Marathon Oil Corporation (NYSE:MRO) Q4 2023 Earnings Call Transcript

Marathon Oil Corporation (NYSE:MRO) Q4 2023 Earnings Call Transcript February 22, 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 morning and welcome to the Marathon Oil 4Q and Full Year 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Guy Baber, Vice President, Investor Relations. Please go ahead, sir.

Guy Baber: Thank you very much and thanks 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 packet that address our fourth quarter 2023 results and our full year 2024 outlook. 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, our Executive VP and CFO; 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 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 prepared remarks, we’ll move to a question-and-answer session. And in the interest of time, we ask that you limit yourselves to one question and a follow-up. Lee?

Lee Tillman: Thank you, Guy, and good morning to everyone joining us on our call today. As I always start these calls, I want to first and foremost thank our employees and contractors for their dedication and hard work in delivering the excellent results we have the privilege of discussing today. And I especially want to thank our employees and contractors for their enduring commitment to our core values. On that front, we have a few notable accomplishments to highlight today. First, we delivered a record safety year in 2023 as measured by total recordable incident rate for both our employees and our contractors. This builds on a multi-year track record of top quartile TRIR in our industry. Providing a safe, healthy, and secure workplace remains a top priority for us.

With our safety performance a key element of our executive and employee compensation scorecards. Second, we continue to make progress in reducing our natural gas flaring, improving our total company gas capture to 99.5% in 2023, a new high for our company. We’ll continue to work hard on our journey of continuous improvement, moving toward our ultimate objective of zero routine flaring. And third, we achieved our 2025 GHG intensity reduction goal of 50% relative to 2019 levels a full two years ahead of schedule. Consistent with our objective to help meet the world’s growing demand for oil and natural gas, while achieving the highest standards of environmental excellence. We are a result driven company, but how we deliver those results matters and I couldn’t be more proud of our people and what they’ve accomplished.

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Q&A Session

Yet this type of delivery isn’t new for us. It’s the continuation of a well-established trend. And before I get into our 2023 results and 2024 outlook, I’d like to reflect on what I believe is our unmatched track record of delivery on our framework for success. We’re now more than three years into our more S&P less E&P journey. My challenge for our company was to raise our game and compete heads up with not just the best companies in our sector, but with the best companies in the S&P 500. And to do so year in, year out, through the commodity cycle on the metrics that matter most. Sustainable free cash flow generation, return of capital to shareholders, and capital and operating efficiency. For the last three years, we consistently held true to our framework for success.

We’ve prioritized corporate returns, sustainable free cash flow, meaningful return of capital, and we delivered differentiated execution quarter in, quarter out. We continue to enhance our multi-basin portfolio, which has produced the best capital efficiency in the sector. And we protected our investment grade balance sheet while prioritizing all elements of our ESG performance. I believe our commitment to our strategy and the consistency of our execution over the last three years have successfully differentiated Marathon Oil in the marketplace. The proof points are summarized in slide six of our deck. First, sustainable free cash flow generation. Through discipline, corporate returns, focused capital allocation, we’ve generated $8.4 billion of free cash flow over the trailing three years.

That equates to over 60% of our current market cap, almost double that of our E&P peers and six times that of the S&P 500. Next, a meaningful return of capital to shareholders. Over the last three years, we’ve consistently held true to our transparent cash flow driven return of capital framework that prioritizes our investors as the first call on cash flow, not the drillbit and not inflation. In total, we’ve returned $5.6 billion to our shareholders, equivalent to over 40% of our current market cap. Again, that’s double that of our E&P peers and well in excess of the S&P 500. Capital and operating efficiency, a testament to the quality of our multi-basin portfolio and the extreme discipline inherent in both our capital allocation and cost structure.

