Marathon Oil Corporation (NYSE:MRO) Q3 2023 Earnings Call Transcript

Marathon Oil Corporation (NYSE:MRO) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Good day, and welcome to the Marathon Oil Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Guy Baber, Vice President of Investor Relations. Please go ahead.

Guy Baber: Thank you, Danielle, and thank you as well to everyone for joining us on the call this morning. Yesterday, after the close, we issued a press release, a slide presentation and investor packet that address our third quarter 2023 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, Executive VP and CFO; Pat Wagner, Executive VP of Corporate Development and Strategy; and Mike Henderson, 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 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 intro, I’ll turn the call over to Lee and the rest of the team who will provide prepared remarks today. After the completion of those remarks, we’ll move to a question-and-answer session. Lee?

Lee Tillman: Thank you, Guy, and good morning to everyone listening to our call today. First, I want to again start our call by expressing my thanks to our employees and contractors for another quarter of comprehensive execution against our framework for success. We know than on another great quarter while continue to stay true to our core values as you responsibly remember the oil and gas of our need. There are few key takeaways among leading this morning. First, the third quarter results we’ve continue to build on our track record of consistent operational execution that is translating to peer leading financial results. Our strong execution culminated in $718 million of adjusted free cash flow at a reinvestment rate of just 38%, truly exceptional delivery.

And I expect our free cash flow generation to further improve during fourth quarter from this already strong level. The first half weighted nature of our 2023 capital program contributed to a significant increase in our third quarter production, above the top end of our full year guidance, while capital spending declined. At the same time, we remain focused on managing our unit cash cost, which declined to the lower end of our annual guidance range, down more than 15% from the prior year quarter. We are well positioned to take advantage of any market-based deflation opportunities, are ensuring that we are driving underlying efficiencies in all aspects of our business, both expense and capital. Second key takeaway this morning. Powered by this foundation of consistent execution, we continue to lead our peer group and the broader S&P 500 in returning capital to our shareholders through our transparent cash flow driven framework that prioritizes our shareholders as the first call on cash flow.

And importantly, we’re delivering on our shareholder return objectives, while continuing to enhance our investment grade balance sheet. During third quarter, we returned $476 million to shareholders, bringing total return of capital through the first three quarters to more than $1.3 billion, representing 41% of our top-line cash flow from operations, fully consistent with our framework. We’re offering shareholders a double-digit annualized distribution yield and peer leading per share growth. Our consistent and committed approach to share repurchases has driven a 26% reduction to our outstanding share count over the trailing 8 quarters, far in excess of any peer company. We’ve also now reduced our gross debt by $450 million this year, including a $250 million October prepayment on our term loan.

We are well on our way to our medium-term gross debt objective of about $4 billion that will further enhance our financial flexibility and lower our leverage metrics to less than one times EBITDA at a conservative oil price assumption. Looking ahead, we remain steadfastly committed to both our return of capital program and further gross debt reduction. It is not an either oral position. Consistent with that focus, our board recently approved a 10% increase to our base dividend and an increase in our outstanding share repurchase authorization to $2.5 billion. Importantly, this dividend raise is fully funded by the synergy with our repurchase program. That also ensures we hold the line on our post dividend free cash flow breakeven price, which is the lowest in the peer group.

My third key takeaway this morning is that our unique EG integrated gas business is now set to realize a significant financial uplift in 2024, driven by a substantial increase in our global LNG price exposure. To this end, we recently signed a new TTF linked LNG sales agreement for our equity Alba Gas. This contract marks the conclusion of the legacy Henry Hub contract, which expires at the end of this year. In 2024, this new contract is expected to contribute to a year-on-year EBITDA increase of approximately $300 million to $500 million, assuming TTF pricing of $15 to $20 per MMbtu, with all contractual agreements necessary to realize this uplift now formalized. Our focus turns to further enhancing the longer-term free cash flow generation capacity in EG by optimizing our integrated gas operations, including the version of a portion of the methanol feed gas to higher margin LNG, and progressing the additional phases of the EG gas mega hub concept.

