Marathon Oil Corporation (NYSE:MRO) Q4 2022 Earnings Call Transcript

Marathon Oil Corporation (NYSE:MRO) Q4 2022 Earnings Call Transcript February 16, 2023

Operator: Good morning. And welcome to the Marathon Oil Fourth Quarter and Full Year 2022 Conference Call. All participants will be in a listen-only mode. . 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, Anita. 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 addressed our fourth quarter and full year 2022 results, as well as our 2023 outlook. These documents can be found on our website @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, our 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.

As always I will 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 will also reference certain non-GAAP terms in today’s discussion, which have been reconciled and defined in our earnings materials. With that, I will turn the call over to Lee and the rest of the team, who will provide prepared remarks. After the completion of these remarks, we will move to question-and-answer session. Lee?

Lee Tillman: Thank you, Guy, and good morning to everyone listening to our call today. First, I want to thank our employees and contractors for their collective contributions to another remarkable year. A year that can only be described as comprehensive delivery against all dimensions of our well established framework for success. Your dedication and hard work, as well as your steadfast commitment to our core values, including safety and environmental excellence that made it possible — that made possible the exceptional results I get to talk about today. So thank you. 2022 truly was an exceptional year. But our outlook for 2023 and beyond is equally compelling. While the team and I will cover a lot of ground today I’ll start by highlighting a few key things.

First, we’re successfully executing on the more S&P less E&P mandate our champions for the last two years. They are delivering financial and operational outcomes not just at the top of our high performing E&P peer group, but at the very top of the S&P 500. The results in 2022 really do speak for themselves. $4 billion of adjusted free cash flow generation, the strongest free cash flow yield in our peer group, and one of the top five free cash flow yields in the entire S&P 500. The lowest reinvestment rate in our peer group a full 10 percentage points below the S&P 500 average. And one of the lowest capital intensities, all indicators of a now well established capital and operating efficiency advantage relative to a high performing peer group.

Second, we’re returning significant capital back to our shareholders through our cash flow driven return of capital framework. Our framework is transparent, it’s differentiated, it prioritizes our investors as the first call on capital, and it uniquely protect shareholder distributions from capital inflation. During 2022, we’ve returned 55% of our adjusted free cash flow from operations or $3 billion to shareholders. And for those keeping score relative to the free cash flow based models of our peers, that equates to about 75% of free cash flow. That also translates to a 17% shareholder distribution yield, the highest distribution yield on our E&P peer space, and one of the top 10 distribution deals in the entire S&P 500. We’ve remained steadfast in our commitment to the powerful combination of a competitive and sustainable base dividend.

In addition to consistent share repurchases. That consistency paid off with $2.8 billion of accretive share repurchases that reduced our share count by 15%, driving significant growth on a per share basis. Rewinding all the way back to the start of this most recent share repurchase program in October of 2021, we have reduced our share count by 20%. Again, leading the peer group. And we raised our base dividend three times during 2022, bringing our track record to seven increases in the last eight quarters. Third, we successfully closed on the Ensign acquisition before year end. Materially strengthening our portfolio and enhancing our Eagle Ford scale. The Ensign acquisition makes us a stronger company. Checking every box of our disciplined acquisition criteria.

It’s a accretive to key financial metrics, it’s accretive to our return of capital framework, it’s accretive to our high quality inventory life and it offers compelling industrial logic in the core of a basin we know well. Pat will provide additional details later in the call but ensure integration efforts are progressing well and initial 2023 results have outperformed our expectations. Finally, while 2022 was certainly a banner year, I’m just as excited about our potential in 2023 and beyond. Fully consistent with our disciplined capital allocation framework, our 2023 budget prioritizes significant free cash flow generation and return of capital to shareholders. At reference commodity prices of $80 WTI $3 Henry Hub and $20 TTF we expect to generate $2.6 billion of adjusted free cash flow and we expect to return a minimum of $1.8 billion to our shareholders, providing clear visibility to a double digit shareholder distribution yield.

