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spk03: Welcome to Marathon Oil third quarter earnings call. My name is Cheryl and I will 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. If you'd like to ask a question, you could do so by pressing 01 on your touch-tone phone. As a reminder, the conference is being recorded. I will now turn the call over to Guy Baber, Vice President, Investor Relations. Sir, you may begin.
spk05: Thank you, Cheryl, and thank you as well to everyone for joining us on the call this morning. Yesterday, after the close, we issued a press release, a slide presentation, and investor packet that address our third quarter 2022 results. Alongside those standard earnings materials, we also issued a separate press release and slide deck addressing our acquisition of Ensign Natural Resources Eagleford assets. All of 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 the presentation materials, as well as to the risk factors described in our SEC filings. We'll also reference certain non-GAAP terms in today's discussion, which have been reconciled and defined in our earnings materials. With that, I'll turn the call over to Lee and the rest of the team, who will provide prepared remarks. After the completion of the remarks, we'll move to a question and answer session. So, in the interest of time, Please. Thank you, Guy, and good morning to everyone listening to our call today. To start, as always, I want to first thank 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 a results-driven company, but we are equally focused on how we deliver those results. I'm proud of our entire organization. As Guy mentioned, in addition to our standard quarterly earnings materials, we're also very excited to discuss our acquisition of Ensign Natural Resources Eagle Proof Assets, a truly compelling opportunity for our company that furthers each and every one of our core strategic objectives. While there's no shortage of highlights from our third quarter financial and operational results, Our continued return of capital leadership is certainly near the top of the list. In fact, our third quarter shareholder distribution set a new record for our company. Dane will start there and provide a bit more context around our return of capital success. And then Mike will walk us through our third quarter financial and operational results and outlook in more detail. We will then spend the balance of our opening remarks on our material expansion in the Eagle Fork. Needless to say, we have a lot of ground to cover today, so let's get started. Over to Dave.
spk10: Thank you, Lee, and good morning, everybody. Returning a significant amount of capital to our shareholders through the cycle is a foundational element of our value proposition in the marketplace. As we've consistently highlighted, we believe our return of capital framework is differentiated in our peer space, uniquely calibrated to operating cash flow, not free cash flow, prioritizing our shareholders as the first call on our cash generation. This is especially important in a market characterized by inflationary headwinds and represents a strong commitment to our shareholders. And during the third quarter, I'm pleased to announce that we've further built on our return of capital leadership by setting a new quarterly shareholder distribution record for our company, corresponding to over 80 percent of our CFO, and essentially 100 percent of our free cash flow to equity holders. Total third-quarter shareholder distributions amounted to $1.2 billion, translating to an annual distribution yield of around 24 percent, a yield that's not just at the top of the E&P peer space, but at the very top of the S&P 500. While we had guided third quarter return of capital to at least 50 percent of our CFO, due to strong operating and financial performance, our financial strength, including our replenished cash balance, and favorable market conditions, including clear value in our stock price, we saw an opportunity to materially step up the pace of repurchases. We bought back $1.1 billion of stock during the third quarter. The timing of our decision proved beneficial, as third-quarter buybacks were executed at an average price of around $24 a share, well below current trading levels. While our commitment to an operating cash flow-driven return of capital model remains differentiated, so does our commitment to significant ongoing share repurchases. And the cumulative benefit of this approach has become pretty hard to ignore. Since kicking off our share buyback program last October, we've repurchased $3.4 billion of our stock, driving a 20 percent reduction to our outstanding share count in just 13 months, contributing to significant underlying growth in all of our per-share metrics. We continue to believe buying back stock is a good use of capital in current market conditions, and consistent with this belief, our Board has again topped up our outstanding buyback authorization to $2.5 billion. Looking ahead to the fourth quarter, we expect to execute around $300 million of share purchases and will ensure we fully meet our commitment to the market to return at least 50 percent of our full-year 2022 CFO to equity holders. This will represent a peer-leading 2022 annual distribution yield. Dialing back the pace of buybacks a bit at the end of the year will allow us to build some additional cash in the fourth quarter, enabling us to increase the cash funding portion of the Ensign acquisition which, as you'll hear in a minute, will contribute to a higher level of shareholder distributions in 2023 and beyond. In addition to increasing our buyback authorization, our board has also approved another increase to our base dividend, demonstrating the important synergies that exist between our base dividend and accretive buybacks. The increase to the dividend was entirely funded through year-to-date share reports. To summarize, we've been clear about our commitment to return significant capital to shareholders. We believe our operating cash flow driven framework is a strong commitment to our shareholders, protecting distributions from the impact of capital inflation. Our consistent execution of accruing buybacks has driven peer leading per share growth of 20 percent. We built one of the strongest return of capital track records in the entire S&P 500 over the trailing four quarters. And we're fully committed to extending this leadership with our 2023 distribution profile, further enhanced by the highly accretive Ensign acquisition. I'll now turn the call over to Mike, who will briefly walk us through our third quarter performance and outlook. Mike.
