Yahoo Finance Marathon Oil Corporation (NYSE:MRO) Q1 2024 Earnings Call Transcript
Marathon Oil Corporation (NYSE:MRO) Q1 2024 Earnings Call Transcript May 2, 2024
Marathon Oil Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Marathon Oil First Quarter 2024 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Guy Baber, Vice President of Investor Relations. Please go ahead.
Guy Baber: Thank you very much, Danielle, and thank you as well to everyone for joining us on our call this morning. Yesterday, after the close, we issued a press release, a slide presentation and investor pack that address our first quarter 2024 results. Those documents can be found on our website at marathonoil.com. Joining me on today's call are Lee Tillman, our Chairman, President and CEO; Dane Whitehead, who as of yesterday is now our adviser to the CEO, Dane successor as our EVP and CFO, also effective yesterday; Rob White, welcome Rob; Pat Wagner, Executive VP of Corporate Development and Strategy; and Mike Henderson, our 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 presentation materials as well as to the risk factors described in our SEC filings. We'll also reference certain non-GAAP terms in today's discussion, which have been reconciled and defined in our earnings materials. So 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 their remarks, we'll move to a question-and-answer session. And in the interest of time, we have a lot to cover today, so we ask that you all limit yourselves to 1 question and a follow-up. Lee?
Lee Tillman: Thank you, Guy, and good morning to everyone joining us on the call. I want to start by again extending my heartfelt thanks to our employees and contractors. We built a track record of execution excellence that is differentiated in our peer space and the S&P 500. A track record that now spans multiple years through the ups and downs of the commodity cycle. Such execution is only made possible to the hard work and dedication of our talented people, who, through it all, remain committed to our core balances, including safety and environmental excellence. Now turning to first quarter results. We have a lot to cover today. I'll start with 3 key takeaways. First, first quarter was another strong financial and operational quarter.
We executed our plan and we've built on our multi-year track record of sustainable free cash flow generation, meaningful return of capital to shareholders and strong capital and operating efficiency. More specifically, we returned 41% or $350 million of our cash flow from operations back to our investors, consistent with our cash flow-driven return of capital framework that provides our investors with the first call on capital. Oil production of 181,000 barrels of oil per day was just above our guidance and free cash flow generation was solid despite not receiving any EG cash distributions from equity affiliates. This is purely due to timing, and we expect to receive a catch-up in EG cash distributions during the second quarter. Importantly, and similar to last year, first quarter marked the trough for both our oil production and free cash flow generation for 2024.
Free cash flow momentum should build significantly as the year progresses, starting with the second quarter. This is driven by several factors, including the expected catch-up in EG cash distributions, a significant increase to our oil production, especially into the second and third quarters and a moderating capital spending profile over the second half of the year, consistent with the phasing of our capital program. My second key takeaway this morning. We continue to make important strides to organically enhance our asset base, making Marathon Oil a stronger, more resilient and more sustainable company. Specifically, we're improving our capital efficiency through extended lateral drilling. About 25% of our first quarter wells to sales were 3-mile laterals spread across the Permian, Bakken and Eagle Ford.
Execution on this program was excellent, including a record pad in the Permian Basin. We continue to bolster the strength of our asset base through refracs and redevelopment, disclosing approximately 600 opportunities across the Bakken and Eagle Ford. These opportunities are complementary and additive to our company's decade plus of primary development inventory life and have been derisked through multiple years of technical work by our teams and actual results generated in the field. Notably, 30% of these opportunities are concentrated in the acquired inside acreage and upside to our acquisition basis. And we continue to progress the EG Gas Mega Hub a key competitive differentiator for our company. During the first quarter, we realized the long-awaited shift to global LNG pricing for our Alba LNG.
We started optimizing our integrated gas operations by diverting a portion of our Alba Gas away from methanol production and towards higher-margin LNG sales. And we sanctioned a high competent low-execution risk Alba infill program that offers risk-adjusted full cycle returns that are competitive with our U.S. onshore portfolio. So not only are we realizing improved financial performance this year on the back of our shift to global LNG price realizations, but we believe this improvement is sustainable, due to all the great work our teams continue to do to advance the EG Mega Hub concept. My third and final key takeaway this morning. We remain fully on track to deliver a 2024 business plan that once again benchmarks at the top of the E&P sector on the metrics that I believe matter most.