And recognizing the ongoing volatility in commodity prices, particularly natural gas it is important to note that a $0.50 per MMBtu change in Henry Hub only impacts our annual cash flow by just over $100 million. While dollar change in WTI moves cash flow by about $70 million, reflecting continued leverage to oil pricing at our balanced portfolio. Once again, we fully expect to lead our peer group and the broader S&P 500 when it comes to the financial and operational metrics that matter most. Free cash flow generation, capital and operating efficiency and shareholder distributions. While our 2023 outlook is compelling, we’re even better positioned for 2024 as our unique integrated gas business in Equatorial Guinea will benefit from an increase to global LNG price exposure.

Just as a reminder, the current Henry Hub index contract for our equity Alba gas through ET LNG expires at the end of 2023. And we will move to a market base global LNG linkage. With the current and significant arbitrage between Henry Hub and global LNG prices, we expect this to translate into an uplift to 2024 EBITDA of $500 million to potentially more than $1 billion relative to 2023. With that, I’ll turn it over to Dane, who’ll provide more detail around our return of capital performance and outlook. Dane?

Dane Whitehead: Thank you, Lee. Good morning, all. Lee (ph) capital high points, but giving you importance of the topic, I’ll further elaborate on our framework, our execution and our outlook. As we’ve stated before, returning a significant amount of capital to shareholders, through this cycle, remains foundational to our value proposition in the marketplace. And when it comes to shareholder distributions, track record matters. We’re building a track record we’re really proud of and that investors can trust. During 2022 we’ve returned 55% of our CFO to shareholders, significantly exceeding our 40% of CFO framework commitment. Total shareholder distributions amounted to $3 billion, good for a total shareholder distribution yield of 17%.

That’s the highest in our peer space and one of the top distribution yields in the S&P 500. That includes $2.8 billion of accretive share repurchases during the year. We continue to believe that buying back our stock is an excellent use of capital due to the value we see with our shares, trading at a free cash flow yield in the upper teens. Repurchases are value accretive, a very efficient means to drive per share growth and are synergistic to grow in our base dividends. During 2022, we reduced our share count by 15%. And since reinitiating our share repurchase program in October 2021, we’ve reduced our share count by more than 20%, by far, the most significant share count reduction in our peer space as shown on the bottom right graphic on Slide seven.

Another benefit of our buyback program, is the capacity it creates for ongoing growth in our per share base dividend. We recently raised our quarterly base dividend by 11% to $0.10 per share. The seventh increase in the trailing eight quarters. While its most recent increases more than fully funded by incremental cash flow from the Ensign acquisition, ongoing share count reductions from our buyback program create clear potential for further base dividend increases in the future. Our operating cash flow driven framework is differentiated and it protects distributions from the effects of capital inflation, offsetting inflation is on us. We believe this makes for a stronger commitment to our investors, as our investors will truly get the first call on cash flow.

For 2023, the recently completed Ensign acquisition makes our framework even more shareholder friendly adding close to 20% to our pre-acquisition operating cash flow, and therefore adding 20% to our shareholder distribution capacity. In addition, with the 2022 financial — actual financial results in hand, along with the December close at Ensign, we anticipate will be able to defer U.S. cash alternative minimum taxes to 2024. Our objective for 2023 is to firmly adhere to our return to capital framework, continuing to return at least 40% of CFO while also paying including some of the Ensign related acquisition financing. We believe we can do both, maintaining our return of capital leadership in this peer space, which is the top priority, and continue to enhance our already investment grade balance sheet through gross debt reduction, all supported by our financial strength and flexibility.

On the balance sheet, we have about $200 million of high coupon U.S.X debt maturing and replaced. We plan to pay that off with cash on hand to reduce gross debt and interest expense. We also have $200 million of low cost tax exempt bonds maturing in 2023. These tax exempt bonds are unique and very flexible component of our capital structure. We plan to leverage the cost advantage or tax exempt credit capacity to refinance those bonds in 2023. And we have the optionality to do the same with future tax exempt maturities in 2024 and 2026. With regard to shareholder returns, our 40% return on capital commitment in 2023 provides visibility to $1.8 billion of minimum shareholder distributions at our reference price deck as a double digit return of capital yield, one of the highest in our peer space.

