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spk08: Good morning and welcome to the MRO first quarter 2022 earnings conference call. My name is Brandon and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct the question and answer session, during which you may dial 01 if you have a question. Please note it is 01, not star 1. As a reminder, this conference is being recorded. I will now turn the call over to Guy Baber, Vice President of Investor Relations. And you may begin, sir.
spk10: Thanks, Brandon, and thank you to everyone for joining us this morning. Yesterday, after the close, we issued a press release, slide presentation, and investor packet that addressed our first 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 article materials, including reinvestment rate and adjusted free cash flow generation. Mentions of free cash flow generation today refer to our adjusted free cash flow before working capital and inclusive of EG, LNG return of capital. With that, I'll turn the call over to Lee who will provide his opening remarks. We'll also hear from Dane and Mike today before we move to our question and answer session. Lee?
spk01: Thank you, Guy, and good morning to everyone listening to our call today. To start, I want to thank our employees and contractors for their dedication and hard work during these most dynamic times, as well as their commitment to our core values of safety and environmental excellence. In light of current events, including geopolitical tensions, economy-wide inflationary pressures, and the highest global energy costs we have seen in some time, I want to briefly provide some context around the current energy market. First, we believe Marathon Oil, as a global oil and gas producer, has a clear and much-needed role to play in the longer-term energy landscape. This belief has only been reinforced as energy markets have struggled to respond to a confluence of factors. continued demand recovery from the pandemic, struggling global supply chains, labor shortages in a fully employed U.S. labor market, and systemic underinvestment in both new oil and gas supply and the requisite infrastructure. The invasion of the Ukraine by Russian forces has only exacerbated these pressures, upending geopolitics and creating a level of uncertainty and hostility between NATO and Russia that has not been experienced since the Cold War. The reality is that energy markets were already tightening from supply and demand fundamentals before this Russian action, and the risk premium now embedded in commodities, including oil and gas, has returned with a vengeance. Even in the unlikely event of a near-term resolution to this crisis, the die has been cast, and actions, particularly by European countries, are already underway to move away from Russian oil and gas and secure more reliable supply from the Middle East and the U.S. And here at home, these events are only adding to an inflationary environment that has once again put energy on center stage, inflation that impacts every American family. It has underscored the need for an orderly energy transition that includes oil and gas as part of an all of the above strategy and has recalibrated global views as to the current and ongoing role of U.S. oil and gas in the world economy. Our mandate is clear, and it is a statement of Marathon Oil's corporate purpose, to help responsibly meet the world's growing energy needs by operating with the highest standards, prioritizing all elements of our safety, environmental, social, and governance performance, while delivering strong financial returns for our shareholders. Oil and gas are essential to any orderly multi-decade transition to a lower-carbon future. Rather than an energy transition, it is more of an energy expansion to both meet growing world energy demand and mitigate global GHG emissions. This is not an either-or proposition, and failure on either front is not acceptable. However, our approach must be pragmatic and grounded in the free market, innovation, and an all-of-the-above energy approach. Company strategies grounded in free market principles and a thoughtful analysis of competitive dynamics and long-term fundamentals are good for energy stability and security, the U.S. consumer, and the longer-term health of our industry. At Marathon Oil, we have conviction that we are pursuing the right strategy for 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, and meaningful return of capital to our shareholders through the commodity price cycle, all underpinned by a high-quality portfolio, a bulletproof balance sheet, and a transparent commitment to comprehensive ESG excellence. Importantly, first quarter represented another quarter of comprehensive delivery against this framework. I would like to focus on three key takeaways today. First, we are continuing to build a peer-leading track record and, quite frankly, a market-leading track record of return of capital to our shareholders. Our cash flow-driven return of capital model uniquely prioritizes our equity investors as the first call on cash flow, not the drill bit. And our continued execution underscores our commitment to our shareholders and highlights the power of our portfolio in a constructive price environment. Over the trailing two quarters, we've returned around 60% of our CFO or over $1.4 billion to our shareholders. To clarify, that's 60% of our cash flow from operations, not our free cash flow. This actually equates to almost 80% of our free cash flow over the same period. In total, we have now executed over $1.6 billion of share repurchases since last October, driving an 11% reduction to our outstanding share count in just seven months. And those shares were repurchased at a price below $19 a share. a discount of over 25% relative to today's trading price, demonstrating the power of consistent dollar averaging. We are significantly growing all of the per share financial metrics that matter most to our equity valuation. Under current market conditions and given our free cash flow yield, we continue to believe buybacks remain an excellent use of capital. And consistent with that view, our board of directors has increased our outstanding buyback authorization to $2.5 billion. We also just raised our quarterly base dividend for the fifth consecutive quarter. My second key point is that first quarter was again another quarter of solid, consistent execution. We generated $1.3 billion of cash flow from operations and $940 million of free cash flow, both before working capital, at a reinvestment rate of just 27%. And we returned $640 million, or 50% of that CFO, back to our shareholders. The strong financial performance was underpinned by solid operational execution, consistent with the guidance we provided on last quarter's call, including $348 million of capital spending and 168,000 barrels of oil production per day. My third key takeaway is that Marathon Oil represents a truly compelling investment opportunity. We've re-based our 2022 financial outlook to pricing more consistent with the current environment, $100 WTI and $6 Henry Hub. At these prices, we expect to generate over $4.5 billion of free cash flow this year at a reinvestment rate of just 20%. That translates to a free cash flow yield of about 25% on the current equity value. That's also a $1.5 billion free cash flow uplift versus the initial financial outlook we provided the market in February, net of $100 million of incremental capital inflation and at a lower reinvestment rate. This uplift highlights our unique torque to higher commodity prices due to our more advantage cash tax outlook, preservation of our upside exposure through our head book, and balanced commodity exposure. This includes our unique integrated gas position in Equatorial Guinea, where we are raising our annual equity income guidance by $200 million, or by 67%. I have long said that our company and our sector must deliver truly outsized financial outcomes relative to the S&P 500 during periods of constructive pricing to attract increased investor sponsorship. we are successfully delivering on this obligation. I will now pass it off to Dain, who will give you a financial update highlighting how most of the free cash flow I just mentioned will be going back to our equity holders.