Free cash flow generation, capital efficiency and shareholder returns. This is demonstrated by the strength of our first quarter execution supporting no changes to our annual guidance. This data is comprehensively summarized on Slides 8 and 9 of our deck and is a compelling endorsement of our value proposition in the marketplace. No peer offers such comprehensive top quartile performance across this powerful combination of metrics. More specifically, we're expecting $2.2 billion of free cash flow generation this year, equivalent to a mid-teens free cash flow yield. We'll stay true to our CFO-driven return of capital framework and expect to again return at least 40% of our CFO back to investors through the combination of our base dividend and material share repurchases, providing visibility to both a double-digit distribution yield and significant growth in future metrics.
We'll keep improving our capital efficiency delivering flat year-on-year total oil production with fewer net wells to sales. And perhaps most importantly, we believe all these results are sustainable. That's true for our U.S. multi-basin portfolio, and that's true for our Integrated Gas business in EG. Before I close my introductory remarks, I'd be remiss if I didn't use this time to recognize Dane Whitehead and his contributions to Marathon Oil as our Executive VP and CFO over the last 7 years. Under Dane's watch, we've established a truly differentiated track record of sustainable free cash flow generation and return of capital to our shareholders, underpinned by an investment great balance sheet. Dane's contributions to this success have been invaluable.
But more than that, he's led his organization with the post integrity and humility. Dane on behalf of the entire organization, thank you, and you'll be missed.
Dane Whitehead: Well, Lee, thank you for those kind words. I really appreciate it. The past 7 years at Marathon Oil has certainly been the highlight in my 40-year career, working with you, our executive leadership team and Board and with all of our talented employees and in forms like this with our analysts and investors. Rob and I have been working very closely together in recent months and that will continue for a while as we ensure a seamless transition. Rob has been with the company for more than 30 years and have all the confidence in the world in his leadership. With that, I'll pass the CFO torch to Rob, who will be handling our prepared commentary today on our financial performance and return of capital initiatives. Rob, welcome to the show.
Rob White: Thanks, Dane. As Lee mentioned, under Dane's leadership, our company has built a track record of providing a truly compelling shareholder return proposition while at the same time continuing to enhance our investment-grade balance sheet. You can expect more of the same going forward with continuity in our long-held capital allocation framework and conservative financial policies. I'll now walk through a few key highlights regarding our first quarter performance and reiterate our key financial priorities for this year. First quarter cash flow and free cash flow generation were solid and consistent with our plan, despite not receiving any EG equity affiliate cash distributions in the quarter. As Lee mentioned, this is purely a timing issue.
For the full year, we expect total EG Cash distributions to approximate our annual equity earnings, starting with catch-up payments during 2Q. The EG catch-up distributions during the second quarter will contribute to an overall significant improvement in our free cash flow momentum as 2024 progresses. This is driven primarily by a significant production increase, especially in the second and third quarters and a moderation of our capital spending starting in the third quarter given the front half-weighted nature of our capital program. Turning now to our key financial priorities for this year. Priority 1 is clear: continuing to return at least 40% of our cash flow from operations to shareholders consistent with our return of capital framework, which represents 1 of the strongest shareholder return commitments in our peer space and across the entire S&P 500.
For 2024, our minimum 40% commitment translates to $1.7 billion of total distributions to shareholders at $80 per barrel WTI price deck, providing our investors visibility to double-digit shareholder distribution yield, a truly compelling shareholder return proposition. During 1Q, we returned $350 million, 41% of CFO to shareholders. We believe our commitment to shareholder returns and the consistency and transparency of our approach have positively differentiated our company. Over the trailing 10 quarters, we now returned $5.8 billion to equity holders, including $5.2 billion of share repurchases, reducing our outstanding share count by 29% and contributing to peer-leading growth in our per share metrics. We continue to see share repurchases as the preferred return vehicle with our stock trading at a free cash flow yield in the mid-teens.