We have been executing share repurchases so far in Q1 €˜23. And plan to continue to do so consistent with our framework. And we have ample capacity in our current Board authorization to keep moving. While 40% represents a good starting point for your models, our track record has been to exceed that minimum return, and we’ll look to keep that track record intact in 2023. Especially if we benefit from any commodity price support over the balance of the year, which would significantly enhance both shareholder returns and debt reduction. They have tremendous leverage to commodity price improvement. And we’ll use that to the benefit of our shareholders. Now I’ll turn the call over to Pat, who’ll briefly walk us through an update on the Ensign acquisition.

Pat Wagner: Thanks, Dane. Consistent with our market commitment, we successfully closed on the Ensign acquisition before the end of the year. As we’ve stated, this transaction checks all the boxes of our M&A framework, immediate financial accretion, return of capital appreciation consistent with Dane comments, accretion to inventory life and quality and industrial logic with enhanced scale, all on maintaining our financial strength and investment grade balance sheet. And we based our Ensign valuation on a one rig maintenance program with no credit for potential upside associated with redevelopment refrac. Our focus now is on integration and execution. In terms of integration, early efforts have gone exceptionally well. We had originally planned for major elements of the transition to take up to four months post close, we not expect to be substantially complete with operations transition activities by the end of this month.

That accelerated timeline is in large measure due to the excellent collaboration and cooperation between both organizations. And it serves to underscore the execution competence that comes with an acquisition and established base and then has a track record of success. On the execution side, as highlighted on Slide 11 on the deck. Early well performance is consistent with our stated view that the acquired Ensign inventory has the potential to deliver some of the best returns and highest capital efficiency in the Eagles Ford, and therefore the entire Lower 48. Our first two pads, nine wells in total are outperforming expectations delivering top decile oil productivity in the basin. This year we plan to bring approximately 40 wells to sales on the acquired acreage, accounting for about one-third of our total Eagle Ford program.

The Ensign wells are expected to deliver accretive capital efficiency and financial returns from comparable oil productivity to those legacy Eagle Ford program. I’ll now hand over to Mike, to provide more color on our 2023 capital program.

Michael Henderson: Thanks, Pat. Turning to Slide 12 of our deck. I’ll provide a brief overview of the high points of our 2023 capital pool. As expected, consistent with our disciplined capital allocation framework and our more S&P less E&P mandate, we expect to deliver strong free cash flow and significant return capital to our shareholders across a wide band of commodity prices as the graphics on the right of the slide show. At our reference price deck, we expect our $1.9 billion to $2 billion capital budget to deliver $2.6 billion adjusted free cash flow at just over a 40% reinvestment paid. As Lee and Dane both highlighted, we expect to return at least $1.8 billion of capital to our shareholders. To deliver these financial outcomes, we’ll operate approximately nine rigs and 3 to 4 frac crews on average this year.

We expect 2023 capital to be first half weighted, with about 60% of our total capital spend concentrated in the first half of the year largely driven by the timing of our activity. At the midpoint of our guidance, we expect to deliver maintenance level oil production of approximately 190,000 barrels of oil per day, flat relative to 2022 after incorporating Ensign volumes. As is typical for our business, there will be some standard quarter-to-quarter variability throughout the year. The lower end of our annual guidance range is a good starting point for our first quarter total oil production, approximately 185,000 barrels of oil per day. This is largely a reflection of activity timing and the associated impact on well sales, along with a very modest negative carryover impact from winter storm Ellie, concentrated in the Bakken.

