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spk09: Welcome to the Marathon Oil Corporation MRO 2Q 2022 Earnings Conference Call. My name is Richard, 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. During the question-and-answer session, if you have a question, please press 01 on your touchtone phone. As a reminder, the conference is being recorded. I'll now turn the call over to Guy Baber, Vice President, Investor Relations. Mr. Baber, you may begin.
spk01: Thanks, Richard, and thank you to everyone for joining us this morning. Yesterday, after the close, we issued a press release, a slide presentation, and investor packet that address our second quarter 2022 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 to the risk factors described in our SEC filings. We will also reference non-GAAP terms in today's discussion, which have been reconciled and defined in our earnings materials, including reinvestment rate, adjusted cash flow, and adjusted free cash flow. With that said, I'll turn the call over to Lee, who will provide his opening remarks. We'll also hear from Dane and from Mike today before we move to our question and answer session. Lee?
spk03: Thank you, Guy, and good morning to everyone listening to our call today. To start, I want to once again thank all of our employees and contractors for their dedication and hard work, as well as their commitment to our core values, especially safety and environmental excellence. We are results driven, but equally focused on how we achieve those results. While both equity and commodity markets remain characterized by significant day-to-day volatility, a few underlying trends remain well entrenched. Global demand for oil and gas continues to recover from the depths of the pandemic. While supply of oil and gas remains constrained by multiple years of underinvestment, strained supply chain, labor shortages, and inconsistent, if not outright hostile, regulatory policy on a global scale. Physical commodity markets are tight, global inventories are well below historic norms, and global spare capacity is limited at best. The ongoing Russian invasion of the Ukraine and the associated humanitarian crisis has only exacerbated these underlying trends. And even in the unlikely event of a near-term resolution, the die has been cast and actions, particularly by European countries, are already well underway to move away from Russian oil, natural gas, and refined products. Here at home, the U.S. consumer is facing inflationary pressures across the board, including energy. The potential for recession looms and American families are suffering. But the U.S. energy renaissance led by the Shell Revolution has provided a measure of protection from the forced and more austere measures now being considered in Europe. We are experiencing firsthand the value of energy security and made in America oil and gas, while witnessing the fallout of failed energy policies that have put much of Europe at risk. We must ensure that the U.S. economy does not fall victim to the same poor choices So while we are fully aware we are price takers and remain steadfastly committed to capital discipline, we could be in for an extended period of elevated commodity prices globally, both for oil and natural gas. All of this underscores the need for an orderly energy transition, or more accurately, an energy expansion, as part of an all of the above strategy to meet the world's growing demand for reliable, affordable, and responsible energy. and it highlights the critical role the u.s oil and gas sector must play on a global scale especially as one of the world's lowest ghg emissions intensity producers as i've said before our mandate is clear and it is a statement of marathon oil's corporate purpose to help responsibly meet global energy demand by operating with the highest standards prioritizing all elements of safety environmental social and governance performance while delivering strong financial returns to our shareholders. We have conviction we are pursuing the right strategy for our shareholders and stakeholders alike. It's best summarized by our framework for success on slide four of our deck. Strong corporate returns, sustainable free cash flow generation, and meaningful return of capital to our shareholders through the commodity price cycle. all underpinned by a high-quality portfolio of U.S. unconventional resources complemented by global LNG exposure via our EG integrated gas business, a bulletproof balance sheet, and a transparent commitment to comprehensive ESG excellence. Importantly, second quarter once again represented another quarter of comprehensive delivery against this differentiated framework, highlighted by record quarterly financial performance. I would like to focus on a few key takeaways this morning. First, we are building a market-leading track record of returning capital to our shareholders. Returning a significant amount of capital to our shareholders through the commodity price cycle is foundational to our value proposition in the marketplace. Our return of capital framework is uniquely calibrated to operating cash flow, not free cash flow. prioritizing our shareholders as the first column capital instead of the drill bit. Facing our return of capital framework on a percentage of operating cash flow instead of free cash flow has been an intentional decision. It reflects the confidence we have in our high-quality asset base and the strength of our commitment to shareholders. This is an especially important distinction in an inflationary environment where capital inflation will necessarily reduce the cash available for peer companies to return to investors based on the inherent design of their frameworks. It won't for us. While frameworks and commitments are important, we continue to believe that establishing a consistent track record of delivery, quarter in and quarter out, is key to building and maintaining trust and credibility in the market. We are in the process of building one of the strongest return of capital track records in the entire S&P 500. Since achieving our leverage objective in October of 2021 through significant gross debt reduction, we have returned $2.5 billion of capital to our shareholders. Over the trailing three quarters, we've returned approximately 55% of our CFO, equating to approximately 75% of our free cash flow. This includes $2.3 billion of share repurchases, driving a 15% reduction