spk04: Dain Heer Thank you, Lee, and good morning, everyone, on the call. I'll speak to slides seven through nine of our deck, largely focusing my comments on our return of capital accomplishments and outlook. First off, our return of capital framework is summarized on slide seven, and remains unchanged. In these uncertain times, we believe the market will reward consistency, transparency, simplicity, and delivery. Marathon Oil has built a hard-earned reputation for execution excellence and delivering on our operational commitments. We've likewise now established the same credibility in return of capital to our shareholders. 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 per barrel. This represents a return of capital commitment at the top of our E&P peer space and is competitive with any sector in the S&P 500. The overall objectives of our framework are to maintain capital return leadership versus peers in the S&P 500 maximize our equity valuation, reduce downside equity volatility by providing clear minimum capital return commitments tied to specific commodity price environments. We also aim to provide the market with transparency around the return of capital quantum while preserving flexibility to deliver that return via the most secretive and efficient mechanism in light of prevailing market conditions. Today, that mechanism is a competitive, sustainable base dividend and a material share or purchase program. Importantly, as Lee mentioned, our return of capital targets are based on our cash flow from operations, not our pre-cash flow. This is purposeful, intended to make clear that our shareholders get the first call on cash generation. It's consistent with our conservative reinvestment rate approach to capital spending, and importantly, it represents a stronger commitment to our shareholders in an inflationary environment. While frameworks and commitments are important, we believe establishing a consistent track record of delivery, quarter in and quarter out, is ultimately key to building and maintaining trust and credibility in the marketplace. Over the trailing two quarters, we've returned approximately 60 percent of our CFO back to equity holders through our base dividend and share of our purchases. Since October of last year, so in just over seven months, We bought back over $1.6 billion from our stock and reduced our outstanding share count by 11%, driving truly differentiated per share growth. We've also raised our base dividend five quarters in a row for a cumulative increase of 167% since the beginning of last year, consistent with our objectives to pay a sustainable base dividend that's competitive with our peers, the S&P 500, and similarly sized industrial companies. Turning to the full year 2022 outlook on slide nine, with no material debt maturities this year, a constructive commodity price backdrop, and our commitment to capital discipline, an expected reinvestment rate of just 20%, we expect to continue to meaningfully outperform our minimum 40% CFO commitment. During the first quarter, we returned approximately 50% of CFO with our pace being somewhat moderated by a negative $200 million working capital impact that accounted for about 15% of our cash flow generation in the quarter. If the current macro holds up, it's reasonable to anticipate us returning at or above this 50% level going forward. To put this into context, that would represent a total return of capital of at least $3 billion this year with upside potential. As I stated, we continue to believe that the combination of a competitive and sustainable-based dividend, along with the material share or purchase program, makes the most sense for our company. Consistent with this view, the board again reset our outstanding buyback authorization to $2.5 billion, giving us plenty of room to continue to execute confidently in coming quarters. And while our equity value has appreciated since we kicked off our buyback program, our free cash flow yield has actually appreciated even more. We're trading at about a 25% free cash flow yield at $100 oil. Even testing buybacks at our current share price against a longer dated forward curve of $60 to $70 WTI, our free cash flow yield is in double digit territory. Buybacks remain a very good use of cash as we believe our equity is fundamentally mispriced. As long as that's the case, we'll continue to aggressively repurchase our own stock. It's the best acquisition we can make. We also continue to believe that disciplined shareholder purchases offer clear strategic advantages. In addition to driving strong underlying per share metrics that are correlated with shareholder value, they also offer clear synergies with our base dividend. One final housekeeping topic for me before I turn the call over to Mike, and that's U.S. federal income taxes. with what we've said before, even at prevailing commodity prices, we don't expect to pay cash federal income taxes until the second half of the decade. However, you've probably noted that in one queue, we partially reversed the valuation allowance we've been carrying on our deferred tax assets and are now booking U.S. deferred taxes at the statutory rate. By way of background, at year-end 2016, we established a valuation allowance for 100 percent of our net deferred tax asset. At the time, we had billed a cumulative three-year tax loss, which, along with depressed commodity prices, was evidence that we may not realize our deferred tax assets in the future. That's why we've been booking a zero percent tax rate in the U.S. since 2017. In 1Q 2022, our three-year cumulative tax loss was erased and is now positive. And given the improvement we've recently witnessed in the macro, our strong performance, and the fact that we expect to continue earning net income, we made the decision to reverse the lion's share of our valuation allowance in the first quarter. This just means we're now accruing U.S. tax expense at the normal statutory rate, 21% federal and 1% state. That's important for modeling purposes because both taxes will have an impact on your EPS estimates. However, this is important, there's no impact on cash flow. The approved tax is all deferred and has no direct bearing on the timing or transition to U.S. cash tax paying status. I'll now turn the call over to Mike who will discuss our 2022 capital program and associated financial outcomes. Thanks, Dave.
