year from a gas processing standpoint.
Yes, I'll I'll start off by just saying a room that first we remain fully compliant.
With the gas capture requirements in the state of North Dakota, and we don't expect any impact going forward on our business plans or the associated oil production.
I can't comment on the issues that other operators may be having I think everyone has a unique position in the basin.
It is a little frustrating for us, though to perhaps be painted.
With the same brush I think we have established a pretty strong credibility.
In the Bakken on delivering against our commitments there.
When you look at almost any metric it's hard not to argue that we have a very.
Unique position there as a best in basin operator.
So we we continue to see the Bakken as a key element of our portfolio.
I think you saw that performance this quarter sequentially Bakken oil was up nominally lower over 10%.
So.
It's all about planning your business and.
You know and getting ahead of the curve on some of the some of these things that could in fact be bottlenecks in the future and so our team is very diligent.
About assessing our takeaway and our ability to again.
To to be fully compliant with the regulations, there and I think that that planning has put us in a very good stead.
Great. Thanks, a lot Lee.
Thank you Eric.
Okay.
Our next question is Brian singer of Goldman Sachs.
Thank you. Good morning can you hear me okay.
Yes, Brian loud and clear alright, great Thats going to start in the Eagle Ford.
First can you speak to the cadence that you expect in drilling completing and bringing wells online there as we go forward and the impact that that has sequentially on production and then could you also address decline rates that you are seeing from some of your older wells beyond the first 90 to 180 days and how that impacts your assumption on terminal decline rates in the Eagle Ford.
Yes, let let me maybe start off with just some high level commentary about cadence in general.
We generally tend to talk about that more at a at a portfolio level, Brian and then perhaps I'll, let Mitch just chime in with us a little bit more color on the Eagle Ford itself.
We are.
Spot on our development capital budget halfway through the year.
We always communicated that we were going to be a bit front end weighted from a wells to sales standpoint, but I also want to stress that gross company operated wells to sales is not necessarily a perfect proxy for development capital spend and as we look forward into the second half of the year. We know that there are going to be some factors as we look into the second half the year, including of course, the fact that we're going to see a little bit longer lateral lengths were going to see a little bit higher working interest in some of our key basins. So that will be impacting it also we are trending toward the.
I would say the upper end of our overall wells to sales guidance. Additionally, even though wells to sales are down in the second half of the year actually drilling activity is increasing and specifically we've added a rig in the in the Bakken. So there are a lot of factors that go into the second half of the year development capital spend I would also though from a momentum standpoint point you to our guidance from a production volumes perspective, and just say when you look at our Threeq guidance now.
In addition to our full year guidance it should become I think pretty straightforward that we continue to grow strongly twoq to threeq, you and of course going into fourth quarter that that that volume metric guidance moderates a bit, but we're finishing the year very very strong and with our activity as design, we expect to carry quite a bit of operational momentum and capital efficiency into 2020.
Perhaps I'll turn over Mitch just to maybe make a few comments just about the performance.
In the Eagle Ford, which quite frankly has been pretty extraordinary this quarter.
Yes, Brian just maybe a couple of additional points all of the things that lead described around the portfolio in general would certainly apply to the Eagle Ford as well in terms of both cadence and some growing working interest.
And longer lateral lengths as we move into the second half of the year, it's exactly as we had planned.
As you're well aware, we have significantly upgraded the performance across the Eagle Ford and extending tier one into the overwhelming majority of the play.
Eight years, and we're delivering record IP thirtys.
Including the Gonzales County, wells and a significant numbers outside of cards.
What we see in tracking year by year programs.
With more long dated production is very similar performance on an upgraded basis.
And as with all of these fields as we continue to grow.
The base production from prior year development.
We're all aware that first year declines are relatively steep in unconventionals, but as the base grows and as the.
Magnitude of that prior year program grows it has a dampening effect over the longer term in terms of shallow in the decline.
Great. Thank you and then my follow up is.
A bit more of the capital allocation on exploration versus inorganic opportunities kind of realize there's not a resource exploration update this quarter, but can you talk philosophically, perhaps to how you're thinking about the budget for resource exploration in 2020 higher versus lower assuming similar commodity prices to today and whether to the degree there is something you want to be opportunistic about.