to our outstanding share count in just 10 months, and contributing to significant underlying growth in all of the per share financial metrics that matter most to our equity valuation. My second key point, we are delivering financial outcomes that are not only at the top of our E&P peer group, but at the very top of the S&P 500. We must compete with investment alternatives across the broader market. As I already mentioned, second quarter represented a record financial quarter for our company in many respects, an all-time high for adjusted earnings, free cash flow, and shareholder distributions. The full-year outlook is just as strong. We expect to generate around $4.5 billion of free cash flow for the full year, assuming $100 WTI and $6 Henry Hub, consistent with guidance provided last quarter. That's good for a free cash flow yield north of 25%. Not only one of the best yields in the large cap E&P space, but the second highest free cash flow yield in the entire S&P 500. For full year 2022, we expect to continue returning at least 50% of our operating cash flow to our shareholders, significantly outperforming the minimum 40% of CFO commitment per our framework. That translates to an annualized shareholder distribution yield of around 20%, one of the strongest return of capital profiles in the S&P 500. Market leading free cash flow yield and return of capital all at an attractive valuation with our shares trading at an EV to EBITDA multiple among the most attractive in the entire S&P. My third key point is perhaps the most important. It is that these market leading financial results I just highlighted are all sustainable. Our continued financial delivery is supported by a high-quality U.S. unconventional portfolio with over a decade of high return inventory and a track record of superior capital efficiency and execution excellence. A world-class integrated gas business in EG with differentiated exposure to the global LNG market. a transparent, disciplined reinvestment rate capital allocation business model, and a unique operating cash flow-length return of capital framework. Our five- and ten-year benchmark maintenance scenarios that highlight our confidence in continuing to deliver peer-leading financial outcomes. And finally, by our commitment to comprehensive ESG excellence. including our objectives to deliver top quartile safety performance while driving peer-leading GHG and methane intensity reductions by 2030 that are consistent with the trajectory called for by the Paris Climate Agreement. I want to now pass it off to Dane, who will provide a financial update.
spk06: Thank you, Lee, and good morning all. As Lee mentioned, second quarter was highlighted by record financial results for our company since becoming an independent E&P company. This includes adjusted net income of $934 million, or $1.32 per share, and adjusted free cash flow of more than $1.2 billion at a 24% reinvestment rate. Such strong financial delivery is enabling us to deliver market-leading return of capital to our shareholders. Turning to slides eight and nine, I'll briefly cover our return of capital track record and outlook. Our cash flow-driven return of capital framework remains unchanged. And in these uncertain times, we believe the market will reward that commitment, clarity, and consistent delivery. We've built a hard-earned reputation for execution excellence, and we're just as focused on establishing the same credibility when it comes to consistently returning capital to our shareholders. The overall objectives of our framework are to maintain capital return leadership versus peers and the S&P 500, and to maximize our equity valuation and reduce downside equity volatility by providing clear capital return commitments tied to specific commodity price environments. As a reminder, our framework calls for delivering a minimum of 40% of cash flow from operations to our equity holders when WTI is at or above $60 a barrel. During 2Q, we returned $816 million of capital equity holders, including $760 million of shareholder purchases. That represents 51% of our adjusted CFO and an annualized shareholder distribution yield of almost 20%, one of the strongest capital return profiles in the entire S&P 500. In addition, we further enhanced our financial position by adding around $500 million cash to the balance sheet. As long as we're comfortably meeting our shareholder return objectives, we like the idea of modestly building some cash on the balance sheet in the current volatile commodity price environment to provide optionality for future debt maturities and small opportunistic bolt-on acquisitions that are accretive long-term. But rest assured that returning cash to shareholders at levels that meet or exceed our framework remains our top priority for use of cash, and our track record backs that up. Since achieving our leverage objective last October, we've consistently outperformed our minimum commitment, returning approximately 55% of our CFO back to equity holders over the trailing three quarters. In total, since last October, we've returned $2.5 billion of capital, We've repurchased $2.3 billion worth of our stock at an average price of $20.51 per share, reducing our outstanding share count by 15%, driving truly differentiated per share growth as shown on the graphic at the bottom right of slide eight. We've also raised our base dividend by 167% since the beginning of last year. While we believe our base dividend is competitive with the S&P 500 and similarly sized industrial companies and certainly sustainable at conservative commodity pricing, there is still clear opportunity to drive further base dividend growth over time, especially considering the important synergies between the base dividend and our share repurchase program. Turning to the full year 2022 outlook on slide 9, we expect to continue to outperform our 40% 40% minimum CFO commitment. We're targeting to return at least 50% of our adjusted CFO for total shareholder return of at least $3 billion with upside potential to that number. We're trading at a free cash flow yield more than 25% and one of the lowest trading multiples in the entire S&P 500. We continue to believe that our equity is fundamentally mispriced. And as long as that's the case, we'll aggressively repurchase our own stock. As I've said before, it's the best acquisition we can make. Now I'll pass it over to Mike for a brief operational overview.