spk07: My key message today is that the priorities for our capital program remain unchanged. With higher prices, we are staying disciplined, prioritizing free cash flow generation, and protecting our execution excellence. We feel very confident about delivering free cash flow, capital efficiency, and operating efficiency at the very top of our peer group, while maintaining a bulletproof balance sheet. First, an updated outlook of the financial performance we expect our program to deliver this year. We have rebased our 2022 outlook to reflect the current commodity price environment, $100 oil and $6 Henry hub. At this price deck, we now expect to generate over $4.5 billion of free cash flow at a 20% reinvestment rate and on an inflation-adjusted $1.3 billion of capital. We have also raised our EG equity income guidance by $200 million. This represents a $1.5 billion free cash flow uplift From the original outlook, we provided at a lower reinvestment rate net of $100 million of incremental capital inflation. Even with this modest incremental inflation of about 8%, our 2022 financial performance still has the lowest reinvestment rate and the highest capital efficiency of our peers. Now let me address the inflationary backdrop in more detail. As a background, we came into 2022 assuming 10 to 15 percent inflation based on a price view of $80 WTI and $4 Henry Hub. That's what was baked into our original $1.2 billion budget. We opted to provide a deterministic budget estimate based on this pricing outlook as opposed to a broad range. We are now assuming a $100 price environment, and if that price environment is sustained, we're going to see some incremental costs. pushing inflation north of 15% and closer to the 20% range. That's effectively what today's update of $1.3 billion reflects. And that $1.3 billion is all in capital, reflecting our total projected capital spend in a $100 price world. Part of that increase is commodity-driven, largely fuel and chemicals, which trend with WTI, as well as steel, It also reflects our efforts to protect the execution of our 2022 program. Prices are high, the labor pool is thin, and supply chains globally and U.S. economy-wide are very tight. We are therefore focused on securing established and trusted service providers to protect our execution excellence and deliver our business plan. To that end, we feel confident about 90 of our remaining rig time for 2022 is now secured on long-term contracts running into 2023 the majority of our pressure pumping leaves are now tied down as well we feel very good about access to both sand and steel although as mentioned we do have some open steel pricing in the fourth order which we've now accounted for to be clear we are only updating our budget incremental inflation, assuming a sustained $100 world. We are not adding any growth capital due to higher prices. We are staying disciplined, prioritizing free cash flow, and protecting execution. Additionally, our full-year guidance for both oil and oil equivalent production remains unchanged, despite some significant winter weather impacts in the Bakken during April that essentially shut down the Williston Basin. With respect to the near-term outlook, we expect second quarter oil production to be flat relative to actual first quarter oil production, or about 168,000 barrels per day. This is primarily due to the reference severe winter storms in the Bakken during the month of April, which will likely have a negative second quarter impact of just over 4,000 barrels of oil per day and a similar impact on oil equivalent production. thus relatively flat quarter and quarter oil production with no change to the full year range for oil or oeb's as a solid outcome given the magnitude of the weather challenges in the willison basin we do expect oil production to recover into the third quarter with second half 2022 output expected to average above the midpoint of our annual guidance on capital spending First quarter capex was consistent with the guidance we provided last quarter. Also consistent with what we indicated last quarter, this year's budget will be slightly first half weighted with approximately 55 to 60 percent of our full year capital spend expected during the first half. There is no change to plan wells to sales overall or at a basin level. I will now turn it back for Lee, who will close out our prepared remarks.