Whether that's a two to turn.
Yes, I think when when we talk about continuing to improve and enhance our resource base. We always talk about it in terms of really Theres theres three buckets, there that we're pursuing and investing in the first of those is organic enhancement and we've talked a lot about that.
Aspect in both the both the Bakken and the Eagle Ford. The second element is really around small bolt ons and trade some of the things that we're doing in northern Delaware for instance, and then the third element like you said is in fact, our resource play exploration program.
It's that program for US offers the ability to to get in at two greenfield leasing positions.
At a cost that allows us to really generate those outsized full cycle returns, but it does require a constancy of purpose and a commitment both in terms of talent as well as financial resource we continue to talk about.
The Rex program as being nominally a couple hundred million dollars a year that is going to ebb and flow.
As activities and opportunities present themselves. Some years, we may see heavier spend in exploration drilling and seismic other years. It may be more bias toward leasing which was exactly the case that we saw last year as we established our position and the Louisiana Austin chalk.
But it's obviously a bit early to talk about 2020 budget, but I think the guidance that we provided this year around the Rex program going forward that.
It's a much more ratable couple of $100 million a year, that's still consistent with our current thinking.
Great. Thank you.
You bet.
Okay. Our next questioner.
As Scott Hanold of RBC.
Thanks, Good morning.
Okay.
First I want to commend Joel on.
Basically supporting your stock with buybacks, especially with where your equity prices I mean, certainly units I think.
Great thing to see.
You made a point that.
Investing in buybacks right now provides a very competitive returns in your portfolio and.
Can you tell us about like your thought at this point in time with the increased buyback authorization.
Would you envision getting a bit more aggressive on short term buybacks in the short term given where the stock prices or would you still be a little bit more patient and wait for the free cash flow to support that.
Yes, our our fundamental principle and we of course have had this dialogue with our board as well as really wrapped around our our share repurchases are going to be governed by our ability to generate organic free cash flow. We are not going to spend money on share repurchases that we have not earned.
And we also believe that dollar averaging and taking advantage of that over time is the appropriate way.
To execute against a share repurchase program. So you should expect us to the extent that we are generating.
Free cash flow.
There were going to put that to work in our share repurchase program, but it is going to be governed.
By organic free cash flow generation.
Understood appreciate that and my follow up is on Ijie, obviously internationally you guys really of streamline things.
And certainly I think as you go into 2021 and beyond it looks like.
Thats going to be in opportunity kind of be I guess upside optionality with with the new tolling agreement can you give us some context of like what that can mean in terms of like the size of incremental cash flow.
You know to marathon.
Yes, I can probably give some directional views on that I mean will we can't give specifics today on exactly the impact that will have on EBITDAX, but what you should expect is that we're going to continue to give full transparency on the financial delivery out of the IGI assets. So that it's very clear what that asset is doing within the broader portfolio and and even though it is a long life low decline asset, meaning the Alba field itself with the addition of the Atlanta arrangement, which is a combination of tolling and profit sharing there is certainly an opportunity to continue to drive financial performance there even off the back of non equity molecules and as we stated before we believe that.
The arrangement that we have with the land is simply a first step a fully leveraging that extremely valuable infrastructure that we have.
Sitting on the OCO Island, which of course is.
Gas plant methanol plant LNG plant storage loading et cetera, and we believe that it will in fact.
Fulfill the promise of kind of a.
Natural.
Aggregation point.
For both regional and local gas in that area, which we will continue to bring additional.
Profitability to the asset.
Okay.
I appreciate that the look forward here and more on that.
Sure.
Okay. Our next questioner is Doug Leggate of Bank of America.
Thanks, Good morning, everyone can you hear me.
Yeah, that's a really good morning, Doug.
Good to see it going forward to seeing in a couple of weeks.
Thank you.
Lee that the the comment you made about S&P 500 been one of your aspirations I guess been able to compete against US there is a little caveat, there I guess, which is.
Visibility on dividend growth and capacity for dividend growth.
You'd obviously growing the inherent cash flow of the organization, but youre continuing to emphasize the buyback or perhaps sustainable dividend growth I just like to know how you think about the balance between the two.