Repurchases remain value accretive, are a very efficient means to continue driving per share growth and are highly synergistic with sustainable base dividend growth. Regarding the base dividend, as we've messaged before, our focus remains on competitiveness and sustainability. Given the ongoing benefits of our material share repurchase program as well as the interest expense savings from our gross debt reduction initiatives, we see clear potential for further base dividend growth while protecting the lowest enterprise free cash flow breakeven in the peer group. After meeting our shareholder return commitment, our second priority this year remains continued enhancement of our investment-grade balance sheet through gross debt reduction. Last year, we returned meaningful capital to shareholders and also reduced our gross debt by $500 million.
My expectation is that you'll see more of the same amounts in 2024. During first quarter, we strengthened our financial flexibility by completing a $1.2 billion offering of 5- to 10-year bonds. Investor demand was strong at greater than 7x oversubscribed which enabled us to achieve a timely and competitive weighted average interest rate of 5.5%. Proceeds from the offering were used to repay the remaining balance on our variable rate term loan facility in its entirety, which in turn delivers $20 million of annual interest savings. With the term loan facility paid off, our focus now turns to the $400 million of tax-exempt bonds that are due in July. As a reminder, this is a very unique vehicle in our capital structure with advantaged interest rates relative to taxable debt instruments.
As such, we will likely remarket those bonds as we've done previously. At the bottom right graphic on Slide 11 of our deck shows, after having paid off terms of the term loan, we have minimal bond maturities over the next 5 years. We do, however, retain the ability to efficiently delever down to our medium-term gross debt objective of $4 billion, which would make our current debt-to-EBITDA of 1x at strip durable down to a more conservative $50 to $60 WTI pricing environment. To be clear, our balance sheet is in great shape and provides us with tremendous financial flexibility, including $2.2 billion of liquidity at quarter end. Our top priority remains consistently meeting our 40% of CFO shareholder return commitment. We are also committed to reducing debt over the medium term down to our $4 billion gross debt objective.
We can do both. With that, I'll turn the call over to Mike to walk through the operational highlights.
Michael Henderson: Thanks, Rob. With strong first quarter execution, consistent with our plan. We've made no changes to our annual guidance and remain fully on track to deliver our 2024 program, but once again benchmarks at the top of our sector on metrics that we believe matter most. The combination of free cash flow generation, capital efficiency and shareholder returns. During the first quarter, oil production of 181,000 barrels of oil per day was slightly better than our guidance, while capital expenditures of $603 million were enlarged. It's been a very strong start to the year for our asset teams. That's especially true in the Eagle Ford is our first quarter drilling rate of penetration was among the best it's been in the last 5 years.
First quarter Eagle Ford completion efficiencies also continue to improve. And in the Bakken, despite the challenging winter weather, we held on to the same execution efficiencies on both the drilling on completion site that we were delivering during the second half of last year, a trend, which bodes very well for execution in future quarters. Referencing Slide 14 of our deck. I'd like to highlight the performance of our Permian team. First quarter was another excellent execution quarter, marked by significant production growth. The primary driver of the production increase was our growth while outperformance 3 Upper Wolfcamp wells in core Red Hills at all at 100% working interest are significantly outperforming tight, realizing early well productivity, almost 4x that of the average Delaware Basin well.
The business isn't just about 1 pad or 1 quarter performance. Our Permian team has now built up a clear track record of execution success. We're all wells brought online since 2022, our Permian program has delivered among the best results of any Delaware Basin operator for oil productivity per foot. And the team has done so very competitive drilling and completion execution now almost exclusively bringing online 2-mile-plus laterals. Additionally, after taking a 2-year break in the Permian during the 2020 pandemic, we now have 1 of the more likely developed acreage positions in the play, with over 2 decades of high-quality drilling inventory at current activity levels. We're allocating more capital to Permian and the asset will continue to be a growth driver for us.