spk01: Thanks, Mike. Before we move to our question and answer session, I want to wrap up with a compelling investment case for Marathon Oil. Recent shocks to the global energy market are outside our control and will test our sector's ability to maintain discipline while also being part of a long-term solution for the U.S. and our allies. There can't be energy security without a viable U.S. independent EMP sector. And for that to happen, as publicly traded entities, we must offer an investable thesis that competes with the broader market. We fully recognize that investors have options. So why MRO? First, we have instituted a transparent capital framework that uniquely prioritizes our shareholders as the first call on cash flow generation. Our framework is complemented by a track record of delivery, 60% of CFO to equity holders over the last two quarters. And it's my expectation that we will lead our peer space in returning capital to shareholders in 2022. Second, when it comes to growth, our focus is not on growing production. It's on growing the per share metrics that matter most. And we have already driven underlying per share growth of 11% in the last seven months, with more to come. Third, due to our balanced production mix, low corporate free cash flow breakeven, attractive hedge book, and advantage U.S. federal cash income tax position, our company retains a differentiated upside leverage to commodity outperformance. We will continue to protect this upside for our investors. That is reflected in the $1.5 billion uplift free cash flow guidance for 2022, including a $200 million increase to EG equity income. And finally, we believe the peer-leading financial and operating results we are delivering today are sustainable. underpinned by over a decade of high-quality, high-return inventory, by our five- and ten-year benchmark maintenance scenarios, and by our commitment to comprehensive, longer-term ESG excellence. The continued responsible development of oil and gas is crucial to protecting the standard of living we have all come to enjoy and, quite frankly, take for granted. And just as important, it's central to elevating the current standard of living for billions of people around the world, many of whom are in developing countries living in energy poverty. Access to responsible, reliable, affordable energy is the great social equalizer and the foundation upon which the world's modern economy is built. We are proud to play our role as a responsible global supplier while also supporting U.S. energy security. which protects the U.S. consumer and serves as a powerful tool of foreign policy, providing options for both the U.S. and our allies. With that, we can open up the line for Q&A.
spk08: Thank you. We will now begin the question and answer session. We ask that you please limit yourself to one question and one follow-up. If you have a question, please press 01 on your phone keypad. Please note it is 01, not star 1. If you'd like to move from the queue, you may dial 02. If you're on a speakerphone, please pick up your handset first before dialing. Once again, if you have a question, please dial 01 on your phone keypad. And from JP Morgan, we have Arun Jhera. Please go ahead.
spk02: Yeah, good morning, gentlemen. Lee, I was wondering if you could provide some thoughts on the broader LNG strategy and how does the company plan to take advantage of what could be a pretty strong LNG LNG cycle in a post the unfortunate Russia-Ukraine situation. I do believe that your EG gas today is priced off of Henry Hub. I think that shifts in late 23 and late 24. And the big question we're getting is what type of operating leverage do you see? You guided the $500 million of equity income this year. If you're able to price that gas at a global level, And also thoughts on potentially opportunities that you may have to increase the throughput of that plan. Obviously, the Chevron assets are on the block, but I'd love to get some thoughts on EGLNG.
spk01: Yeah, sure, Rune. Well, first of all, I'd just like to say at an enterprise level, Rune, we do have a very balanced exposure to the commodity space, meaning that we're about 50% oil, 50% natural gas, and NGLs. A big component, obviously, of that 50% natural gas in NGLs is our very unique asset in EEG. And as you described it, you know, clearly that asset is well positioned to take advantage of not just the elevation in Henry Hub pricing, which is the index contract that we have today on the ALBA production. But via LEND opportunity, we are also able to take advantage of both tariffs through the plant as well as profit sharing, which is linked to TTF. So today, we are experiencing, you know, uplift by participating in the broader, I'd say, global LNG market. Kind of stepping back and looking to the future a bit, and we've been very clear on this with regard to EG, this is a very unique asset. It's a set of world-class infrastructure, gas plant, LNG plant, methanol plant, storage, offloading. sitting in one of the most gas-prone areas of West Africa, we are certainly a natural aggregator of gas. And our vision is that, similar to our success with the ALEN project, that we'll continue to find enhanced opportunities to baseload the terrain that we have there at Punta Europa and continue to have that exposure to the TTF market and obviously the European gas market.
spk02: Great, great. Okay. And just to follow up, Lee, you've been rewarded, I'd say, for your cash return strategy. You're returning a lot of cash to shareholders. One of the questions we get from the buy side is whether the cash return strategy is too pro-cyclical, 60%, 70% of CFO, and how do you think about balancing cash return with portfolio renewal?
spk01: Great. Yeah, thanks, Aaron. I'm going to maybe let Dane take that one.