spk06: Thanks, Dave. And good morning to everyone. Third quarter was yet another strong financial and operational quarter, highlighted by over $1 billion of free cash flow generation at a reinvestment rate of just 29%. Our oil and oil equivalent production increased sequentially to 176,000 barrels of oil per day and 352,000 barrels of oil equivalent per day, outperforming our guidance provided in the last earnings call, driven by achieving a high end of our quarterly wells to sales guidance and new well outperformance in both the Eagleford and Permian. In the Permian specifically, We returned to our highest level of activity since 2019. We brought 13 wells to sales, including eight two-mile laterals, which are more representative of the go-forward program for this asset. Productivity for those extended laterals was very strong, including three Red Hills wells, deploying our latest completion design that delivered an average IP30 of over 3,800 barrels of oil equivalent per day. The future for our Permian asset is bright, amplified by our success in the Texas-Delaware oil play to develop both the Woodford and Merrimack, with our initial four-well pad expected to deliver first oil in early 2023. Stepping back a bit to the updated full-year 2022 financial and operational outcomes, our outlook remains compelling. We raised our EG equity income guidance by another $70 million over $600 million. EG equity income guidance is now more than double what it was at the beginning of the year due to strong operational performance and upside in pricing, especially for European natural gas, where our commodity exposure remains underappreciated. And while we already have differentiated European LNG price exposure that has contributed to stronger financial performances, we will see a significant increase to our global LNG price leverage in 2024 as our legacy Henry Hublink LNG contract expires, which will potentially drive a step change increase in EG's financial performance as we have more equity molecules exposed to the global LNG market. We also raised our 2022 capital spending guidance to $1.4 billion, an increase of $100 million from prior guidance due to a combination of incremental inflation and targeted efforts to protect our execution and operational momentum into 2023. We expect this additional capital to set us up for success next year, protecting our production profile early in 2023, mitigating our execution risk, and improving operational continuity. Despite this increase in our capital budget, we still expect to lead our peer group in 2022, re-cash flow yield, reinvestment rate, and capital spending for barrel production, as depicted in slide 11 of our earnings data. In other words, our delivery against the metrics that matter remain intact. Looking ahead to 2023, while it is too early for explicit guidance, as we are actively optimizing our plan and working to integrate the end-sign asset. Our case to beat remains the maintenance program in order to deliver maximum free cash flow, significant return of capital, and continued per share growth while maintaining our investment-grade balance sheet. Under this maintenance scenario and incorporating the targeted efforts we are already taking in 2022, we would expect to mitigate the year-over-year increase to our pre-N-SIGN 2023 capital spending to the 10 to 15 percent range. I'll now turn it over to Lee to discuss the strategic rationale of the N-SIGN acquisition.