Our final key takeaway is that we remain on track to deliver a 2023 business plan that benchmarks at the top of our high quality EMP peer group on the metrics that matter most. Free cash flow generation, reinvestment rate, capital efficiency, free cash flow breakeven, and production growth per share. These differentiated outcomes are underpinned by a high quality and high return inventory that is demonstrating durable productivity year-over-year and offers a decade plus of running. And as I look ahead to 2024, I expect more of the same. Our framework for success and our core priorities won’t change. Our objective will again be to maximize our sustainable free cash flow generation. An objective we believe is best accomplished by a maintenance oil program of 190,000 barrels of oil per day.

We’ll, again, strive to deliver pure leading return of capital and per share growth. I fully expect another year of very strong wealth productivity and operational execution across our high quality multi basin portfolio, and we will benefit from the added tailwind of our growing exposure to the global LNG market and the associated financial uplift. With that, I’ll turn it over to Dane, who will provide a brief financial update.

Dane Whitehead: Thank you, Lee, and good morning to all on the call today. As Lee mentioned, the third quarter was an exceptional financial quarter for us, highlighted by $718 million for adjusted free cash flow, a reinvestment rate of just 38% and $476 million of capital return back to shareholders. Importantly, we expect even stronger free cash flow generation during the fourth quarter as our capital spending continues to moderate. It should go without saying by now, but we continue to believe that returning significant capital back to our shareholders is foundational to our value proposition in the marketplace. We’re successfully building a long-term track record of consistent shareholder returns through the cycle that can be measured in years, not just quarters.

We’re now two years into that journey and the bottom-line results of our program is delivered are both compelling and differentiated. Over the trailing eight quarters, we’ve now returned $5.1 billion back to our shareholders. That’s over 30% of our current market capitalization. We’ve repurchased $4.6 billion of our stock and attractive levels, driving a 26% reduction to our standing share count contributing to peer leading growth on our per share metrics. The commitment and the consistency of our approach is paid off, and we remain committed to this powerful combination of material share repurchases along with the competitive and sustainable based dividend. To that end, we raised our base dividend by 10% this quarter, that’s the ninth increase in the last 13 quarters.

This increase was fully funded by share count reduction from our buyback program, protecting our free cashflow breakeven, which is the lowest in our peer group. Additionally, we’ve increased our outstanding share repurchase authorization to $2.5 billion, which gives us plenty of runway to continue buying stock. As I’ve said over the last few quarters, our plan is to maintain this return on capital leadership, while also further improving our already investment grade balance sheet through gross debt reduction. We can do both and that’s exactly what we’re demonstrating. We’ve now paid down $450 million of gross debt year-to-date, including $250 million of term loan that we paid down in October. Looking into fourth quarter specifically, we aim to continue paying down the term loan.

At current prices, we expect to be able to pay down $400 million to $500 million in the fourth quarter, and that’s inclusive of the $250 million reduction already executed in October. With the variable interest rate, that the term loan carries, aggressively reducing outstanding principal of free cash flow will make a meaningful dent in our annual cash interest expense, and we expect to continue to hit our minimum 40% of CFO shareholder return opportunity. Our balance sheet is very strong, firmly in investment grade territory. Yet we’d like to be even stronger. Our current leverage at prevailing commodity prices it’s around one time debt to EBITDA. Over the medium-term, our objective is to reduce current gross debt of $5.5 billion down to around $4 billion.

That would translate to one time debt to EBITDA, assuming a $50 to $60 WTI price environment. Turn our gross debt level back to where it was before the Ensign acquisition. With that financial summary, I’ll turn it over to Mike.