spk08: Thanks, Dean. Similar to last quarter, my key message today is that the priorities for our capital program remain unchanged. We are staying disciplined. We are prioritizing free cash flow generation, and we are protecting our execution excellence. And we still expect to deliver free cash flow, capital efficiency, and operating efficiency at the very top of our peer group. More specifically, our free cash flow guidance of $4.5 billion at a reinvestment rate of approximately 20% remains unchanged, as do our full-year capital and production guidance ranges. While we've increased our U.S. production expense guidance by 25 cents per The impact to our earnings and cash flow is more than offset by a 25 cent per barrel reduction to our U.S. BD&A guidance and a $40 million increase to our EG equity income guidance. With respect to the near-term outlook for production and capital, we expect third quarter oil production to increase sequentially from 167,000 barrels per day to over 172,000 barrels driven by the timing of our wells to sales program. Total oil equivalent production is expected to be relatively flat with order on order due to a modest decline in EG. Year to date, capital spending has been fully consistent with our expectations and with our guidance for a first half weighted program. We spent 56% of our full year budget versus prior guidance of 55 to 60%. Third quarter CapEx is expected to be similar to the second quarter level, reflecting some shift in capital spend from second quarter to third quarter and a working interest uptick. While it's premature to provide detailed 2023 guidance, we are hard at work optimizing our 2023 execution plans. A little earlier than normal, we are taking a disciplined and thoughtful approach to our contracting strategy Our top priority is to continue protecting our execution confidence and access to high-quality service providers and equipment in order to continue delivering peer-leading free cash flow generation and return of capital. With that, I will turn it back over to Lee to close us out.
spk03: Thanks, Mike. Before we move to our question and answer session, I want to provide a few preliminary comments on the 2023 outlook and then put the financial results we are currently delivering into context. Consistent with Mike's remarks, it's far too early to offer up any detailed 2023 capital spending guidance, largely due to macro uncertainties that could materially impact the outlook for inflation. But I can give you confidence that Marathon Oil's key priorities will remain unchanged. Regardless of the environment, our objective will be to continue delivering peer leading and market leading free cash flow generation and return of capital to shareholders. This durability is supported by our peer leading capital efficiency, balanced portfolio, investment grade balance sheet, and low free cash flow break even of less than $35 per barrel. Our case to be for 2023 will be a maintenance program that holds production flat in order to deliver maximum free cash flow, pure leading return of capital, and significant per share growth. For years now, I have reiterated my view that for our company and for our sector to attract increased investor sponsorship, we must deliver competitive financial performance with other investment opportunities in the market, as measured by free cash flow generation and return of capital. More S&P, less E&P. This is especially true when commodity prices are much lower than they are today. We believe we have built that type of resilience into our business. And when we do experience a constructive commodity price environment, as is currently the case and which could continue to be the case for some time, we must deliver truly outsized free cash flow and return of capital versus the S&P 500. Slide 12 of our earnings deck illustrates just how strongly we are delivering on this more S&P, less E&P mandate. According to consensus estimates, we are delivering the number two free cash flow yield in the entire S&P 500 this year, driven by our high-quality, capital-efficient U.S. unconventional portfolio, our world-class integrated gas business in EG, featuring unique global LNG exposure, and our disciplined approach to capital investment. Through the strength of our financial delivery and despite solid year-to-date equity performance, We are trading at one of the most attractive valuations in the S&P 500, with 2022 consensus EV to EBITDA multiple among the 10 most attractive in the S&P 500. And we are returning the majority of the cash flow we generate right back to our shareholders, building one of the strongest return of capital track records in the entire market while driving significant per share growth. Though others are now transitioning to a focus on per share growth, no peer has delivered more strongly or consistently than us or matched our 15% reduction in outstanding shares in just 10 months. To close, I am proud of how we have positioned our company. We are delivering financial outcomes that are at the very top of the S&P 500 and just as important. We are supporting the continued responsible development of much-needed oil and gas that is absolutely fundamental to furthering global economic progress, lifting billions globally 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.