Over the trailing three years, we’ve delivered the lowest reinvestment rate in the E&P sector, below the S&P average. And our well-level capital efficiency, according to independent third-party data, has been the best in the E&P’s peer space, 35% superior to the peer average. And 2023 was emblematic of these three proof points. Last year, we delivered $2.2 billion of adjusted free cash flow, $1.7 billion of shareholder distributions, equivalent to 41% of our CFO, providing a shareholder distribution yield of more than 12%. $1.5 billion of share repurchases that drove a 9% reduction for our outstanding share count, a 22% increase to our base dividend while maintaining our peer low, free cash flow break-even, $500 million of gross debt reduction, and 28% growth in our production per share, driven by our share repurchase program and the seamless integration of the Ensign Eagle Ford acquisition.

That’s what comprehensive delivery on our key properties looks like. And if you like 2023, then you will not be disappointed in our 2024 business plan, which offers more of the same as we continue to build on our multi-year track record. We have confidence in our strategy and in our capital allocation and return of capital frameworks and our focus will be on consistently executing our plan amidst all the volatility inherent in our sector. And at the end of the day, I expect our plan to again benchmark with the very best companies in our sector outperforming the S&P 500. More specifically, this year, we expect our $2 billion capital program to deliver approximately $1.9 billion of free cash flow, assuming $75 WTI, $250 Henry Hub and $10 TTF.

We fully recognize that we are a price taker, not a price predictor and commodity price volatility impacts our financial outcomes. As such, we’ve provided cash flow sensitivities for each of the key commodities within our slide deck to help you model expectations based on your own commodity forecast. We’ll stay true to our CFO return of capital framework, expecting to return at least 40% of our CFO to shareholders, again, providing visibility to a double-digit shareholder distribution yield. We expect the underlying capital efficiency of our 2024 capital program to improve as we maintain our well productivity leadership and work all avenues to improve capital efficiency, including further extending lateral links. And perhaps most importantly, we believe our results are sustainable.

That’s true for our U.S. multi-basin portfolio, and that’s true for our integrated gas business and E.G. As you all know, our E.G. business now has no Henry Hub exposure with the expiration of our legacy contract at the end of 2023. That business is now fully realizing global LNG pricing, which will drive improved financial performance this year. We believe this improvement is sustainable due to all the great work our team has done to advance the E.G. gas mega hub concept. For example, over the next five years, we’re expecting our E.G. business to generate cumulative EBITDAX of approximately $2.5 billion, assuming flat $10 TTF commodity price. With that, I’ll turn it over to Dan, who will walk through our commitment to return of capital while also fortifying our investment grade balance sheet.

Dane Whitehead: Thank you, Lee, and good morning, everybody. As Lee mentioned, in 2023, we continued building on a peer leading track record of returning capital to shareholders as consistent with our differentiated cash flow driven framework that prioritizes our shareholder as the first call on capital. Importantly, we did this while continuing to make progress on our balance sheet objectives through $500 million of gross step reduction. We’ve built a track record of providing a truly compelling shareholder return proposition, while at the same time continuing to enhance our investment rate balance sheet. We did both in 2023, and that’s my expectation again for 2024. More specifically, on our 2023 return of capital delivery, total shareholder returns amounted $1.7 billion, including more than $400 million during the fourth quarter.

That translates to 41% of our CFO consistent with our framework, and an annual distribution yield of over 12% on our current market cap, compelling relative to any investment opportunity in the market. The majority of shareholder returns came in the form of share repurchases, which reduced our share count by 9% last year. That’s about double the share count reduction of our next closest competitor. For full year 2023, we grew our oil production per share by a peer leading 28% due to our share repurchase program and the integration of the accretive Ensign acquisition. Looking to 2024, we expect to prioritize free cash flow via our disciplined capital allocation framework by holding our top line oil production flat. We also remain focused on driving significant per share growth and fully expect to maintain our long held leadership position in the peer group.

While the majority of our capital returns 2023 came in the form of share repurchases, our base dividend remains foundational and we remain committed to paying a competitive and sustainable base dividends to our shareholders. During 2023 we raised our base dividend by 22%, one of the strongest growth rates in our sector. Importantly, we did so with laser focus on sustainability, maintaining one of the lowest post dividend free cash flow break-evens in the peer group. Our consistent and committed approach to shareholder returns over the last three years has positively differentiated our company and our approach in 2024 will remain the same. Priority number one remains consistently delivering returns of at least 40% of our CFO in the form of share of purchases and base dividends.