Mike Henderson: Thanks, Dane. The strength and sustainability of our shareholder return and balance sheet initiatives are ultimately underpinned by the high quality of our U.S. multi basin portfolio and our ability to consistently execute. Slide 12 highlights we’re delivering strong and durable well productivity, while also continuing to improve our drilling and completion efficiencies. While we are positioning ourselves to take advantage of commercial leverage and potential deflation, we recognize that self-help is fully within our control. More specifically, our average oil productivity per foot this year is trending flat with 2020. And at those levels, we are 25% better on a 180 day cumulative basis than our high quality peers.

In Eagle Ford, the successful integration of the Ensign acquisition earlier this year this further enhanced both the quality and quantity of our inventory. Our fully integrated program is delivering another very strong year, with oil productivity flat to 2022 and oil equivalent productivity better. In the Bakken, we’re consistently bringing online the best wells in the basin. Wells that payout in less than 6 months with early oil productivity 40% better than the basin average. We’re also just wrapping up the drilling of our first 3 mile laterals in the Ajax area. And in the Permian, we’ve significantly improved our capital efficiency through our transition to a 2 mile lateral or longer program, now reliably delivering oil productivity consistent with the industry top quartile.

Yet while underlying well productivity gets most of the external attention, there are 2 components to the capital efficiency equation, and we’re equally focused on both the numerator and the denominator. Field level operational execution matters and is a primary driver for well costs. I’m pleased to report that our year-to-date execution has been strong with drilling and completion efficiencies continuing to improve. More specifically, our average drilling efficiency this year is on pace for a 10% improvement versus 2022, while our completion efficiency is set to improve 15%. We’ve taken advantage of an improved market, high grading certain areas of our business where it’s made sense. We’ve placed a greater emphasis on preplanning efforts, which will reduce non-product time on location.

And we continue to work closely with our longer term service providers to implement incremental changes that can drive quantifiable execution improvements. Turning to our integrated gas business in EG, great job by our teams in achieving all our targeted commercial milestones this year. With the signing of our new TTS linked Alba LNG contract with Glencore’s beginning January 1, 2024. Of the sourced LNG will no longer be sold at a Henry Hub linkage. The current arbitrage between Henry Hub and European natural gas pricing is expected to drive significant financial uplift for our company at current forward curve pricing next year. A year-over-year EBITDA increase of $300 million to $500 million assuming a TTF price range of $15 to $20 per MMBtu.

With the commercial framework now fully in place to realize this financial uplift. Our focus now turns to further extending the longevity of stronger financial performance. Next year, we’ll begin diverting a portion of our Alba Gas from the methanol facility to the higher margin, higher working interest LNG facility. Highlighting the flexibility of our integrated EG operations where we have alignment across the entire volume chain. Additionally, we’re continuing to assess up to 2 well in field drilling program on the Alba block, targeting high confidence, low execution risk, shorter cycle opportunities that could partially mitigate Alba field decline beginning in 2025 and maximize the flow of our equity molecules through the LNG plant. Our Alba infill program is expected to compete with the risk-based returns generated from our U.S. resource base.

Before any other infill capital spending is unlikely to make a significant impact on our overall 2024 capital program. And finally, we continue to advance longer term gas mega hub concept in EG, as more fully described in the edge agreement signed between ourselves, to the EG government and our partner Chevron earlier this year. By truly leveraging our unique world class infrastructure in one of the most gas prone areas West Africa. We expect to extend the life of EGLNG well into this decade and further enhance our multiyear free cash flow capacity. The next phases of development likely with the same gas cap monetization, as well as potential cross border opportunities. With that, I will turn it over to Lee, who’ll wrap up our call.

Lee Tillman: Thank you, Mike. For years now, I have reiterated that for our company and for our sector to attract increased investor sponsorship. We must deliver financial performance competitive with other investment alternatives in the market as measured by corporate returns, free cash flow generation, and return of capital. More S&P, less ENT. We’ve delivered exactly that type of performance over the last two years and counting, and not just competitive, but at the very top tier group. And looking ahead to 2024, I don’t expect anything to change. To close, I would be remiss if I didn’t address the competitive landscape for our sector. We’ve obviously seen significant consolidation in our peer space recently. While every transaction is unique with its own set of facts and circumstances, a common takeaway is clear, low cost, high quality traditional oil and gas assets will have a critical role to play in helping meet global energy demand for decades to come.