spk05: Lee Neubecker- Thank you, Mike. Hopefully, you've all had a chance to review our dedicated Eagleford acquisition press release and associated slide deck. I'm especially excited to talk to you today about the strategic rationale for this transaction. as it satisfies each and every element of the exacting acquisition criteria that you've heard me and the rest of the team talk about on these very calls. While we've assessed each and every opportunity that has come to market in recent years in our core basins, we truly believe this asset offers a superior risk-adjusted return profile, especially given our experience and knowledge in the Eagle Group. while striking the right balance between immediate free cash flow accretion and future high-quality development opportunities. This is a truly unique asset. Going back to our M&A framework, this transaction checks all the boxes. Immediate financial accretion, return of capital accretion, accretion to inventory life and quality, and industrial logic with enhanced scales. all while maintaining our financial strength, conservative balance sheet, and shareholder return commitments. I will quickly walk through each of these key points. First, this deal is immediately and significantly accretive, expected to drive double-digit accretion to all key financial metrics. More specifically, we are modeling an approximate 17 percent increase to our 2023 operating cash flow and a 15% increase to our 2023 free cash flow. Accretion is even stronger on a per share basis and will only improve as the additional cash flow generation will support a higher level of share repurchases, further reducing our share count and driving incremental per share growth. It's also accretive on a debt adjusted per share basis. The cash consideration paid for the asset is attractive at just 3.4 times 2023 EBITDA with a 17% 2023 free cash flow yield, highly accretive relative to Marathon Oil's standalone metrics at the same price day. Second, this transaction is accretive to our return of capital profile as the additional cash flow generation will go straight to our shareholders, consistent with our unique and transparent operating cash flow driven framework. Simply put, we remain committed to returning at least 40% of our CFO to shareholders in 2023 and beyond at prices above $60 WTI. But we will now be delivering this return of cash from a higher base of CFO. Therefore, the 17% cash flow accretion I just discussed will translate to an increase in our shareholder distribution capacity by an equivalent 17%. Additionally, we plan to raise our quarterly base dividend by another 11% post-transaction close to $0.10 per share, taking full advantage of the cash flow accreted nature of the deal. Third, this transaction offers compelling industrial logic and is accreted to our inventory line with locations that immediately compete for capital, enhancing our cash flow sustainability. We're adding 130,000 high-working interest-operated net acres adjacent to our legacy position, fully leveraging our knowledge, experience, and operating strengths in a high-confidence, capital-efficient basin where we have a demonstrated track record of execution excellence. We're acquiring more than 600 undrilled locations representing an inventory life greater than 15 years with locations that immediately compete for capital in the Marathon Oil portfolio. Not an easy bar to clear by any means. Finally, we're executing this deal while maintaining our investment grade balance sheet with our net debt to EBITDA expected to remain below one and our financial strength firmly intact. Importantly, Our valuation was based on a nominal one-rig maintenance program, no assumed synergy credits, and no redevelopment refract upside. For that overview of the strategic rationale, I will turn it over to Pat to discuss the inventory depth and quality of this asset, which we believe is an especially critical and differentiating element of this deal.
spk08: Thanks, Lee. I will focus my comments on slide six of our acquisition diagram. speaking specifically to the inventory quality of this asset, as it's a differentiating factor compared to recent asset packages we've evaluated. As Lee mentioned, we've assessed every asset that has come to market in our core basins in recent years, especially in the Eagleford and Bakken. We believe this asset is truly unique, given its attractive combination of immediate cash flow accretion and future development opportunity. Due to the unique history of this asset, there has been limited drilling activity since 2015, effectively preserving the high-quality inventory. Additionally, the inside team has done an excellent job of cleaning up burdensome legacy midstream contracts and consolidating operatorship and ownership interests. The end result is a high margin, 99% operated, 97% working interest, $130,000 net acre position in the core of the Eagleford, a significant high return on drilled inventory. Our technical teams have spent significant time and effort analyzing each and every DSU on this acreage, a bottoms-up effort to truly understand the quantity and quality of undrilled inventory. We came away from this process impressed, assigning value to over 600 undrilled locations, representing an inventory life in excess of 15 years using conservative spacing and development assumptions. We see value in this position across all three phase windows. condensate, wet gas, and dry gas, with significant inventory that immediately competes for capital, especially in the condensate and wet gas phase windows. The un-drilled condensate inventory has the potential to deliver some of the best returns and highest capital efficiency in the Eagleford, and therefore the entire lower 48. And the economic dry gas inventory enhances our longer-term development optionality and further strengthens our underlying resource base. A simple analysis of external third-party data validates the quality of Ensign's inventory, as shown in the charts on the right-hand side of slide six in our deck. Screening all wells brought online since 2019, Ensign's 12-month oil equivalent productivity on a 15-to-1 value basis has been among the very best in Eagleford. And on a capital efficiency basis, analyzing 12-month cumulative production relative to total well cost, Ensign has proven to be one of the most capital-efficient operators in the entire U.S., outperforming every large-cap E&P in our peer group. It's worth highlighting that the Ensign acreage also includes 700 existing wells, many of which are pre-2015, early-generation, under-stimulated completions, which likely left substantial recoverable resource behind. We therefore see upside potential associated with redevelopment and or refracts on the acreage, especially considering our track record of high-return successful development on our legacy position. Peers have been successful in refracts on offsetting acreage to Ensign, and Ensign has recently brought online three refract tests of their own with encouraging early results. Importantly, all of this represents pure upside for us as we assign no redevelopment or refract upside in our valuation of the asset or in our inventory count. I will now pass it over to Dane to discuss financing and our return of capital objectives.