That minimum 40% level translates to about $1.6 billion of expected shareholder distributions at a reference price deck, again providing visibility to a compelling double-digit shareholder distribution yield. With our stock trading in the low $20 per share range and at a free cash flow yield in the mid-teens at strip pricing, repurchases remain highly value accretive. They’re also a very efficient means to continue driving our per share growth and are highly synergistic with continuing to grow our per share base dividend without negatively impacting our peer leading free cash flow break-even. To summarize our 2024 return of capital plans, at least 40% of our CFO to shareholders which will be near the top of our sector, driving peer leading per share growth and competitive sustainable growth in our base dividend.

We’re also committed to further improving our investment grade balance sheet and we plan to direct excess cash flow to continue reducing gross debt. We have tremendous financial strength and flexibility in our capital structure with net debt to EBITDA approximately one times at strip pricing. We have $400 million of tax exempt bonds that mature this year. This is a really unique vehicle in our capital structure and will likely remarket those at an advantaged interest rate relative to taxable debt as we’ve done previously. We also have plenty of flexibility to manage the 1.2 remaining outstanding on our Ensign term loan due at the end of this year. The markets are wide open for us to potentially refinance a portion of that debt and as a reminder we have $2.1 billion available capacity on our credit facility that matures in 2027.

And even if we opt to refinance in total the maturing tax exempt bonds and the term loan, we will retain capacity to payoff at par almost $1.5 billion of commercial paper and bonds which would get us to our medium term gross debt goal of $4 billion. One final comment for me on our ’24 outlook before I turn it over to Mike to walk through some of the details of our capital program. Consistent with our prior messaging, our 2024 financial guidance assumes we’ll transition to becoming an alternative minimum tax, or AMT, cash taxpayer this year. The AMT tax rate is 15% on our pre-tax U.S. income. Our primary exposure here is domestic as our E.G. income will largely be offset by current year foreign tax credits. The new information we’re providing today involves research and development, or R&D, tax credits.

We recently completed a study of capital spent in past years on organic enhancement activities that qualified for R&D tax credits. As a result, we expect to apply approximately $150 million of these R&D tax credits this year as a direct offset to a significant portion of our 2024 AMT cash payments. A direct benefit to our free cash flow is most likely not included in any sell-side models at this point. With that, I’ll hand over to Mike who will walk us through the final points of our 2024 capital program.

Mike Henderson: Thanks, Dane. As we highlighted earlier, we’re a results-driven company. So I’ll start with the expected bottom-line results of our 2024 capital program. We expect our $2 billion capital program to deliver $1.9 billion of free cash flow with one of the lowest reinvestment rates and free cash flow break-evens in the sector. This will enable us to deliver our investors a truly compelling shareholder return profile. We fully anticipate these bottom-line financial outcomes and the underlying capital efficiency of our 2024 program to again benchmark at the very top of our high-quality E&P peer group. To deliver these outcomes, we’ll operate approximately nine rigs and four frac crews on average this year. We expect our capital program to again be first half weighted with about 60% of our CapEx concentrated in the first half of the year, largely a function of the timing of our wells to sales.

This should drive stronger production and underlying free cash flow over the second half of the year. At the midpoint of our full year guidance we expect to deliver flat total company oil production approximately 190,000 barrels of oil per day consistent with what we previewed last quarter. Yet importantly, as Dane highlighted, we fully expect to continue driving significant growth in oil production on a per share basis. We’re guiding to a modest year-on-year decline in our oil equivalent production this year. This BOE decline is largely a function of well mix and our focus on value over volume. Given the extreme weakness in natural gas prices relevant for oil, we’re allocating capital to the oiliest and thus highest volume areas in each of our plays consistent with our prioritization of corporate returns and free cash flow generation.