spk09: Thank you. We will now begin the question and answer session. If you have a question, please press 01 on your touch-tone phone. If you wish to be removed from the queue, please press 02. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. We also ask callers to limit their questions to one question and one follow-up question. Once again, if you have a question, please press 01 on your touchtone phone, and we're standing by for questions. Okay, and our first question online comes from Arun Jayaram. Please go ahead.
spk00: Good morning, Lee and team. Lee, I did want to maybe start with kind of your thoughts on, you know, you've released a five-year and 10-year kind of maintenance scenario. I know it's preliminary to talk about 2023, but I did want to, you know, just get your preliminary thoughts on how you're thinking about allocating capital next year. In slide 20, you highlight kind of your well activity this year between the four different U.S. basins. And I guess effectively what we're thinking about is you're doing $1.3 billion in capital this year. We've seen less inflation in terms of your numbers than your peers. And as you think about you know, rigs, frac services, and tubulars, are you caught hedged below market rates today? And as we think about 2023, would you expect if the industry is, you know, CapEx trends are up 10 to 15 to be within that range?
spk03: Yeah. Yeah, thanks for the question. Maybe I'll take a bit of that and then maybe let Mike expand a bit on the inflation question. As you stated, Aaron, we did put out a five- and ten-year view that is a maintenance view. And in that, of course, the capital programs are all calibrated to the actual commodity price decks there. so that those two are really linked to one another. From a capital allocation standpoint, as you know, there was a pretty material shift from 2021 to 2022. We moved from kind of 90%, you know, Eagleford and Bakken to about 75% Eagleford and Bakken, you know, this year. It's still a bit too early to get into, you know, specifics specifically, around capital allocation. But needless to say, we see all basins contributing as we get prepared to go through that exercise and prepare our 2023 program. We did experience, like others, inflation this year. In fact, we did raise our capital program budget a bit last quarter from kind of the $1.2 to the $1.3 billion. We have been very, I would say, deliberate about ensuring first and foremost that we have the execution capability and capacity to not only execute our 2022 program, but to have us in very good stead as we look ahead at least to the first half of 2023, that there's maybe a bit of a difference this year. And I think Mike mentioned this in his opening comments is that we are getting a much earlier start on how we want to secure those services and materials looking ahead. to 2023. To the specific question though around inflation, maybe I'll let Mike talk a bit about obviously the service side as well as kind of the goods and commodity side, everything from steel to frac sand. So with that, Mike, I'll turn it over to you.
spk08: Thanks, Lee. Morning, Arun. Let me maybe start with 2022 and then I'll swing over to 2023. You know, market's still tied across the board. We think it's going to stay that way, particularly You know, we assume current prices are sustained. You know, activity levels, particularly privates, have increased. You know, access to labor continues to be a challenge. A high degree of volatility, particularly anything commodities related. So, you know, we're seeing it in diesel. We're seeing it in steel. I think as a result of that, ourselves and others, we're just continuing to see that tight market for most categories extend. I think you then throw in maybe the macro backdrop, you know, things are tight there, economy, supply chain, labour market. And as we mentioned, as I mentioned, you know, our focus, our priority, it really is about securing established and trusted service providers. Execution excellence is everything for us this year and as we get ready for next year. And I think maybe just looking at the major execution related elements of the business plan through the remainder of 22 for us, start with rigs. I would say the majority of our remaining rig lines in 2022 have been secured in long-term contracts that in a lot of cases run into 23. You know, we've also had quite a bit of success farming out some of our operational rigs. So maybe rather than lose the iron and the we like working with. That's allowed us to take a bit of a break in our program and then get them back to us when we need them. Similar type story in the pressure pumping. The majority of our remaining scope for the year is tied down. And when I think about the rig space, the pressure pumping space, I do think it's worth mentioning that we are termed up longer term than the companies that we're working with at the moment. So you know, we've got established relationships. They do an excellent job for us. And then real quickly, sand, again, most of our needs secured for the remainder of the year. And similar with steel, we have the capacity, maybe just working through some open pricing at the moment with regards to that. Certainly recognize a lot of volatility in 2022, but 1.3 remains the budget, and that's what we're looking to deliver. with regards quickly in 23 we mentioned pretty early to address that many detail very dynamic market in our case to beat next year's maintenance program and really that's how we're thinking about uh the things that we're doing at the moment it really is taking steps to ensure that we can deliver on that program you know one of the things that we've done um is have a look at our execution plans we're trying to minimize spot work wherever we can so you know, being able to offer that consistent extended program. Obviously, safety benefits, execution benefits, and commercial benefits. Maybe just a little bit more in the contracting strategy. I'd describe it in the comments there. We're taking a disciplined and thoughtful approach. Working the first half of 2023 as a priority, I'd say we've secured much of our rig pressure pumping sand and steel needs. Some of the pricing remains open. We've had a little bit of success with index link pricing mechanisms. We've used that in the pressure pump and sand rig and chemical space. And then on the second half of 23, I'd say we're being a little bit more patient there. We feel good about our ability to maybe access the providers and equipment we need, but just given the uncertainty around the macro environment, We're probably just taking our time when it comes to logging in prices and just being a little bit more thoughtful in that side of things.