spk04: Hey, everyone. Good morning. Yeah, you know, we obviously, like you do, monitor what our peer companies are saying about cash return programs. And I feel for you, just trying to understand, because with all the kaleidoscope of different language and different approaches out there, we've tried to be really clear about ours. And maybe I can just for everyone's benefit, maybe just go through some of that again just to make sure it's clear and then get directly to your question around procyclicality. So, obviously, we're positioned to generate a significant and sustainable amount of free cash flow. Our balance sheet's in great shape. We'll continue to pay down debt as those maturities come along. And our intent then is to return significant capital to shareholders. really want that to be competitive. We have chosen the vehicles of a sustainable and increasing of the last five quarters based dividend, along with significant share purchases, which we execute ratably, and I mean daily, ratably, and have been doing that over the last seven months now. And our minimum target in a commodity price environment over $60 a barrel is 40%. We've been obviously beating that in a commodity price environment that's quite a bit above $60 a barrel. That builds a lot of flexibility as to how we approach this return to shareholders. And so we've really consistently beat that minimum, and we expect to continue to do that. In Q4 of 2021, we returned 70% of cash flow to shareholders. We followed up this quarter with 50%. The pace was tempered a little bit in Q1 because we had a working capital deduct, if you will, of about $200 million. And that was caused, I'm sure everyone experienced it, was caused by the significant increase in oil price between February and March. And that uptick in accounts receivable that turned into cash in April was actually looked like a deduct from cash flow in the first quarter. So last week we announced our fifth increase in the base dividend. Over the last seven months, we've purchased $1.6 billion in stock and taken out 11% of our shares. So to your pro-sequicality point, we think this is kind of undeniable. The fact that we traded a free cash flow yield of 25%, which should not exist. It's like a vacuum. It should not exist in nature, that kind of a free cash flow yield. But it does, which means our stock is mispriced. in this commodity price environment. And so we feel like it's a very efficient way to return capital to shareholders and thrive per share growth over really the most important metrics that matter to share price. We'll note that over the past couple of quarters, we've been building a little bit of cash, about $100 million a quarter. That, on one hand, provides us flexibility to do things like deal with working capital swings. We funded a small bolt on in the fourth quarter of last year. In May, we're going to pay down our only debt maturity in the year. It's a little $40 million debt maturity, but we can pay it off with cash easily. That's got almost a 10% coupon on it. So good riddance. Really happy to get that one out of the portfolio. So our intent is not to continue to build sizable amounts of cash. Our intent is to return cash to shareholders, and through that, share or purchase vehicle will be the primary vehicle as long as our share price remains dislocated as it appears to be to us. In terms of what you can expect, I'll just make the other point, too, that, you know, we've I think we're very free cash flow efficient, not just because of our cost structure, but our hedge positions are extremely low drag. So it's certainly compared to some of our peers. And we don't have any U.S. income taxes for years to come. So we're really in good position to execute this strategy. To put a range around the cash return potential for the full year of 2022, we're kind of now assuming $106 price environment. If we return at the 50% level, that could be at least $3 billion of cash returns for the full year. On the more aspirational end, if we go back and we could do this, but we're going to kind of monitor conditions as we go through the year, we repeat what we did in Q4 of 2021, returning 70% of CFO to shareholders. That would represent $4.2 billion of returns, or we north of 20% of our market cap. So very substantial impact on shareholders and we think stock price as a result of that kind of strategy. Thanks for the fulsome answer.
spk01: Also, Arun, I think you mentioned as well kind of balancing against, you know, resource opportunities as well. You know, I would probably address that by first of all just, you know, restating that, you know, we do have more than a decade of capital efficient high return inventory at kind of a maintenance pace. And that's really based on a pretty conservative price assumption. And obviously that inventory would move north of that. That inventory life would move north of that under the current pricing environment. And that's even before taking credit for things like our success in the Texas Delaware oil play. We have largely replaced all of the top tier inventory that we've consumed over the last few years. through organic enhancement initiatives. And if you recall, we dedicate, you know, nominally 10% of our capital program each and every year. So embedded in that $1.3 billion is investment to continue that organic enhancement initiative, as well as to continue to progress things like the four-well pad that we're doing and the exploration play and the Texas Delaware oil, which is the Woodford Merrimack play. So we don't view this as an either-or proposition. We're looking at continuing to reinvest in organic opportunities, but also being very aggressive with our return of capital back to shareholders.
spk08: Great. Thanks, Lee. From Tourist Securities, we have Neal Dingman. Please go ahead.
spk10: Morning, Neal. Neil, you might be on mute.
spk04: We're not hearing you, Neil. You may be on mute.
spk10: Hey, Brandon, maybe just go to the next.
spk08: Sure. From Bank of America, we have Doug Leggett. Please go ahead.
spk06: Okay, thanks, everybody. Can you hear me? I just wanted to check my head so it's connected okay. Can you hear me okay?
spk01: Yeah, Doug, you're coming in loud and clear, Doug.
spk06: Oh, excellent. Thanks, Lee. Thanks for taking my question. So, Lee, I want to have a go at tackling this EG question a different way. I think you know we've been real interested to try and understand the operational leverage as everyone asked, but I want to ask the question a little differently. The whole industry's got windfall cash right now, and it seems to us that as the logical buyer of the Chevron assets, clearly you mentioned yourselves being a consolidator, it could potentially transform, in our opinion, the outlook for that business by really bolstering the backlog of gas for the ULG and the LNG facilities. So my question is this. While you've not been prepared to talk about the commercial terms of the tolling agreement, if you own that gas organically, would it make a material difference to the free cash flow outlook had you to, you know, leaving aside the value of the acquisition potentially, but had you to own that gas, would it make a material difference to the free cash flow outlook net to you or EG?