And within the oil and gas space, the short cycle, U.S. shell opportunities where there advantage, risk adjusted returns and potential for further innovation will continue to be highly valued and critical to meeting that long-term demand. Recently, you may have seen articles speculating on Marathon’s involvement in M&A. While I won’t address any specific market rumors or speculation on today’s call, I will reiterate that it’s our duty to always explore avenues to further enhance the long-term value for our shareholders. Whether those opportunities are organic or inorganic, that’s always been our objective and our responsibility to our shareholders and nothing has changed. For Marathon oil, our approach to M&A, small or large has been consistent and will not be compromised.

As exemplified by the inside transaction, which ticked all the boxes of our well-established criteria. It is about making our company better, not just bigger and enhancing the delivery against our framework for success. Any transaction must meet or tried and true principles of financial and return of cash accretion, industrial logic within our existing basins, inventory life extension and no harm to our investment grade balance sheet. Our paradigm needs to shift from that of an energy transition to one of an energy expansion. And I continue to believe that elite group of high-quality U.S. EMP companies are necessary to drive that energy expansion to deliver strong financial results for shareholders, while also collectively defending U.S. energy security, playing our role in lifting billions out of energy, poverty, and protecting the standard of living we’ve all come to enjoy.

Marathon Oil is well positioned to be one of those significant few companies, with over a decade of high return U.S. unconventional inventory and a differentiated EG integrated gas business with unique and growing global L&G exposure. I’m proud of how our company is delivering for our shareholders. Our financial and operational leadership speaks for itself, and you can have confidence that our strategic framework will continue to guide all of our decisions by prioritizing strong corporate returns, sustainable free cash flow generation, significant return of capital to our shareholders, and ongoing resource base enhancement, and all while protecting our investment grade balance sheet. With that, we can open the line for Q&A.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Arun Jayaram of JP Morgan.

Arun Jayaram: I wanted to follow up on your M&A comments and wanted to get your thoughts on how you would view transactions that could potentially be viewed as more of an MOE for Marathon. And just maybe if you could address, we got numerous buy-side pings and an 8-K filing from MRO last week that was filed under M&A or an asset disposition or under Reg FD. Looks like you had an amendment earlier this week, but just wanted to see if you could touch upon what the deal was with that 8-K filing as well?

Lee Tillman: Yes. No worries. Yes. Good morning. Well, first of all, just around M&A and whatever flavor of M&A you want to talk about, whether that’s MOE or a large bolt on transaction like we did in Ensign, the criteria is still fully in play. We don’t look at those, really, through any different lens, and I’ll take you back to what I stated in the prepared remarks, which is any transaction of scale is going to have to tick all the boxes in and our criteria. It’s going to need to be financially accretive, it’s going to need to be return of cash accretive, it needs to add to our already high quality in resource life and inventory life. It needs to have very clear industrial logic, meaning for us, it exists in one of the basins where we have high execution confidence.

And then finally, it can’t do any harm to our investment grade, balance sheet, and financial flexibility. So it’s really irrespective of the scale, that’s going to be the lens, the criteria that we’re going to evaluate any opportunity. Yes, let me just, maybe put to rest any of the noise created on the 8-K. We had not updated, our corporate bylaws since back in 2016. This was just some cleanup on those bylaws. There was a little bit of a mistake on how those got classified which prompted the amendment, but there’s nothing more to it than that.

Arun Jayaram: My follow-up is on EG. Lee, you mentioned in your press release earlier in October. You had a long-term sales agreement by Glencore. Can you talk about why they were the right partner for you? And maybe you could talk about, the new wrinkle, which is the ability to shift maybe some volumes from Methanol to back to LNG, some thoughts on what the implications of that could be? And perhaps, as well, you could outline kind of your development program, at Alba later in 2024?