Just in terms of of.
With that but relative metric because free cash flow certainly.
Competitive but dividend growth as the other piece of the S&P 500 metric how do you think about that.
Yeah, well I think you rightly point out that the first step is sustainable generation of free cash flow and let's be honest, we're not an industry. That's been doing that on a regular basis. I mean, this is our sixth quarter.
Of achieving that because you can't have a conversation about returning cash to shareholders unless you are actually generating free cash flow. So the first step is having a model a business model in a portfolio that consistently and sustainably to levers that free cash flow yield once you get your yield to where you are competitive then you're simply talking about the best mechanism to deliver that cash back to shareholders. Today, we very much favor the share repurchase because of the volatility in the market and where we sit from a value perspective on our shares relative to our I'll say our own internal NPV calculation. So we truly believe that with our returns first had on that is the right answer for shareholders.
That split that mix between dividend and share repurchase is something that we will continue to assess.
Each and every quarter and we'll look at it and make it a thoughtful decision about how to continue to balance that mix today again were sitting at about 1.5% yield on the dividend.
We think that is truly competitive within the peer group. It's clearly part of your cost structure moving forward in time, so you have to be very mindful.
And patient about how you continue to ramp into the dividend, but at the end of the day I believe that you are our ability to essentially returned over 90% of our free cash flow back to shareholders in one form or another that's really the most important metric and I will also emphasize that return of cash to shareholders is a metric all my scorecard as well.
That's very very good point, maybe just quick follow up to that so assuming your share price was.
Let's be honest operational and see it go back to where we all thought it was reasonably valued your dividend yield with obviously be not competitive as it would be significantly lower we expect the pivot to the dividend at that point.
I think at that at that stage I think that's a that's a very valid consideration, it's clearly going to be based on what we see in the market and do we have that sustainability to take that step forward in the dividend, but yeah. I mean, it's it's absolutely on the table as part of the mix. It's just today. It's we so the returns are so overwhelming for us on the flip side of that equation and then you factor in the inherent volatility of the of the forward curve right now and I think it just lends itself to the share repurchase as the best mechanism to get value back to our shareholders.
Last one from me if I.
Taking that as part one and part wouldn't be so hopefully.
Now the.
Last one real quick is you inherited a fairly onerous contracts in EG as it relates to.
The British gas offtake agreement, which expires in a couple of years.
Well, how should we expect the cash flow from EG to evolve once you get in but control of.
Destination, if you like for the offtake and I'll leave it there. Thanks.
Yes, well certainly that contract and that agreement was put in place at a time at a different time, so I don't want to go back in and.
Hindsight that but what I will say is that going forward as that that agreement runs. Its course, we absolutely can go out and get full market exposure and we think through that we'll have the opportunity to continue to enhance the profitability of the asset.
Great. Thanks, so much.
Yes. Thank you.
And next is.
Neal Dingmann of Suntrust.
Good morning, guys, great answer so far.
My question is first just pertaining to your Permian could you speak there's obviously been increased scrutiny. There on just how people are looking at spacing.
Not only just in terms of per zone, but I guess, you talked about multi well.
Multi zones and I'm just wondering.
Can you talk a bit about what you think about your development plans remainder of this year next year in terms of.
Multi zone targets and spacing.
Sure Neal this is Mitch.
Probably not going to spend a lot of time on 2020 is we haven't set our capital program for 2020, but I think we've been.
Pretty consistent with our messaging around our focus in Permian.
Which is kind of strategically pacing our investments.
To both delineate the position and move into development in areas like Malaga, where we've reported on the upper Wolfcamp.
Continued strong productivity.
We've had a fair bit of focus in that area over the past few quarters. We also.
Revealed in the slides as we move.
End of the second half of the year, there was a bit stronger component of delineation over into the Red Hills area.
In the.
Backdrop of all of that of course were.
Focusing on improving our margins with getting water and oil on pipe for up to 80% of our water on pipe driving cost structure down.
Capturing efficiencies from various completion trials and.
Drilling programs across that position. So it's right on track, we're executing the plan that we expected to.
In early when we set the budget early this year.