spk00: My follow-up is maybe for Dane. Dane, I was wondering if you could give us a little bit of a teach-in of your understanding of the AMT or mansion tax proposal. Obviously, you guys are in a favorable U.S. tax, cash tax position kind of today. I do know that there is a three-year average book income provision of a billion dollars. I don't think it would affect you until 2024, but I was wondering if you could maybe provide some thoughts on what this means for your U.S. cash tax position and how does your EEG earnings, how could those be taxed under the new proposal, which is in law, of course.
spk03: Hey, Arun, before maybe flipping it over to Dane on that specific item, It's probably worth just a little bit of commentary around the Inflation Reduction Act of 2022. I want to stress, you know, that first and foremost, this proposed legislation is just that, it's proposed, and that we're continuing to really, you know, digest the potential impacts and a lot of the details that come along with it. Second, I would just say, you know, the purported legislative objective is to reduce inflation, but That's validated by non-partisan policy center, non-partisan internal congressional agency. As far as we can tell, it will have no measurable effect on inflation. So from a legislative standpoint, it does seem to be a little poorly conceived from the get-go, and certainly the proposed actions look like they're going to add some cost and complexity to businesses, specifically manufacturing in oil and gas in the form of taxes and regulation that ultimately are going to be passed on to the U.S. consumer and negatively, I think, impact future investments. So beyond some of those fundamental flaws and the fact that it has zero impact on inflation, there are a couple of provisions, and you've mentioned one of them, that cause us particular concern. One is kind of the approach to methane fees and taxes, and then, of course, this corporate AMT issue as well. On the methane tax, I think we need clarification around certain elements, including measurement methodology. There still remains a high degree of uncertainty around the proposal, but the bottom line is we don't need legislation to incentivize us to reduce our methane footprint. We're already doing exactly that, and we've got a great track record of significant reductions, and some of the most aggressive targets in the industry are that, as I mentioned earlier, are fully consistent with the trajectory of the Paris Climate Agreement. So even though we support reasonable regulation, regulation of methane is already happening. And so anything that this act does is going to be somewhat duplicative and certainly without any discernible policy benefit. So with that little bit of an overview, let me flip it over to Dane to share a few thoughts on your specific question around the tax provision.
spk06: Yeah, good morning, Arun. First of all, let me say that under current tax law, not this proposed change, but current tax law, we have substantial NOL and foreign tax credit positions that we are highly confident will shield us from cash taxes, U.S. cash taxes, until the second half of the decade, even at high prevailing commodity prices. So there's no change in that outlook at this time. With the Manchin-Schumer proposal, proposing to implement an alternative minimum tax based on 15% of gap pre-tax income. The legislative process, I'll say, is ongoing and contentious, to say the least. The timeline for getting something done before midterms really ramp up is extremely tight. So I think the outcome of this proposal remains uncertain, whether it gets done at all or what shape it gets done in. And I think that's an important point to keep in mind at this juncture. There are a couple of major issues with the alternative, the AMT proposal that I think are pretty significant. Two of them stand out to me. One, it significantly reduces the investment incentives for capital-intensive industries where those incentives currently reside in the tax code, and this goes around those. Second, by using GAAP pre-tax income as the basis for taxes, it allows accounting rules to drive tax policy, which effectively puts taxation authority in the hands of the likes of the FASB and the SEC. And I think we've learned recently that Congress shouldn't be delegating the power to tax to those bodies. There are a number of counter proposals emerging that could potentially address these and other shortcomings, but most, you look at the stats, most of the companies that are going to be impacted by this are industrial manufacturers essentially. And so I expect a very spirited challenge to be mounted. It actually has been mounted by that constituency and we'll see how it, we'll see how that plays out. I will say a straight-up minimum tax like the one proposed could accelerate our cash taxability. It's really too much uncertainty in how the rules are going to play out for us to really be super definitive for you right now, Arun. But even in the scenario of a straight minimum tax on book earnings, our historical tax attributes, our NOLs and foreign tax credit positions remain very valuable. and will realize the value of those. Also important to know about the proposal in its current form, any exposure Marathon might have due to the proposed AMT is limited to domestic income. EG income would largely be offset by foreign tax credits, so we wouldn't expect the AMT proposal to impact taxes in EG.