spk01: Yeah, thanks for the question, Doug. And I think first of all, you know, I appreciate the recognition of the contribution that we get from the EG asset. And obviously with, I think, the dynamics that we're seeing in the global gas market, I think the value of EG has really vaulted even ahead of maybe where we would even have placed it. I think maybe I'll start by just addressing kind of just kind of the M&A kind of element of your question. First and foremost, I think for us, we are going to view all opportunities through the lens of our high confidence organic case that delivers significant free cash flow and really a market leading return of capital. And of course, as we just talked about, it's underpinned by this over a decade of high return inventory. So when we assess opportunities, the bar is very, very high. It's going to have to be accretive to that organic case. It's going to have to compete with a suite of opportunities that are very high quality and very high return. So the bottom line is the same discipline that we've been talking about in our organic program, certainly that's going to apply in the inorganic space as well. On EG specifically, I think we have always noted EG as a core element of our portfolio. We've always noted that there is opportunity in EG to drive more gas to this very unique world-class infrastructure. I can't comment, obviously, specifically on opportunities that may be or may not be in the market, but clearly to the extent that we control our own molecules that are flowing through Punta Europa, that will generate incremental value for the company. So similar to, I would say, the Alend project. which, again, are third-party molecules in this case. They're not equity molecules like ALBA, but the Elen molecules are very accretive. And even though we're, from an ALBA perspective, maybe on a long-life low decline there, with accretive additions like Elen, we're able to continue to generate very strong financial outcomes, even though our equity production may be on a bit of a decline.
spk06: I know it's a tricky one to answer, but sorry, let me just get to the root of my question. So it would be positive of UMD assets or no?
spk01: Well, I think I would just look at it like this. Just like we talk about bolt-ons in the U.S. and existing bases where we have execution competence and experience, an international bolt-on in an area where we already own and operate assets, clearly we have high competence in our ability to drive value.
spk06: Sorry for flogging that one. My follow-up is real quick. Obviously, gas in the U.S. I'm curious how this changes your thoughts on capital allocation, inventory depth, specifically in the Anadarko. Obviously, we're facing a very different gas environment today than perhaps your original planning assumptions. I'll leave it there. Thanks.
spk01: Yeah, no, thanks, Ed. Yeah, I go back to a few of my earlier comments, which is, you know, one of the positives we have in our portfolio today is that we do have broad exposure across the commodity complex. You know, that 50 percent, again, of our exposure is in gas and NGLs. Obviously, some of that domestic, some of that through the EG asset. We are allocating about 25 percent of our capital this year to the Permian and Oklahoma. That's up significantly relative to last year. You know, I think this is a time, though, where the commodity complex is really lifting all boats. So oil and gas are both – which has the net effect of uplifting the economics of the whole portfolio, not just the combination play that might be more reliant on natural gas. But clearly those opportunities look very, very strong. And back to my earlier comments that when we talk about our inventory and inventory life, that's typically predicated on a very conservative view of forward pricing. Think about it more in terms of $50 WTI, $3 WTI. Henry Hub. And so to the extent that we were to apply a different price deck to that, obviously the top tier component of that inventory would increase and we would likely bring more inventory into the economic window. even on projects like for instance are the work that we're doing today in the woodford merrimack and the texas delaware oil play and i want to emphasize that is an oil play i know obviously it's high pressure and we get associated gas that comes with it but that's a great example of another opportunity that was already moving to compete for capital but now in the current commodity pricing will be even that much stronger and may allow us to even drive more inventory from that opportunity.
spk06: Thank you so much. We appreciate your answers.
spk01: Thank you, Doug.
spk08: From Barclays, we have Janine White. Please go ahead.
spk00: Hi. Good morning, everyone. Thanks for taking our questions.
spk10: Good morning.
spk00: Good morning. Our first question may be for Lee or Dane, hitting back on the cash returns. Dane, you provided a lot of helpful color in response to Arun's question. And we just wanted to dig a little bit further into the parameters of getting to that full 70% upside case. You mentioned that you were going to monitor conditions. And based on our free cash flow forecast, Marathon can continue to build a healthy amount of cash, even if you're paying out at the 70% level. So we just wanted to know if you had any more color on the parameters that might get you to that 70% case.
spk04: Yeah, Janine, let me take a crack at that, and Lee may want to chime in as well. We are certainly, I think part of your question is, are we responsive to macro conditions and business conditions in how we kind of throttle our share over purchase program? And the answer to that is yes, we are. We saw a significant uptick in cash flow in Q4 and Q8. felt comfortable taking it all the way up to that 70% level in the first quarter. This year, as we guided, we kept it at 50%. We did experience that impact of the working capital deduct, if you will. So we kept that in mind. If you look at the pace of repurchases, year-to-date it's $900 million. And in Q1 proper, it was $592 million. That will imply that we've increased the daily pace of purchases in the second quarter in response to operating cash flow improvements and quantity price and other things that are driving that. So, we'll be responsive to macro conditions and also other considerations along the way. And that's why we're not being – we try to be pretty formulaic and pretty specific to get you that 50 percent guidance. and let you know clearly there's upside to that, but I can't paint more of a bright line to the 70 percent and all the considerations We are very committed to consistent, strong returns to shareholders through share reverses. I think we've demonstrated that since we started with Q4.