But we'll continue to increase our capital investment at a disciplined pace with an eye on maintaining our execution excellence. With this exceptionally strong start across our U.S. asset bases, our annual guidance midpoints for both production and capital expenditures remain unchanged. And my confidence in delivering on our full year guidance commitment is high. Consistent with our initial outlook, we expect our 2024 capital program to be heavily weighted in the first half of the year, similar to the profile we've seen from us before. Driven by relying execution efficiencies, we're pulling forward some of our activity. This should result in a slight increase to both our expected capital spending and our oil production during second quarter versus our original assumptions.
We now expect our capital spending to be just over weighted for the first half of the year. which will drive a significant sequential increase in second quarter oil for production, up to the midpoint of our annual guidance range, 190,000 barrels of oil per day. In addition to delivering on our guidance commitments. We also remain focused on continuing to enhance our capital efficiency and the strength of our underlying asset base through both the application of extended laterals and other organic enhancement initiatives summarized in more detail on Slide 13 of our deck. Extended laterals remain a compelling opportunity to continue enhancing our capital efficiency. At a high level, we're expecting significantly lower total well cost per foot, yet similar EUR per foot.
And thus, better returns and higher per well NPV in comparison to shorter laterals. And that's exactly what our initial cohort of 12, 3 milers during first quarter representing 25% of our total well set is delivering. Execution on the cost front is a clear positive as we're consistently realizing well cost savings on a per foot basis of more than 20% versus comparable 2-mile laterals. While early train production in the Bakken and Eagle Ford has been consistent with our expectations. Our first 3-mile pad in the Permian Basin, as previously mentioned, has dramatically outperformed. It's shaping up to be 1 of the strongest pads in Basin history. In addition to the extending laterals, we also continue to further bolster the strength of our asset base through refracs and redevelopment.
More specifically, we're disclosing approximately 600 high-quality refrac and redevelopment opportunities across the Bakken and Eagle Ford. Approximately 30% of these opportunities are concentrated in our Ensign acreage in the Eagle Ford, representing upside to our acquisition based. These refrac and redevelopment opportunities are complementary and additive to our decade-plus primary drilling inventory at the total company level. With this derisk through multiple years of tank work numerous trials over the last 5-plus years and a recent track record of very strong bottom line results. Importantly, we progressed this opportunity set with tremendous discipline and intentionality. Redev and refrac testing has been a key part of what we've long described as our organic enhancement program, which typically comprises 5% to 10% of our total capital budget for a given year.
This capital dedicated to enhancing the returns and resource recovery of our existing asset base through targeted testing of the best concepts the asset teams bring forward each year. For redevs and refracs, we've specifically identified potentially stranded resource from early advantage completions that we can economically access through integration into our primary plan of development. In total, we brought online over 100 refracs and 50 redevelopment wells across the Bakken and Eagle Ford to date. So we've compiled a rich technical data set and a master deep operational understanding. All 600 of future opportunities we are disclosing are strongly economic and prevailing commodity prices and about half of the 600 we believe, are directly competitive with a Tier 1 primary development inventory industry is drilling today.
More recently, we've been bringing on around 20 or so of these opportunities per year. This year, we're expecting to bring online just over 25. Again, this can account for around 10% of our activity in the Bakken and Eagle Ford. In terms of our development approach, for the most part, we aren't doing refracs or redevelopment as part of a separate stand-alone program. Rather, these opportunities are mostly integrated into our primary plan of development, typically directly offsetting our primary activity with the goal of maximizing the capital efficiency financial returns of our overall program. Recent results have been very strong, proving out the economic attractiveness of these opportunities supporting the disclosure we're now providing. In the Bakken, our opportunity set is more heavily weighted to refracs, where we've had good success.
Over the last couple of years, our refrac program has delivered 6-month oil productivity per foot that is competitive of the basin average for industry new drills. And we delivered this competitive productivity with a total well cost per foot more than 20% below the industry average for a new drill well. Again, most of our Bakken refracs have not been stand-alone, rather they offset new development wells. This has had the added benefit of improving the productivity of direct off-set Middle Bakken wells by around 10%. In the Eagle Ford, our opportunity set is a bit more balanced, split roughly 55% to refracs and 45% to redevelopment. Over the last couple of years, our refrac and redevelopment productivity has actually even better than the basin average for industry new drills.