spk03: Thanks a lot. Yeah, maybe just to wrap up, Aurene, you know, it's definitely clear to us that, you know, kind of the bad idea factory in Washington, D.C. is in overdrive. And in essence, you know, this proposed legislation will elevate taxes and costs at a time of high inflation. And as Zane said, it's going to negatively impact much needed investment in both the manufacturing and oil and gas sectors. So thanks for the question, Aurene.
spk09: Thanks a lot, guys. Thank you. Our next question online comes from Phillips Johnson. Please go ahead.
spk04: Hey, guys. Thanks. Just a follow-up question for Mike on the CapEx guidance for the third quarter. It seems to imply a fairly large drop in the fourth quarter from the first three quarters. I think you mentioned some shift in spending from Q2 into Q3, and you expect working interest to tick up. It also looks like you're turning line well count in both the Bakken and Eagle for the remainder of the year. is very much weighted to Q3. So I just wanted to confirm that's also coming into play and just, you know, generally see what kind of confidence you guys have in that fourth quarter number coming down.
spk08: Yeah, Philips, it's Michael here. Yeah, it's Mike. You know, just as I mentioned on the call, first half capital fully consistent with our guidance where we spent 56% of the full year capital. budget or the program that was in line with the guidance we supplied. We'd also mentioned that the program was front-end weighted, so we do expect third quarter expense to be similar to the second quarter before a bit of a decline into the fourth quarter. As you touched on there, we did have some capital shift from second quarter into third quarter and the uptick in working interest. Again, as I mentioned just a minute ago, the The 1.3 budget remains the number that we're looking to deliver. You know, in terms of maybe the wealth to sales cadence, what I'd say is third quarter, we're guiding 50 to 60 wealth to sales. Fourth quarter will be our low quarter from a wealth to sales perspective and also the working interest drop. So maybe that helps explain why we're seeing the fourth quarter capital
spk07: the year yes okay great that's it thank you thank you our next question online comes from Doug legate please go ahead well good morning everyone thanks for taking my questions then I apologize for beating up on the EMT question again but I just wonder if you could potentially quantify if that minimum tax was put in place, what would it do to the timing, in your opinion, of when you would expect to become a cash taxpayer, if you can try and frame that with any certainty?
spk06: Yeah, my comments earlier were really meant to convey that there's just so much uncertainty around the final shape of these rules that coming out and giving you some really specific outlook like that. I think it's just, it's premature to do that. Certainly, if the AMT construct could accelerate to some extent, some cash taxes quantifying at this point, I think it's just too early. I did note in my earlier response to a room, though, that it would be probably less not impactful on EG earnings, which is an interesting, important data point as well.
spk07: Yeah, I'm sorry. I just wanted to try and push on it again because we're all trying to figure this out. So thanks for your thoughts on it. Lee, you have done an extraordinary job on capital discipline. You led the market on your commitment to stable production, not outspending your cash flow and returning cash. It's left you with a lot of commodity leverage, obviously, and tremendous cash flow potential. In an environment where it seems there's a lot of assets coming for sale pretty much in your backyard, so the list goes from the back end to the Eagleford and, of course, the EG with Chevron's assets. I'm just curious how you see the role of M&A in a framework which is obviously very disciplined on shareholder returns, but you've also got a lot of headroom for potential acquisitions if you choose to. How are you thinking about that?
spk03: Yeah, thanks for the question, Doug, and good morning. You know, obviously, Doug, I can't comment on any specific or hypothetical M&A transactions, but what I will say is that we're always assessing and evaluating bolt-on opportunities in basins where we have a competitive advantage and can generate value for our shareholders. Clearly, as you stated, we have a tremendous amount of of confidence in our organic case, which delivers market leading from cash flow and return of capital. And that is the lens that we're going to assess all opportunities. So the bar is quite high, and whatever we do, it's going to have to be accretive to that organic case. And so the same discipline that we show in our business is the same discipline we'll show in assessing inorganic opportunities. But to be clear, we like the assets in our core portfolio, and we're always looking to further improve our core positions. that's true for all of our core positions, U.S. resource plays as well as EG. And there are a number of reasons why when we think about EG, you know, we do deem that very much one of our core assets. Very free cash flow generative, low level of capital reinvestment, competitively advantaged infrastructure that that should be the natural aggregator of gas in a very gas-rich portion of the world, differentiated in direct exposure to the global LNG market, which relative to our peers is quite unique. And then, of course, it does have a geographic and cost advantage as a supplier into the European gas market, which, as you know, is very short on gas. So hopefully that addressed your question, Doug.
