Marathon Oil Corporation
Q4 2017 Earnings Call Transcript

Published: 15 Feb 2018

[Operator:]

Welcome to the Marathon Oil Corp. 2017 Q4 Earnings and 2018 Budget Conference Call. My name is John, and I'll 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. Please note that this conference is being recorded. And I'll now turn the call over to Zach Dailey.

[Zach Dailey:]

Thanks, John, and good morning to those listening. Last night, we issued a press release and slide presentation that address our fourth quarter results, full year 2017 results and our 2018 capital budget. Those documents as well as our quarterly investor packet can be found in our website at marathonoil.com. 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 Tillman, our President and CEO, who will provide a few opening remarks before we begin Q&A.

[Lee M. Tillman:]

Thanks, Zach, and thank you to everyone for joining us this morning. I'd like to begin with some highlights from 2017, followed by some key messages around our 2018 capital program. 2017 was truly a pivotal year in our ongoing transformation to a U.S. resource play-focused independent E&P. We made progress across every element of our playbook

[Operator:]

Thank you. We'll now begin the question-and-answer session. Our first question is from Arun Jayaram from JPMorgan.

[Arun Jayaram:]

Yeah. Good morning. Lee, I was wondering if you could...

[Lee M. Tillman:]

Good morning, Arun.

[Arun Jayaram:]

Good morning. Yeah. I was wondering if you could maybe comment, within the organization, the technical group, et cetera, I wanted to flag slides 13 and 15, where the company really has gone from drilling, dare I say, kind of mediocre results in some of the basins to some of the best results that we're seeing in E&P today. So I just wanted to see if you can maybe comment on internally some of the things that you've done really to drive these improvements in overall results?

[Lee M. Tillman:]

Yeah. Thank you, Arun, for the question. I appreciate you recognizing those two teams, because it really has been a remarkable uplift and truly a step change in performance, and were really two of our core developmental areas as we look into 2018. And you know Arun, as you might expect, it's not one thing that's driving that performance, it's a collection of things. And certainly from a technology aspect, I truly believe that what you're seeing here is also a bit of the strength of our four-basin model approach where we're able to learn across basins and apply those learnings very rapidly across all of our major plays. So when we identify a best practice or a technique that's proving dividends in one of our plays, we're very rapidly transferring that into our other basins and that allows us, I believe, to get up that learning curve very, very quickly.

[Arun Jayaram:]

Great, great. And then just my follow-up is just, I was wondering, Lee, if you could go through kind of your land strategy in the Delaware basin and opportunities to kind of increase your acreage position in the core, expand your opportunities to do longer laterals, et cetera?

[Lee M. Tillman:]

Yeah. Yeah, thanks, Arun. Yeah. Our strategy really in Northern Delaware is less about just gross acreage adds and it's more about finding acreage that fits a very specific criteria and we're going to do that through swaps and trades as well as through some small bolt-ons and we've completed some of all of the above. But really that criteria echoes just what you were addressing, Arun, which is we're looking for those synergistic adds that are going to enhance our overall working interest, that will allow us to convert non-operated to company-operated wells and will provide us more optionality to have longer laterals in the portfolio. And so we continue to work that hard, it's still very competitive in the Northern Delaware. I mean, you probably will have noted in our material that we were a little cagey even about the location of some of our well results and it's because it remains an active area and our land team and our asset team are out there looking for those kind of hand-in-glove fits that are going to make a difference in our position.

[Arun Jayaram:]

Great. Thanks a lot, Lee.

[Lee M. Tillman:]

Thank you, Arun.

[Operator:]

Our next question is from Paul Sankey from Wolfe Research.

[Paul Sankey:]

Hi, Lee.

[Lee M. Tillman:]

Good morning, Paul.

[Paul Sankey:]

Good morning. We love the returns targets. Could you just talk about the baselines, this is slide 4 obviously, the baselines from which you're growing the delta, if that makes sense?

[Lee M. Tillman:]

Yeah. No, it absolutely makes sense, Paul. We tried to provide in the supplemental data all the pieces needed to do the math. But just to be really clear, we're more focused on the rate of change. But when we look at the absolute metrics in 2017, CROIC is right around the 12% baseline and the cash flow per debt adjusted share is right around $1.90 or a little bit more than that. So that's the baseline that we're coming off of.

[Paul Sankey:]

And just let me double check here, so the – and this is – and then the improvement obviously is going to be a 2018 over 2017 improvement that you're targeting?