With activity and wells to sales weighted to the first two quarters of the year, we expect to see an improving production trend for oil into the second and third quarters. Turning to oil equivalent production. The midpoint of our guidance is 395,000 oil equivalent barrels per day, inclusive of a planned second quarter turnaround in EG that is designed to set us up for a high level of uptime in 2024. Overall, our 2023 plan is a disciplined and high confidence program designed to deliver strong financial and operational outcomes. In the Eagle Ford, we run a 4-rig program. We expect an improving well productivity trend in 2023 from an already strong 2022, due in part to Ensign contributions. In the Bakken, we will run 3 rigs in average again, focusing our activity in our high-quality hectare area of the play, where the average well pays out and licensed six months at current commodity prices.

In the Permian, we expect to continue improving our capital efficiency by increasing on average lateral lines to 10,000 feet this year, an increase of over 25% in 2022. While our headline Permian wells sales guidance looks similar to last year, the strong well productivity and competitive drilling and completion performance that we’ve delivered is getting back to work over the second half of 2022 supports a higher level of capital allocation. We, therefore, plan to spud between 25 and 30 wells this year inclusive of at least one multi-well pad in our Texas Delaware, Meramac Woodford fleet, which will support a higher level of well to sales in early 2024. Our Texas Delaware position is no longer an exploration play. The asset is now fully integrated into our Permian asset development team where it will compete for capital on a heads-up basis with all the other assets.

So our Oklahoma asset continues to provide us valuable optionality to a fundamental strengthening of the gas and NGL price environment. We aren’t exposing much capital to the asset this year. Rather, near-term activity is limited to a 1.5 rig joint venture program that will allow us to efficiently defend our acreage position and delineate some lower priority acreage limited scope and capital. With that, I’ll turn it over to Lee, who will provide an update on our Integrated Gas business in Equatorial Guinea.

Lee Tillman: Thank you, Mike. 2022 was an exceptional year for our unique world-class integrated gas business in EG. We delivered over $600 million of equity income more than double our guidance at the beginning of the year. And we generated approximately $900 million of EBITDA. Our results were driven by solid operational performance as well as higher-than-expected commodity pricing, especially for Henry Hub and European natural gas. For 2023, we expect equity income and EBITDA to decline largely due to assume significantly lower commodity prices, especially for natural gas and the already referenced planned turnaround during the second quarter. The outlook beyond 2023, however, is robust as we expect to realize significant EG earnings and cash flow improvement in 2024 on the back of an increase in our global LNG price exposure.

A way of background, in addition to our 64% interest in the operated Alba gas condensate field, which produced approximately 60,000 oil equivalent barrels per day on a net basis in 2022. We also have a 56% interest in equity accounted 3.7 MTPA baseload LNG facility. This LNG facility currently processes equity gas from our operated Alba field that is sold on a legacy Henry Hub link contract and third-party Alen gas volumes on a total plus profit sharing basis. The Alba Henry Hub link contract expires at the end of 2023. While we’re still working through contractual and commercial details, the bottom line is that beginning January 1, 2024, Alba source LNG will no longer be sold at a Henry Hub linkage. It will be sold into the global LNG market which is expected to drive a significant financial uplift for our company given the material arbitrage between Henry Hub and global LNG pricing.

More specifically, at pricing generally consistent with the forward curve or $20 per MMBtu TTF, we’re positioned to realize an approximate $500 million EBITDA uplift in comparison to 2023. As there is a wide range of potential global LNG price outcomes in 2024, we’ve also provided a high side sensitivity to help you better appreciate the leverage we’ll have in 2024 to global LNG prices. Assuming an upside case of $40 per MMBtu TTF in 2024 or a price consistent with the average of the trailing 12 months, the potential EBITDA uplift could be in excess of $1 billion. And beyond the significant financial uplift expected in 2024, we remain equally focused on further maximizing the long-term value of our unique EG gas assets by leveraging available haulage through EGL&G.

This world-class infrastructure is well positioned in one of the most gas prone areas of West Africa and is a natural aggregation point to monetize both indigenous EG gas as well as discovered undeveloped cross-border opportunities. In summary, for years now, I’ve reiterated my view 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 the return of capital. More S&P, less E&D. We’ve delivered exactly that type of performance over the last two years and not just competitive, but at the very top. And as I said before, our challenge now is to prove that our results are sustainable, quarter in, quarter out, year-end and year out.