Lee Tillman: Okay. Well, you just packed a lot into that question. Let me start maybe with Glencore. First, I want to say up front that the team, the marketing team, did an exceptional job of creating competitive tension in the marketplace, and we had a lot of interest, when we put out the RFP for those, base load cargos, so, the positive, of course, is Glencore came in with a very competitive offer with a 5-year term, a TTF linkage, a fixed transportation element as well. They also have experience working and operating an EG. So from a lifting, scheduling standpoint, etcetera, they’re very familiar with how we operate the business there. So, 1st and foremost, it was about driving the best competitive offer, and I think an added bonus, of course, was just the fact that Glencore did have a lot of experience already, in country.

On the diversion question, we’ve talked a lot about the arbitrage between Henry Hub and, obviously, TTF and Global LNG, but there’s another element of arbitrage that we have available to us in EG as well. And that is the feed gas that we send to the Methanol facility. And because of our alignment across the full value chain, we can look at optimization, around that, where we can divert some of those volumes where we believe the highest value can be attained. And as we look at and we’re methanol pricing and were TPF pricing under the new, contract terms, as well as just the market in general, we feel very strongly that redirecting those molecules and optimizing, that flow, we’ll end up just adding some incremental value as we look ahead to ’24.

And then finally, I think the last element of your question was really around just the Alba infill program and some of the opportunities that we’re pursuing there. The way we’ve described that thus far has been up to a 2 well infill program. And as Mike mentioned in his comments, the reason we really like this, well, first of all, it competes head-to-head from an economic return standpoint, with our U.S. resource play, but importantly, this is about as short cycle as you can get, in the offshore space. We have very high geologic certainty. This’ll all be jack-up drilling with dry trees. There’s no facilities investment, required, and so we’re just working through that process, and I would just say, just be patient with us. We’ll have a lot more to say about the Alba Enzo program, as part of February’s budget release and work program.

I think, I called it every day, but I was telling if I did it.

Operator: The next question comes from Scott Gruber of Citi.

Scott Gruber: Just looking back at your tilt schedule and how that’s evolved over the course of the year. It looks like the targeted well count for the full year has tick tire, just a bit over the course of the year. So the question is, as you look out at your maintenance program next year. Do you think you can achieve the 190 or so in oil production at a flat well count from the 260 or so this year, if you include all the JV wells, or would you anticipate the well count needing to take higher a bit next year?

Lee Tillman: Well, first of all, I would just say that the till count, there’s a positive story in there, which is around execution efficiency. And obviously, we don’t want to pump the brakes on that. When we’re achieving that kind of efficiency that Mike talked about on both the drilling and completion side, we want to continue, that momentum. And so you saw that, again, that wells to sales count being a bit higher. It’s still probably a little premature to talk specifically about the 2024 program, but I will tell you, even with, a bit of capital, say, from some long lead kit in EG, we expect the capital program to essentially the flattish year-over-year. And so I think the subtext to that would be that we would, on a, if you kind of move from maybe gross wells to net wells, we would expect, on a net well basis, to generally be in alignment with where we have been this year.

And a lot of that, quite frankly, is driven by the productivity that we have machine, that underlying productivity that was in the deck, which really shows you that as we move from 2022 to 2023, there was really no downshift in productivity, and as we’ve just started our early planning for 2024, we believe that’s a trend that we’re going to be able to support, even moving into next year. So we feel very good about the capital efficiency that we’re going to be able to deliver in 2024. We set a pretty high bar this year, but we believe that we can continue that trend and that momentum going into 2024.

Scott Hanold: Got it. And those drilling completion efficiencies, look robust and it’s obviously given you some leverage, your service contractors. So what’s the latest thinking on kind of overall deflation potential into ‘24?