We’re also expecting some modest ongoing base decline in Equatorial Guinea. As is typical for our business and consistent with last year, there will be some quarter-to-quarter variability in our production. First quarter should mark the low point for the year impacted by about 4,000 barrels of oil per day of winter weather-related outages largely concentrated in the Bakken. We’ll then grow from first quarter levels as we bring more wells to sales as the year progresses. Now to the more important details of our 2024 program. We expect to deliver our flat oil production guidance with 5% to 10% fewer net wells to sales than last year. This is a function of improving underlying capital efficiency driven by durable well productivity at peer leading levels, an additional 5% increase to our average lateral lengths and modest deflation recapture that is built on conservative underlying assumptions.

Approximately 70% of our total capital will be allocated to our high confidence Eagle Ford and Bakken programs where we have a demonstrated track record of execution excellence. For 2023, external state data indicates we delivered six months per foot oil productivity 60% better than the basin average in the Eagle Ford and 40% better than the basin average in the Bakken. With our cost structure, we believe we’re leading each basin in capital efficiency. We expect another year of leading performance in 2024 as we maintain our productivity advantage and find ways to continue enhancing our capital efficiency. The bulk of our remaining resource play spend will be dedicated to the Permian where we’re increasing our activity and capital investment in a disciplined manner.

Since getting back to work with a consistent D&C program in the Permian a couple of years ago, we’ve delivered among the best well productivity in the basin with competitive drilling completion performance for transitioning to an almost exclusive two-mile-plus lateral program. This year over 20% of our Permian wells will be three-mile laterals. We’ll get into more details in E.G. in a minute, but our E.G. CapEx will be up modestly this year with spend limited to long lead items in preparation for potential Alba infill program in 2025. Our non-developing capital is higher this year to large-late to more environmental regulatory and emissions-related spending, as well as some nonrecurring projects such as water infrastructure and pipeline additions.

For context, a couple of years ago this bucket represented about 5% of our total capital. It’s about 10% this year. Importantly, however, we expect our non-D&C capital to peak this year and to trend lower in 2025. I would also add that many of those projects designated as emissions-related have the added economic benefit of enhancing our reliability and uptime performance. Now to Lee for E.G. and the wrap up.

Lee Tillman: Thank you, Mike. Focusing on slide 15 in our deck with the expiration of our legacy Henry Hub linked LNG contract at the end of last year, our E.G. integrated gas business is now fully realizing global LNG pricing, and in January we lifted our first cargo under these new contractual terms. Consistent with our prior disclosure, the majority of our Alba LNG sales are covered by the five-year sales contract we announced last year. That contract is TTF linked. The balance of our 2024 LNG cargos have now all been contracted, but at a JKM price linkage. This will afford us a nice combination of both TTF and JKM price exposure this year. Although, global LNG pricing has weakened somewhat on warmer winter weather, the arbitrage between global LNG and Henry Hub pricing is still significant and therefore should still drive improved financial performance for our international operations.

We’re guiding to $550 million to $600 million of E.G. EBITDAX this year, assuming $10 TTF, that’s a significant increase from actual 2023 EBITDAX generation of $390 million. Importantly, we don’t expect this to be a one year financial uplift. For some time we’ve been focused on sustaining this improved financial performance by progressing all elements of the E.G. gas mega hub concept supported by the HoA signed with the E.G. government and our partner last year. The five-year E.G. EBITDAX outlook we’re providing today is intended to demonstrate the sustainability of our E.G. cash flow generation. Over the next five years, we expect to deliver cumulative E.G. EBITDAX of approximately $2.5 billion, assuming $10 TTF and $80 Brent flat. Beyond realizing global LNG pricing, there are a few drivers of the strong performance over the duration of the five-year period.

They include, ongoing methanol volume optimization to maximize higher margin, higher working interest LNG throughput; an Alba infill well program, which will help mitigate Alba decline and maximize the amount of Alba equity gas through the LNG plant in coming years; and further monetization of third-party gas through the Aseng gas cap as we continue to take full advantage of our unique and highly valuable gas monetization infrastructure in one of the most gas prone areas of the world. And while this five-year EBITDAX scenario reflects the life of our recent global LNG sales agreement, we fully expect to extend the life of E.G. LNG beyond the next five years, well into the next decade as we continue to advance the longer term gas mega hub concept.