We believe they are. We’re up for the challenge, and I believe our outlook is as strong as it has ever been. Our compelling investment case is simple. We offer a unique and differentiated return of capital framework that provides shareholders first call on cash flow and protect distributions from capital inflation. For 2023, we’re providing clear visibility to double-digit shareholder distribution yield. We have an established track record of market-leading free cash flow yield and shareholder distributions at an attractive valuation and offer investors a free cash flow and return of capital profile that competes with any sector and company in the S&P 500 across a wide range of commodity prices. We have delivered per share growth across all the metrics that matter via a consistent share repurchase program that leads our peers in addition to a durable and competitive base dividend.

We believe this peer-leading financial delivery is sustainable, underpinned by our high-quality U.S. unconventional portfolio with over a decade of high return inventory and a track record of sector-leading capital efficiency, recently strengthened by the Ensign acquisition. Our portfolio provides commodity leverage with strong oil weighting, coupled with a unique and increasing exposure to global LNG prices that will drive material financial uplift in 2024 and beyond, all underpinned by an investment-grade balance sheet. And finally, we’re delivering these results to help meet global oil and gas demand while prioritizing all elements of our ESG performance. To close, I want to again reiterate how proud I am of the way we position our company.

We are results driven, but it is also about how we deliver those results, staying true to our core values and responsibly delivering the oil and gas the world needs. The oil and gas that is critical to furthering global economic progress, defending U.S. energy security, limiting billions out of energy poverty and protecting the standard of living, we have all come to enjoy. With that, we can open the line for Q&A.

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Q&A Session

Operator: The first question today comes from Jeanine Wai with Barclays. Please go ahead.

Jeanine Wai: Hi, good morning, everyone. Thanks for taking our questions. Our first question, maybe just starting with the ’23 outlook for Lee or Mike, one of the things that really stood out to us in the outlook was actually the number of Eagle Ford wells to sales in the plan, which was decently below our forecast, and it’s about, I think, 20% lower year-on-year on an adjusted basis, if you just assume maintenance mode and then you add the 40 Ensign wells to the number of wells you did last year. And we saw your comments about higher aggregate year-over-year well productivity in the Eagle Ford in ’23. And we were just wondering if you could share any further details about the implied improved capital efficiency in the Eagle Ford because it seems to be pretty meaningful.

So for example, if the Eagle Ford — is the Eagle Ford actually in maintenance mode this year on an adjusted basis and are there any other factors out there that would be affecting the wells this year to sales, whether it be the mix, the working interest or anything else? Thank you.

Michael Henderson: Thanks, Jeanine, it’s Mike here. I’ll take that call. So to maybe answer part of your question. Yes, I think it is safe to assume that the Eagle Ford is in maintenance mode — all maintenance mode this year. And I think it’s also correct. You’re also correct in that the legacy position, we are holding volumes flat on a lower well to sales count in 2023, which is obviously a positive thing. A couple of elements that I would say go into that. The first one being the timing of when we bring wells online in the year. We are going to be bringing close to 60% of our legacy wells to sales in the first half of ’23. And that definitely helps the annualized volumes. I think the second element and probably the more important one from my perspective is well productivity and a lot goes into well productivity.

But one of the things that the team has been doing is really continuing to optimize our completion design. That has resulted in an uplift in our well performance. And you see that factored into this year’s business plan and the ultimate volumetric outlook. So we were already setting up for a strong year in Eagle Ford with the legacy business. I think the addition of the Ensign acreage only reinforces our position, as Pat mentioned. I think we’re particularly encouraged with the performance of the first 9 wells from the 2 pads that we brought online in the condensate window, very strong productivity, top decile and oil, really fully consistent with our belief that this is some of the highest capital efficiency inventory in the Eagle Ford. And that only adds to what was already a highly capital-efficient business.

So very, very excited about the opportunities that the acquisition brings us this year and even beyond.