spk07: It does. I guess I was kind of curious if you had an opinion on Chesapeake's announcement and if you've heard if that fits with your portfolio or prefer not to comment, I guess.
spk03: Yeah, I mean, I think, again, I don't want to get into specific assets in the marketplace, but rest assured, I think, Doug, that to the extent that there are sound opportunities within our core basins that Pat and his team are actively evaluating and assessing those against that criteria that I described.
spk07: Thanks, fellas. Appreciate you taking my questions.
spk03: Thank you, Doug.
spk09: Thank you. Our next question online comes from Neil Dingman. Please go ahead.
spk10: Morning, Lee. Maybe I can just do a follow-up on Doug's. Maybe I'll emanate one different way. I'm just wondering, I guess what I'm curious on is your requirements for deals. Have those requirements changed in the recent year or two? You guys continue to have some fabulous acreage. You do a good job of laying this out in the slides. I'm just wondering now, when you continue to look at deals out there, and I guess given the environment we're in, I'm just wondering if the requirements have changed and if you can maybe discuss maybe some of those key requirements.
spk03: Certainly, Neil. Fundamentally, the criteria on which we evaluate any inorganic opportunity has remained constant. As I mentioned, the bar is high. It's going to have to deliver financial accretion. It's going to have to be leveraged neutral to positive. it's going to have to offer industrial logic and clear synergies. And so we look across all those dimensions and make an assessment and try to determine as well as does it play into the sustainability of our model also. We're not looking to necessarily buy someone's decline curve. We're looking for things that can amplify the already strong sustainability of our portfolio. So fundamentally, Neil, no, it's not different. Now, is the market different? Absolutely. I think in a high-priced environment and a volatile environment like we are, I do think you're going to run into instances where, you know, the bid-ask spread is going to be difficult to reconcile. And given that, we just have to be that much more committed to our criteria and ensuring that we're bringing any type of opportunity is bringing true value, lasting value into the portfolio.
spk10: Great details. And then my second is just on capital allocations specifically. You've all been pretty clear about suggesting that your shareholder return will continue to be predominantly buybacks given the intrinsic value. I'm just wondering, how do you think about the relative comparison, I guess, in today's market, either given where oil is, given where your share price is, when you think about the relative comparison between buybacks and dividends?
spk06: Yeah, Neil. Here's Dane. I'll just take a quick I think we've been pretty strong in our view that returning capital to shareholders through the share-by-packs structurally changes the company, drives per share growth. And it's synergistic with our ability then to increase our base dividend over time without increasing our total cash distributions on the dividend. So we like that, especially in light of the fact that the free cash flow yield that our stock is generating right now is in the 25%. It's even got closer to 30 recently. So it's just an unquestionable value to do that. And so it's been very easy for us to allocate capital that way. We still do think the base dividend is a very important part of the return equation. We have raised the base dividends through the first quarter of this year, five consecutive quarters, a total of 167% over that period of time. We paused this quarter. I will say, though, that with the consistent and large share repurchase activity that we're doing, we'll definitely be in a position likely this year to reassess that because we're just absorbing so much of that outstanding stock. So I think they're synergistic there. We like them both. And, you know, the variable dividend idea is something we It's a tool in the toolkit, but given what I said about how compelling share repurchases are to us right now, it's going to just be on the back bench.
spk10: I'm glad to hear it. Thanks, Dan. Thanks, Luke.
spk09: Yeah. Thank you. Our next question online comes from Scott Hanold. Please go ahead.
spk05: Yeah, thanks. If I could ask a question, I think Lee had mentioned that you know, the equity, Marathon's equity is mispriced and that's why buybacks makes most sense. And I think there's, you know, largely, you know, most people will agree with that. And, you know, fundamentally, you know, your discussion also talked about, you know, you're fine with billing some cash on the balance sheet. And I'm just kind of wondering when you look at that sort of, you know, cash bill, do you think a way to, you know, bridge the valuation gap would be to You know further leaning hard with the buybacks and kind of force the issue or are there other you know things you can do with that sort of incremental cash that you think can help bridge the gap with with marathon to some of the peers.