spk01: Yeah, Janine, maybe if I could, this is Lee. I think you should expect that there's going to be some natural variation quarter to quarter in the delivery against that percent CFO. As Dane mentioned, we're going to be forward looking at, you know, where the commodity prices are headed. You know, we're going to think about the unique features of that quarter. For instance, as Dave mentioned, you know, fourth quarter, we definitely had some tailwinds that helped us. You know, when you think about that was the peak oil production for the year. We had a significant EG dividend in fourth quarter. We had some natural decline in CapEx from an activity standpoint as well. So there were a lot of unique features that allowed us to stretch to that set 70% target. Similarly, as they mentioned in the first quarter, we had some headwinds there. We had a bit of a working capital negative that we had to account for. So all of those will be stewed into that forward look. And remember, the 10 programs are typically looking ahead 30 to 45 days. But they don't restrict us Once we set that base program, we can still enhance that program using 10B18 instruments along the way as perhaps we do take advantage of some of those tailwinds that might present in any given quarter. But, you know, we kind of look through the quarters and, you know, our view is that we want to be certainly now in the current price environment at or above that 50%. CFO going forward through the year. And we're clearly going to look for opportunities to beat that when we see those kind of unique features in a given quarter.
spk00: Okay, great. Thank you. That's really helpful. You know, we love our models, but we can appreciate, you know, it's not that simple in real life. Okay, moving to inflation. In the current environment, there's inflationary headwinds, there's supply chain headwinds. Can you provide a little more color on how Marathon is positioned in both of these? In particular, like a lot of your peers have given this percent of total well cost that's locked in. You mentioned you have 90% of your rigs locked in, a bunch of your pressure pumping. So maybe if you have that percentage, it would be helpful for us for comparison. And maybe also, how is your planning process for 2023 different from prior years? We're just trying to figure out implications for next year. Thank you.
spk07: Hey, Janine, it's Mike. I'll take a stab at that one. So as we highlighted this morning, we came into the year assuming 10% to 15% inflation, and that was based on that $80 WTI, $4 Henry Hub environment. Again, as we announced, we're kind of rebasing that outlook. We're going to assume a 106 price environment. Those prices are sustained. We're going to see some incremental costs, and really that was focused back into the announcement. You know, certainly recognize the market is tight across the board. It's likely going to stay that way if prices are sustained. You know, activity levels, particularly the privates, have increased. Accessing labor has become a real challenge. And I think as a result of that, we're all seeing a tighter market. Maybe specific to the update today, what I'd say is out of the $100 million increase, I would say 50% of that is directly linked to commodities. So fuel and chemical costs, which have been trending higher with WTI. I've got FIGRED in there. We also mentioned we're also anticipating some higher steel costs later in the year, just with the sustained demand and supply constraints. I think just given that backdrop, given the price environment, given how tight everything is, Our focus and our priorities probably shifted to more securing, I guess, protecting, securing our ability to execute. I think that accounts for the additional 50% of the increase that we announced this morning. Again, we discussed having 90% of our remaining rig time in 2022 locked in and secured on contracts. Some of those do run into 2023. Similarly, pressure pumping. We've got the majority of the scope tied down there. I think it is worth highlighting here that in both of those areas, we are termed up with companies who we're currently working with. So we've got some established relationships and, quite frankly, do an excellent job for us. On the sand front, I'd say we're close to 100% of our needs secured for the year. And mentioned steel, we've got capacity secured for all of the year, but there is a little bit of open pricing in the fourth quarter. So maybe how I'd characterize it, we've locked down and accounted a large percentage of our 2022 spend, but I think you've got to recognize that the market is fairly dynamic. Maybe as it relates to 2023 and our plans there, I think it would be fair to say we're starting a little bit earlier than maybe we would normally. Again, I mentioned we do have some contracts rolling over into 23, so rigs, sand, steel. We've also got some hydraulic horsepower options. Some of those are index length. And certainly, you know, where it makes sense, we're going to look to leverage our 2023 program early to really try to secure access and even favorable terms. But, I mean, it is a volatile, fairly dynamic market. We're cognizant of that. So, you know, it's difficult to predict when things are going to calm down, but I think they will. And I think it's just therefore important that we do strike the right balance as we look forward into 2023.
spk01: I think, Janine, to your question around, you know, well, how are we thinking about it differently? Obviously, we haven't been in an inflationary environment for quite some time. And so, you know, kudos to our supply chain team. You know, they have leveraged, you know, stepping into a little bit of 2023 to help us really secure some of that execution confidence there. and certainty that we need to deliver the 2022 plan. So I think the difference is we're having to step into 2023 a little bit earlier, kind of with that maintenance activity mindset, and start building upon that and getting ready for what will continue to be a very dynamic market that I think is challenging for anyone to predict right now. So the best thing we can do is get started a bit earlier.
spk00: Very helpful. Thank you.
spk08: From Truist Securities, we have Neil Dingman. Please go ahead, sir.
spk11: Try this again. Morning, guys. My first question may be for you, Dane, on hedging. I'm just wondering, given your ironclad balance sheet, you all have appropriately refrained from putting on hedges. However, it's interesting today to see some of the natural gas callers available. Does this cause you to potentially reconsider the plan?