[Lee M. Tillman:]

That's correct. Yeah. What we've tried to do is provide at least line of sight on what that year-over-year kind of rate of change or momentum effect is going to be doing, because we think, again, that it's a bit indicative of multiple things. Obviously, the portfolio moves, but clearly that transition with more of our volumes being sourced from the unconventionals and the impact of the 2018 capital program as well.

[Paul Sankey:]

Right. And then, given the uncertainty around oil price as always, can you just confirm that you'll be pretty much sticking with the capital program, let's say, regardless of whether oil was to go to $70 a barrel or some sort of upside? And I guess the question ultimately would be whether you want to accelerate more in the Delaware, given that you're essentially pursuing the Bakken and Eagle Ford first, I wondered whether there was a temptation to accelerate to do more if there was more cash available or whether you're happy with the scale of spending and growth? Thanks, Lee.

[Lee M. Tillman:]

Yeah, yeah. Yeah, thanks, Paul. Just with respect to your first question about the development capital program, we feel that that program is well-optimized across all four basins; it fits within our overarching criteria to deliver that capital program within cash flows at a high rate of return and do that at a moderate oil pricing. So we don't visualize flex in that development capital program. In terms of acceleration, we always test how much, how fast can we go. And in many of these basins where we're still just migrating from kind of appraisal, delineation and the early phases of multi well pads, there is an appropriate pace where you can process the data, learn from it and then drive those learnings into your forward decision making. And so there is a balance there between smart acceleration and just accelerating for acceleration sake.

[Paul Sankey:]

Okay. So, but having said that, you're really firm on the CapEx program for this year and so it's going to be a moot point?

[Lee M. Tillman:]

Yeah. Clearly we're going to always be examining the program throughout the year as we get new data, and in my opening comments, Paul, I talked about the fact that we don't view our capital allocation as static, but that allocation is going to be within that framework. Could we redeploy a little bit of capital from one basin to another? Sure, that's absolutely possible. But in terms of the construct and the level of spend, we feel very comfortable with where we are on the $2.3 billion.

[Paul Sankey:]

Understood, Lee. Thanks very much.

[Lee M. Tillman:]

Thank you, Paul.

[Operator:]

Our next question is from Jason Gammel from Jefferies.

[Jason Gammel:]

Yes. Thanks very much, folks. A couple on the Eagle Ford, if I could, please. We're seeing some pretty outstanding results out of not only your Austin Chalk wells, but from others in the industry. I was curious just in terms of that play, how much running room you think you actually have there and then maybe if you could further comment on the remaining drilling inventory that you have in the Eagle Ford as a whole that would be, let's say, less than $50 breakeven price? And then finally, if I could please, you've talked about bolt-on acquisitions, which you see this is an area where you could potentially be a pretty natural consolidator of properties given that many others in the industry have kind of walked away from the play to a certain extent?

[Lee M. Tillman:]

Yeah. Let me take a couple of those and I may pitch the Austin Chalk question over to Mitch to address and talk about the specifics there. But I think in terms of inventory, Jason, we have talked in the past about kind of at current run rates in terms of wells to sales, we've got about a decade of high quality inventory, right. Now, I know you're referencing a specific kind of breakeven point, but we think that that inventory is a solid inventory to speak from when we address the Eagle Ford. In terms of bolt-on opportunities, in our core plays, we're always looking for small opportunities that might be accretive to our overall footprint and we certainly evaluate those on an ongoing basis through both the asset team as well as our business development team. So that's always on the table. I mean, a lot of folks have solidified their positions there, we are in a very high quality area of the Eagle Ford, which makes it a little challenging because the folks usually around us are also pretty comfortable with their position as well, but we're always going to keep the aperture open there. So, with that, maybe I'll let Mitch just talk a little bit about the well results and specifically Austin Chalk.

[Thomas Mitchell Little:]

Yeah, sure, Jason. This is Mitch. And to address the Austin Chalk specifically, certainly we are encouraged by our most recent test there, more so in the northeastern portion of our position within the Eagle Ford. We will continue to test the Austin Chalk and extend the area of delineation there away from the most recent wells. But our program will largely be focused, like it was last year, on 40 acre Lower Eagle Ford development, extending high intensity completions and engineered flow backs into Atascosa where we're seeing significant uplift in the productivity and the well returns from that program, which is really upgrading and has upgraded the overall competitiveness of the Eagle Ford and driving a fair chunk of that year-over-year improvement that we showed on the slides.