spk03: Yeah, maybe I'll offer a comment or two and then maybe flip over to Dane. You know, I want to be really clear, Scott. You know, when we talk about the 50% of CFO as a target, that's a minimum. You know, we still have optionality to go beyond it. And then from time to time, we have already, you know, gone beyond that mark. But I'm not going to be apologetic about, you know, the fact that we're delivering still a 20% distribution yield, which leads not only our peers, but the S&P 500. And, you know, you can even look at this quarter and just the absolute shareholder distribution yield. was a record for the company. So I do believe that we're delivering strongly against that shareholder commitment. And the efficiency of the share repurchase program, the facts kind of speak for themselves. I mean, 15% reduction in dilution over a 10 month period. And that really is unrivaled in our peer group. So although I agree that we have optionality there going forward relative to that 50% minimum, I think we're putting a pretty strong case out there today when you look at the relative comparison, not only to the peers, but also to the broader market. And maybe, Dave, you want to say a little bit about our thinking about just cash on hand and how we consider that.
spk06: Yeah. So to your point, Lee, I think our commitment to significant returns is there. We have almost a 20% annualized distribution yield. The quarter was so strong with realized pricing with the operational and financial execution that Even with those returns, we built about $500 million in cash. My perspective, as long as our return objectives are being met, modestly building some cash on the balance sheet is a positive thing. We're obviously in a highly volatile commodity price environment. One thing to keep in mind. But there really aren't any bright lines around the amount of cash in my mind. some buckets that I sort of think of as we manage our cash balance. First, I'd like to have a minimum of $500 million on the balance sheet just to handle inter-month working capital swings. We do have a couple of debt maturities coming up in 23 and 24, $400 million in each year. We intend to retire that debt with cash on hand. So, preparing for that time when prices are strong is a good thing. And it also provides us the flexibility to act quickly on, you know, accretive bolt-on acquisitions that can improve our portfolio, the kind of things that Lee referenced earlier. And then, you know, holding a little more cash, you know, it's pretty prudent, I think, given the macro uncertainties, the volatility, recession risks, all the stuff we're met with every day when we turn our TV on, and even regulatory change, which we're seeing, you know, potential for that. So... having a very robust company with strong liquidity, I think is a plus. I say that. And then I'll also say our return to shareholder commitment is top priority, but also keeping a bulletproof balance sheet and ample liquidity is right alongside that in our conservative financial model.
spk03: Yeah. And I would even just add to that, you know, the work on the balance sheet and liquidity, you know, is, is, is never ending. And recently, you know, Dane and his team also extended our credit facility as well at, you know, favorable terms. And again, it gives us that runway out to to 2027 on that instrument as well. So, you know, we look at all that holistically, but again, we believe we're leading the field on shareholder distributions, but we're going to continue to challenge ourselves as we go forward, and we're going to have, you know, optionality against that minimum commitment.
spk05: Great. Thanks for that. And just as a follow-up, you know, the Permian, you know, it's, I think, been about a year since you've you know, been active with completions. And I know this quarter or the third quarter, we're going to be, you know, I think 10 to 15 wells and maybe another dozen in the fourth quarter. If you all could provide a little bit of color and context on, you know, some of the activity there and what to expect in terms of types of formation and are these multi-well pads and, you know, how we're going to kind of progress with sort of that buildup in the Permian in the second half of this year.
spk08: Yes, Mike here. I'll take that one. So, Fermin, as you mentioned, 10 to 15 wells of sales in the third quarter. We've actually got another five coming online in the fourth quarter. That excludes the Texas, Delaware wells. There's four of those that will come online probably late in the fourth quarter, maybe early first quarter of next year. You know, with the exception of the first five wells that we've brought to sales this year, the majority of the remaining program, they're all going to be two mile laterals. And then by 2023, we're pretty much into only bringing on two mile laterals. You know, I say that because these two mile laterals, what we're seeing is on a kind of normalized, complete CWC than the single mile lateral. So team has done an exceptional job there in the trade front, moving away from these SLs to these XL wells. And actually we're active at the moment looking to potentially get into some three milers as well. Maybe coming back to 2022, how I'd describe the balance of the year, we're going to be bringing on wells in some of the high confidence areas. Red Hills, Upper Wolf Camp, and then followed by Malaga, Upper Wolf Camp. Probably 60% in Red Hills, 40% in Malaga, the Welsh, to sales. Just a quick bit of commentary on the Welsh that we have brought to sales. They've only been online a few weeks, so still early, but I think we're encouraged by the performance thus far, and maybe I'll just highlight the team have definitely taken advantage of the break in activity and I know I'm pretty excited about potentially what we're going to deliver, not only this year, but also next year in the Permian.
spk05: Thanks for that.
spk08: Thanks, Scott.
spk09: We have no further questions at this time. I will now turn the call over to Lee Tillman for closing remarks.
spk03: Thank you for your interest in Marathon Olin. I'd like to close by again thanking all of our dedicated employees and contractors for their commitment to safely and responsibly deliver the energy the world needs now more than ever. Thank you very much.
spk09: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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