And so it's going to continue to be in the near term more of that mix between.
Localized development in areas like Malaga.
Upper Wolfcamp.
And then a delineation element across the position as we move towards maturing into more full field development, we do have.
Trials in multiple benches as part of that delineation program, but the concentration has been more in the upper wolfcamp.
And some other wolfcamp and bone Springs zones.
Very good and then could you talk.
Bit about maybe leave my I guess my question is just sort of a broader one theres theres been some reallocation out of the mid con by few players I'm just wondering.
So really when you look at you you had obviously some very.
Great basins I'm just wondering is it purely just when you look at your development plan.
Just purely return driven and I guess, that's one and.
Would you consider smart reallocation of that like others or how do you sort of how does that that mid con play of your stack up versus the others.
Yeah, well, absolutely with its going to be all about returns for us and how we allocate just maybe as a little bit of a reminder, backing up to our original budget allocation that we talked about earlier in the year just recall, 60% of our development capital is going to the Eagle Ford and the Bakken about 40% to northern Delaware in Oklahoma.
Having said that our original Oklahoma program was really designed to concentrate activity in the oil bigger parts of both the stack and the scoop because.
Those offer the advantage of more competitive returns. In addition, this kind of targeted development also allowed us to really bear down on completed well costs to continue enhance our capital efficiency and we've demonstrated that case in point.
The the print that we just made on the completed well costs for the last two stack Meramac pads, where we're getting these wells done for basically $6.3 million.
And so as we kind of take that and even look at the second half of the year, our Oklahoma activity again is going to be overwhelmingly concentrate in the oilier areas of the play including the Springer and again that is all driven by our returns orientation and our view is those opportunities obviously compete head to head with the other aspects of our portfolio.
No when I don't I don't believe anticipated some of the headwinds on the secondary products, which for certain of the phase Windows and Oklahoma do in fact have a pretty significant issue, but I just point to this and say this is part of our multi basin advantage.
If we see the need to move capital, we have a lot of flexibility to do so.
Great Great details. Thanks, Lee Thanks, Mitch.
Okay. Our next questioner, David Heikkinen of Heikkinen Energy advisors.
Good morning, guys.
Thanks Lenny.
Time.
Thinking about the last six quarters of building a track record and I do think that commendable and is eliminating uncertainty for investors.
As I listened to some of the earlier questions and and really trying to think about the intent.
I think they are trying to eliminate uncertainty around the comfort do you have of your existing portfolio versus acquisition.
And can you talk about like the dividend could be locked in very simply.
It seems like you're leaving yourself flexibility, which I understand.
Can you just talk about your your existing portfolio your existing stock price.
And your thought process of how much time marathon people spend on looking at site acquisition.
Yes, I think you know David first of all you know I think with our very extensive portfolio transformation and what we believe is a differentiated position in the four best U.S. resource plays.
Large scale M&A is not really a consideration for us now or is it really required.
For forward success, So I think that multi basin model gives us a lot of competitive advantages that we've talked about before so the hard work for us, particularly with the.
Exit from the UK in Kurdistan hard work on the portfolio is really behind us not in front of us and we believe the right approach as we again look to continue to enhance and grow our resource base going forward is the one that I've already addressed which is it really comes into looking at enhancing what we already have which could be elevating the economics are or even adding incremental sticks and are in the basins that we currently operate.
But it's also looking at smaller accretive bolt ons that fit within.
The our kind of core basins as well as trades even.
Even lease sales like we participated in and new Mexico last year and then finally.
The third element of that is really our Rex program, which.
Albeit it's risky to money, we have to get out there and expose some money from a lease standpoint on things that are truly exploration.
There are no guarantees in it.
But we think we've got the right approach there and that we will generate success there as well. So I think the bottom line is we've got a very comprehensive strategy in place to continue to replenish and improve our resource base and that does not require really large scale.
M&A.
I guess following on that the your slide number five shows your free cash flow.
But to the right of the line is Rex Capex in a in the net.
As you think about enhancing the portfolio versus organic or total free cash flow.
A couple of hundred million dollars indirectly year.
You could use of that free cash flow pretty quickly with the accretive bolt ons trades and lease sales so.