[Lee M. Tillman:]

I'd also maybe just mention too, Jason, as we have stepped more to the west in the Eagle Ford, some of those areas are also much more lightly developed than some of our core areas. And so there's a considerable amount of running room there to elevate those returns into kind of our top tier type of economic returns. So a tremendous amount opportunity and the team is generating some really terrific results out to the west.

[Jason Gammel:]

Yeah, the results have been very impressive. That's really helpful. Thanks, guys.

[Lee M. Tillman:]

Thank you, Jason.

[Operator:]

Our next question is from Pavel Molchanov from Raymond James.

[Pavel S. Molchanov:]

Thanks for taking the question, guys. When you talk about not envisioning any upward flexing of the capital program, essentially should we assume that to the extent that you're generating free cash flow at $60, you're going to be putting the cash on the balance sheet or are there other uses you anticipate for that?

[Lee M. Tillman:]

Yeah, again, just to reiterate, we're very comfortable with the capital program irrespective of the ultimate prices that we see in 2018. But in respect that if we do see consistent and sustainable free cash flow generation through the year, which obviously would be north of our breakeven, and certainly in the $60 range we would be, we're going to go through kind of our priority list at that point. And what we're going to be driven by is what is in the highest and best interest of the shareholder. What's going to generate the best long-term value? We always start with the balance sheet. I give a ton of credit to Dane and the team here for really doing some outstanding work on the balance sheet in 2017 through some very unique features of our capital structure. And so, I would say a lot of – maybe some of the low hanging fruit there we've captured, that when by doing so, that also brought along with it some pretty significant corporate cost reductions. We're always going to, though, test our comfort level with the balance sheet first and also seek those opportunities that can continue to drive our corporate cost even lower. Once we get kind of beyond the balance sheet, I think our next view is taking a look at some of those other high return opportunities and the two that really stand out to us and we've talked about it a couple of these already is, is really one, our ability to drive our resource play exploration opportunities where we're looking for low entry cost, potentially very high return and accretive return opportunities in and around current basins as well as even looking at new plays and new basins. We've already talked about bolt-on opportunities. We mentioned the Eagle Ford, but more specifically the Northern Delaware and then finally we have to reflect on the fact that we're already returning $170 million of dividends directly to the shareholder. But if we meet those other high return opportunities, that's a discussion that we have each and every quarter with our board of directors around are we calibrating that dividend and that direct return to shareholders correctly. So that's going to really be the priorities that we'll work through in that instance where we are seeing that consistent and sustainable free cash flow generation.

[Pavel S. Molchanov:]

Okay. And a follow-up about the North Sea, this is obviously by far the smallest part of your portfolio, you have talked about selling it in the past and we are actually seeing pretty decent pickup in M&A activity in both the UK, Norway and even Denmark. So with the kind of appetite in the industry for some of these assets, would you be perhaps looking to revive that asset sale effort?

[Lee M. Tillman:]

Yeah. I think that, as you stated, we made an effort to monetize the UK asset when we sold our Norwegian sector asset back in 2014, and we're not able to, in our view, capture value for that asset at that time. A lot of credit to that team that they have continued to drive cost down, improve reliability, lower the abandonment cost and do many things that are continuing to improve the overall economics of that asset. But however, we would view that as sitting outside of our core assets, which are the four U.S. resource basins plus EG. So having said that, I agree with your assessment that since 2014, we have had new players come into the North Sea that offer potentially different monetization routes, and the business development team will continue to assess that market and look at those opportunities in due course, but there's no doubt that the UK remains outside of our core portfolio.

[Pavel S. Molchanov:]

Okay. Appreciate it, guys.

[Lee M. Tillman:]

Thank you, Pavel.

[Operator:]

Our next question is from David Heikkinen from Heikkinen Energy Advisors.

[David Martin Heikkinen:]

Good morning, guys. Thanks for taking the question.

[Lee M. Tillman:]

Good morning, David.

[David Martin Heikkinen:]

The perspective on the Eagle Ford inventory was helpful. How many years do you think you can continue to grow and sustain the Bakken?