In fact, it's been closer to top quartile. And with our refracs, we realized the same positive impact to offset wells that we see in the Bakken. To summarize, at approximately 10% of our activity in the Bakken, Eagle Ford, our refrac and redevelopment programs aren't primary drivers of our capital spend in those big basins. But they still represent a very valuable opportunity set that is positively contributing to our bottom line results and extending effective inventory life and they're a great example of our ability to extract the most value possible out of our existing high-quality resource base. I'll now turn the call back to Lee, who will wrap up with an EG update and some closing thoughts.
Lee Tillman: Thank you, Mike. Shifting to our EG operations on Slide 15. With the expiration of our legacy Henry Hub-linked LNG contract at the end of last year, first quarter marked the transition to fully realizing global LNG pricing for Alba Gas. Under the new contractual agreements effective this year, we began marketing our own share of Alba LNG directly into the global LNG market. During the first quarter, these LNG sales at $7.21 per Mcf realization drove a significant increase to the international revenue within our consolidated financials. In comparison to previous years, when our EG income was dominated by equity affiliates, a greater share of our EG profitability will accrue to the upstream through our Alba LNG sales and will, therefore, be consolidated in our financial statements.
These reporting changes should all result in improved transparency into the underlying operations of our integrated gas business in EG. We see no change to our 2024 guidance as we continue to expect $550 million to $600 million of total EG EBITDAX this year, assuming $10 TTF. That's a significant increase from our actual 2023 EBITDAX generation of $309 million. Importantly, we don't expect this to be a 1-year financial event. For some time, we've been focused on sustaining this improved financial performance by progressing all elements of the EG Gas Mega Hub concept. The 5-year EG EBITDAX outlook we provided last quarter demonstrates the sustainability of our EG cash flow generation. You'll recall the strength of our multi-year outlook is driven by a number of additional factors beyond realizing global LNG pricing.
Ongoing methanol volume optimization, which started during first quarter, our Alba infill program, which we just sanctioned and further monetization of third-party gas through the ethane gas cap. A few more details on our just sanctioned Alba infill program. This is a high confidence, low execution risk, shorter cycle project with returns that are competitive with our high-quality U.S. onshore reinvestment opportunities. We successfully contracted a rig within the region and expect a first half of 2025 spud with first gas from both wells expected during the second half of the year. These wells will largely mitigate Alba base decline, contributing to a flat production profile from full year 2024 to full year 2026. Our 2024 capital spending for this program is limited but fully accounted for in the capital spending guidance we provided to the market in February.
We expect 2025 capital for the program to be about $100 million. We covered a lot of ground today. All great stuff and all intended to further our more S&P mandates. Consistent with that mandate for the last 3-plus years, we've been in delivering financial performance highly competitive with the most attractive investment alternatives in the market as measured by corporate returns, free cash flow generation and return of capital. I fully expect 2024 to build on this track record, and we're off to a great start. Our compelling investment case is simple. A high-quality multi-basin U.S. portfolio and integrated global gas business that delivers peer-leading free cash flow. A unique and differentiated return of capital framework that provides our shareholders with the first call on cash flow.
The output of which is clear visibility to compelling shareholder distributions across a broad range of commodity prices and sector-leading growth in per share metrics and a multiyear track record of consistent execution and proven discipline. And perhaps most importantly, everything we're doing is sustainable with resilience through the commodity cycle. This is due to the quality and depth of our U.S. multi-basin portfolio, where we have over a decade of high return inventory and a disciplined and multifaceted approach to portfolio renewal, including organic enhancement initiatives. It's also due to our differentiated integrated gas business that's now fully realizing global LNG pricing, as we continue to progress all elements of the Regional Gas Mega Hub concept.
Rest assured, our commitment to our strategy is unwavering, and is built upon our core values, resilience across the commodity cycle and our long-term track record of success. With that, we can open up the line for Q&A.
See also
12 Under-the-Radar High Dividend Stocks to Invest in Now and
20 Best Wellness Retreats in the US.
To continue reading the Q&A session, please click here.