How do you think about that flexibility and outlook for repeatability of building on the track record.
Yeah, well I think first of all it obviously is highly dependent upon.
The commodity price environment that we find ourselves in.
I think that our focus on continuing to drive our enterprise breakeven down.
As low as we can and really having that mindset of.
Continuing to drive that breakeven even lower.
Gives us that headroom to continue to operate to meet all of those needs.
To generate free cash flow across a very broad range of commodity price outcomes and then we can redeploy that as we see fit.
Between not only returns back to shareholders, but also funding some of these accretive opportunities and resource capture which could be rack. Some years could be bolt on some years and it's just really striking that balance in selecting the best opportunities. So they're going to have the most meaningful impact on our business.
Okay.
Our next question from Jamaal Dardar of Tudor Pickering Holt.
Good morning, everyone.
Good morning.
As I kind of listened in on the commentary for second half the year I'm mentioning kind of longer laterals and higher working interest I'm is there any color you could give on you know the magnitude of working interest increase we could see.
As I look at some of the charts.
It looks like Q1 and Q4.
<unk> were relatively low on working interest but.
Snapped back a little bit in Q2 should we expect something kind of similar to the Q2 trajectory or something higher.
Yeah, well certainly the way I would I would think about them. All is that you know directionally.
Certainly and.
In some of our basins, where we do have relatively high capital allocation, we are going to see.
Materially higher working interest in those basins. So that does make a difference and and again I don't want to get into the basin by basin specifics and we can certainly follow up with you on that.
But that is a driver I would also remind you that beyond the working interest and lateral link. The fact that we have been very efficient and we are trending toward the higher end of our wells to sales will also be an element of that as well.
All right fair enough and as it looked at some of the moving pieces in the second half of the year looks like the Springer is going to get some attention.
Which is which is much oilier than the Oklahoma region, and you're moving a little bit up dip in Gonzales, which could be oilier than the average for as well just wanted to get a sense of just kind of overall are there any moving pieces on oil cut that we should be expecting in the second half of the year.
Yes, it will certainly it's a metric that we watch very closely.
Because of that is our high value products. That's what we that's what's really the key to delivering our financial outcome. So I would say directionally, where we're going to continue to try to.
Keep that if not flat certainly improving over the second half of the year, particularly in those basins like you said in Oklahoma, where we have a well mix that is going to allow us to drive a little bit more oil cut and places like obviously, the Bakken to some extent you know the the oil cut is relatively fixed regardless of the well mix and Eagleford. However, as you pointed out as we continue to do more in up dip at ASCO to county, as well as Gonzales. There is the opportunity to continue to move that toward a higher oil cut.
All right. Thank you.
You bet.
This question is germane way of Barclays.
Hi, good morning, everyone.
Good morning.
Good morning.
So my question I only have one my question is on level loading and the consistent free cash flow that you spoke about regarding.
Meeting that to support dividend growth. So if we go back to the original I'll tell you that team plan in the U.S.
Bakken and the dollar objectives, both included growing oil and the Eagle Ford is more in harvest mode I'm with you doing actually more or less given efficiencies that we suspect Eagle Ford well this year as well, but can you talk about if and when it's appropriate for the backend Delaware in Oklahoma to be run with a more level loaded type program like in the Eagle Ford and which perhaps you could enhance what we already considered to be a pretty free cash flow pretty strong free cash flow story. So our guess is does the Bakken is closest to getting to this maybe a level loaded type of scenario, but we just wanted to check in on a longer term view of how you're thinking about running the assets.
Yes, well certainly first of all Janina, we manage our assets as a portfolio not as individual assets all of our assets have the capability to cycle between growth and higher free cash flow generation each of them have that implicit flexibility. So we start our capital allocation process with a view of driving a rate of change in our corporate level returns. The next really objective is to drive sustainable free cash flow on a conservative price deck, and then quite frankly, the oil growth that pops out of that is an outcome not an objective and so I would just say that it's so it's a bit too early for us to give specifics around 2020.
But I would just emphasize that.
All of the basins can make that that flex and it's really going to be around delivering our financial metrics on how we actually.
Allocate capital within those four basins.