[Lee M. Tillman:]

Yeah. Yeah, we haven't provided a fulsome update on the Bakken inventory and then, David, a lot of that has to do with the fact that we're just in a high rate of change in the Bakken today with the success obviously that started in the geologically advantaged Myrmidon area that's now carried down into at least the higher quality areas of the Hector, we're pushing south and Hector, this year we'll also do some testing in Ajax. So, given all that rate of change and the fact that we really don't have a tremendous amount of production history on the newly designed completions in the Hector, we really need to get some time there so that we can do, I would say, a more fulsome job of providing a comprehensive update on the Bakken inventory that reflects what is a tremendous amount of new data and new information.

[David Martin Heikkinen:]

So maybe end of the year start getting sort of that thought process of everything together, but it looks pretty sustainable on our numbers, so looks good.

[Lee M. Tillman:]

Okay.

[David Martin Heikkinen:]

On the other side, Oklahoma resource plays, you made a statement that the Eve pilot, you announced five of the six wells and it informs your pace of development and the best economics. What – can you kind of characterize what informs means and what you think about in the black oil window?

[Lee M. Tillman:]

Yeah, I'm going to kick that one over to Mitch, who can probably give us a little more color just across the black oil window in general.

[Thomas Mitchell Little:]

Yeah, sure. David, let me kind of start from a little bit higher level that I think addresses your question. If you think about the normally pressured black oil area versus the over pressured area of the STACK, there's been much less activity in the normally pressured area. We drilled three pilots over in that area in pretty rapid succession, and really testing the higher end of well spacing. We had between five and six infills plus a parent in the three pads, but effectively tested equivalent spacing between six and nine wells per section in those three. The results haven't met our expectations thus far and we think with our returns focused capital allocation that suggests it's prudent to moderate our pace there. Let us integrate those learnings and concentrate more of our efforts into the over pressured area in the near term where there's been more industry activity. We've actually progressed into the development mode particularly in the oil window in the over pressured area, and as you mentioned or others have mentioned, certainly very encouraged by the nine-well Tan infill test. What I would say in terms of informing, this play is certainly not ubiquitous. We're integrating massive amounts of subsurface completion and production data, integrating that with all available tools and technology to get down to essentially a DSU-by-DSU development solution, the right combination of both well spacing and completions. I think notionally, we would say the Eve was our furthest east most test and between aggregating all of that data, it would suggest on the far east sides, the solution will likely be less than six wells per section, but well count increasing as you move west into the thicker and more pressured areas. And certainly, early data from the Tan at nine wells per section is very encouraging, but we'll need to monitor that longer term.

[David Martin Heikkinen:]

That's really helpful. Thank you.

[Operator:]

Our next question is from Biju Perincheril from Susquehanna.

[Biju Perincheril:]

Hi, good morning, everybody. I had a question about, in the Eagle Ford with the new completion improvement, have you tested anything in the Gonzales area, the Barnhart area?

[Lee M. Tillman:]

Sure. We have concentrated a fair bit of our activity in the Karnes area, but as we've disclosed for the last several quarters, we're progressing more and getting more concentrated down into Atascosa. But we also have tests across the entire play and that would include Gonzales and Barnhart. But we disclose every quarter the wells to sales and where our activity is and that's probably the best measure of seeing how we're allocating capital across our position.

[Biju Perincheril:]

Got it. And then some of this completion improvements and the basin modeling that you're doing, can you talk about how close you are to in applying that or are you applying that now in the over pressured area of – in the STACK?

[Thomas Mitchell Little:]

I think if I follow the question, Biju, we obviously have an extensive position across the STACK, in all phase windows and all pressure regimes, including both company-operated and operated by others, non-operated positions where we have access to all of the details around completion style. Over the past 18 months or so, particularly in the volatile oil area, we've tested a pretty extensive range of completion parameters, including varying propane loading from 1,500 pounds to up over 3,000 pounds per foot, different stage spacing, cluster spacing and fluid composition. And so, we do feel like we're narrowing in on the right completion design there, which we employed on the Tan and have had very successful results, previous to the Tan on our parent wells in that area. And so, we feel like we're honing in on the right answer in that – in the north – in the over pressured window, yes.

[Biju Perincheril:]

Yeah. That's helpful. Thank you.

[Operator:]

I'll now turn it back over to Zach Dailey for closing remarks.

[Zach Dailey:]

Thanks, John, and thanks to everybody for joining us today. We appreciate your interest in Marathon Oil. We look forward to speaking to you all soon.

[Operator:]

Thank you, ladies and gentlemen. That concludes today's teleconference. Thank you for participating and you may now disconnect.