spk09: Neil, this is Pat. I'll take that one. Yeah, you probably saw in our release that we did just recently take – some 5x19 two-way gas collars. The market was there for us, and it was a good opportunity to set the floor in five, so we did that. But to your broader question, given our strong financials, and I think we covered this a little bit last time, we've intentionally kept that leverage for our shareholders to the upside. So we're minimally hedged, particularly compared to our peers. We've kept that open for our shareholders to see. anticipate in that. And then the bit of oil hedging we have done, we've intentionally linked that to our return on cash framework. So most of our three-way collars are set to floors around $60, which ties to our minimum of 40% cash flow from operations back to the shareholders. And I think as we've talked about, it's just one component of how we look at our commodity risk management. We have the strong balance sheet, our low-grade So we don't see a need at this point to go and block on a bunch of hedges. I think we can be patient and opportunistic, just like we were recently with this cash hedge.
spk11: No, it's great to hear. And then just follow up on EG. The asset continues to generate very strong free cash flow. Do you all have ability to increase capacity, or just could you talk about potential upside, further potential upside in EG? Sure.
spk01: Yeah, I think for, Neil, this is Lee. I think for EG, Neil, you know, the goal there is clearly to take advantage of what's in the market today. I mean, we have, you know, the ALBA molecules essentially linked to Henry Hub, but only through the end of 2023. And then we can renegotiate that deal based on, you know, market conditions, you know, at the time. The ALIN, you know, third-party molecules are a little bit different. We get, you know, the tariff uplift. plus kind of a percentage of proceeds linked to TTF on the back end of that. The goal right now really is just to continue to maintain and load the train, the base load of the train that we do have at EGLNG. And, you know, Olin, you know, we view as a great bridging project to really load in the interim while we continue to pursue other backfill opportunities. It's there, and so the best use of that infrastructure is to fully load it. And so we're already clearly thinking about what comes after a LEN, what's next to allow us to drive more gas to the base load LNG train that we have in EG. So that's really the focus, Neil.
spk11: No, great to hear. Thanks for the details, Lee.
spk08: From Benchmark, we have Subhash Chandra. Please go ahead. Yeah, hi, Lee.
spk05: You know, so your strategy has been a winning strategy, right, clearly. Just trying to, I guess, reconcile that with what seemed to be the message in your intro of a more prominent role for, you know, U.S. hydrocarbons globally, et cetera, et cetera, with this sort of, you know, commitment more or less to a maintenance program. and optimization of return of capital program. So just trying to understand, is there a point where the curves cross that would maybe have you play a more aggressive role in what seemed to be in your commentary?
spk01: Yeah, no, great question. I think my starting point would be that first and foremost, obviously, we strongly condemn the Russian aggression that or witnessing against the Ukrainian people. And just to be very clear, we have no operational exposure or dealings with Russia whatsoever. But to your point, I mean, when we think about our strategy, we think about it more from a long-term perspective. The crisis that we're in today is something that clearly is serious, but it is a near-term point-in-time crisis. And if you recall, also in my comments, I made the statement that there were already supply and demand fundamentals that were tightening the market in the base case even before we saw some of these geopolitical events unfold. Our strategy is going to remain premise on discipline. And the reason I think that's important is that, you know, without that discipline, without having an investable thesis, then we're not going to have a domestic EMP business to lean on. whether it's in normal times or at a high point in the cycle like we're experiencing today. So I think we do have the right strategy. We do have within our framework an ability to grow up to 5% if that makes sense from a financial delivery standpoint. But clearly any action that we would take today would have little or no impact on on the market that we're experiencing. I mean, for one thing, I mean, obviously our volumes are 0.002% of the global volume. So even from a materiality standpoint, they could not move the needle, but also just the practical side of the cycle time, even though we're a short cycle business, If we start investing today, we're still six months to longer out in time, and that investment would be made in a hyperinflationary environment where we can't really count on labor, we can't really count on supply chains. To be able to support that. And then I think finally, I think that, you know, we have to recognize that this still is a capital intensive business. I mean, we reinvest more of our cash flow than the S&P 500 average just to keep our business flat. And I think sometimes that's lost on folks. So even though there is not growth capital per se, there's an incredible amount of capital that has to be put to work just to keep the production where it is. I think stepping back beyond just marathon, I think the positive is that, you know, coming out of the pandemic that there is going to be some natural growth in the U.S. liquid space. And I think that is going to support markets and ultimately will help. with the price side of the equation. But our expectation is that capital discipline still rules. That is the model to be. We're going to be focused on that financial delivery. And by keeping a healthy company and a healthy sector, we are going to deliver that energy security that we've seen really come under threat because of some difficult policy decisions perhaps made both here in the U.S. as well as elsewhere.
spk05: Thanks for the clarity, Lee.
spk08: Thank you. We will now turn it over to Lee Tillman for closing remarks.
spk01: All right. Thank you for your interest in Marathon On. 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.
spk08: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for joining. You may now disconnect.
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