Some like for instance, this year Eagle Ford is a great example of the year, where we generally speaking managed eagleford relatively flat. So it was in a very high free cash flow generation mode and the case of Bakken for instance, it was being managed to growth, but was also generating significant free cash flow and so each of the each of the basins will have a particular role based on what we need to drive our financial outcomes at an enterprise level. So I would say there is no.
I'd say rule in effect when we're trying to get a given basin to some terminal production or plateau level.
Okay, Yes, I guess my point was that.
At least listen to the commentary and some of the investor feedback is that.
Volatility in oil prices prevents companies like oil and gas companies like you guys in terms of having a bigger dividend growth model and so you can't control oil prices you can control your free cash flow and dampening the volatility in oil prices, if you kind of enhance or free cash I do that so.
We are just kind of wondering how youre thinking about.
I think what I would say on that John is that what we have tried to focus on is really driving our enterprise breakevens as low as practical such that we can operate across the broad spectrum of commodity prices, while still generating sustainable free cash flow I mean, we're well sub 50.
In terms of our enterprise breakeven this year and with that sub 50 enterprise breakeven, we're still growing our overall MRO oil by 10% and our U.S. oil by 12%. So I think it's obviously, it's a it's an optimization process, but it starts with the financial objectives first and foremost.
Okay, great. Thank you that's very helpful.
And our next question from Paul.
Multiples of Raymond James.
Thanks for taking the question in highlighting the free cash flow metrics I'm curious if you can.
Disaggregate, where that free cash flow is coming from and in particular.
This year you guys end up doing maybe three 400 million of free cash how much of that is coming from E. G.
Yes, the way the way I would think about level is that.
When you look across our asset base, the strong free cash flow generators, our Bakken Eagle Ford and EGI all of those are contributing strongly to free cash flow generation.
Because Oklahoma still early in the development cycle.
It is still probably a little bit of a cash taker to two two to neutral and then of course.
Northern Delaware still being the delineation appraisal phase is at this point.
Still cash flow negative as we continue to build the base production and gain economy of scale there.
Okay. That's it.
Couple of EG the largest.
Contributor.
No.
It is in dollar terms.
No it is not.
Okay. Okay.
Your balance sheet, you highlighted investment grade from all of the rating agencies are you happy with the current level of ratings.
It's just kind of on the cusp of investment grade or would you like to get further up into maybe single a territory.
Well I'll, maybe make an opening comment then let Dana danger bump in.
First of all we're very pleased that we were the first split rated GNP company to get upgraded.
Then we subsequent to the Moody's upgrade we got an S&P upgrade from Triple B minus to Triple B, which has strengthened our investment grade rating, obviously that brings benefits to it that we can we can now enjoy.
For Us I mean, we don't do things in order to necessarily drive ratings.
We tried to do the right things to drive the business and we look at key metrics like net debt to EBITDAX that really help us determine the overall health of our balance sheet and we're also looking to make sure that we maximize the flexibility.
That we have.
But I'll, maybe let dane jump in and throw anything else that he would like.
Yeah. Thanks, I'd say, we're very happy with the fact that we're investment grade rated at all three agencies.
The hard on.
Wishing that really everything that we've talked about today.
Focusing on corporate level returns generated free cash flow.
Driving down costs, increasing well productivity, it's all in terms of.
More financial strength.
And so I think rather than push on some key metric accelerated to see if we can get to another notch upgrade from the ratings agencies. We're just going to keep focused on exit business exactly in the model that we've described to you and that's going to support.
The credit quality rating.
Support with the agencies, they really like the model we're executing.
I would maybe also add that we took a lot of balance sheet action back in 2017, I think we're a little bit ahead of the curve. There we took out quite a bit of of gross debt really reduced our interest cost et cetera, all that contributes to the strength of our balance sheet as well as to our our enterprise Breakevens and so we got well out in front I think of the balance sheet question, because we knew that that financial flexibility was going to be important.
And the kind of forward commodity environment.
Okay. That's helpful. Appreciate it guys.
Thank you thanks.
And this concludes our question and answer session return the call now impacting the Tillman for closing remarks.
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Thank you and that concludes our call.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation.
You may now disconnect.
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