spk10: Thanks, Pat. I'll be short and sweet. My key point is that we're executing on this accretive transaction while maintaining our financial strength, our investment-grade balance sheet, and conservative leverage profile, while continuing to deliver on return of capital commitments to equity holders. Who says you can't have it all? We plan to fund this acquisition with a combination of cash on hand, our credit facility, and new prepayable debt. financing approach will give us the optionality to pay off the acquisition debt quickly without incurring additional costs. Importantly, with the incremental debt, we expect our net debt to EBITDA ratio to remain below one times at the forward curve. And even testing our leverage against more conservative price deck, $50 to $60 per barrel WTI, we remain in the zip code of one and a half time leverage by the end of 2023. We've received constructive feedback about the deal from the ratings agencies, given the improvement to our scale and sustainability, coupled with the limited impact to our leverage profile. We also believe that tangible assets acquired in this transaction are eligible for full expensing in 2022, contributing to our income tax optimization efforts, another positive aspect of this deal that could defer our exposure to AMT. Bottom line, our balance sheet remains rock solid, giving us the financial flexibility to do an attractive deal like this and pay down our acquisition debt in short order while simultaneously enhancing our return of capital to equity holders. Additionally, as we've already stated, our commitment to return of capital framework remains steadfast. In 2023 and beyond, Our objective remains to return at least 40 percent of our CFO to equity holders, and potentially more if market conditions are supportive, all driven by a higher base of cash flow consistent with the financial accretion of the inside deal. Back to Lee for a wrap-up. Lee Maraschall- Thank you, Dane.
spk05: Consistent with earlier remarks, it remains too early to offer up any detailed 2023 capital spending guidance as we are still working our plan and optimizing the integration of an accretive new asset. Yet I can say that our strategic objectives remain unchanged. To continue delivering peer and market leading free cash flow generation and return of capital to shareholders, all of which is further strengthened by this Eagleford acquisition. Our case to be for 2023 is a maintenance program that efficiently and expeditiously integrates the inside Eagle Ford assets and that continues the focus on growing our first-year metrics. For years now, I've reiterated my view that for our company and for our sector to attract increased investor sponsorship, we must deliver financial performance competitive with other investment alternatives in the market, as measured by corporate returns, free cash flow generation, and return of capital. More S&P, less E&P. Today, we are successfully delivering just that kind of performance. Our challenge now is to prove that our results are sustainable, quarter in and quarter out, year in and year out. We're up for the challenge. Our compelling investment case is simple. Capital discipline, sustainable free cash flow, protecting commodity price upside, market-leading return of capital to shareholders, and per share growth. and we have a track record of delivery underscored by this quarter's record-setting shareholder distribution. Our multi-basin U.S. portfolio has only been strengthened with the announced Eagle Ford acquisition, and our complementary integrated gas business in EG brings a growing and differentiated exposure to the global LNG market that is unique among our peers. To close our call today, I want to reiterate how proud I am of how we've positioned our company. We're delivering financial outcomes at the very top of the S&P 500, and just as important, we are doing so while adhering to our core values, supporting the continued responsible development of much-needed oil and gas that is absolutely critical to furthering global economic progress, lifting billions out of energy poverty, and protecting the standard of living we have all come to enjoy. With that, We can open up the line for Q&A.
spk03: Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press 01 on your touch-tone phone. As a reminder, please limit your question to one question and one follow-up. Again, if you'd like to ask a question, please press 01 on your touch-tone phone. Our first question comes from Neil Dingman from Truro Securities. Your line is now open.
spk01: Morning, guys. Congrats on the deal. It looks quite good. My question is on the Enzyme deal. You gave a lot of color around this, guys, but I'm just wondering, in sort of broad strokes, you know, how are you thinking about, obviously it comes with some great PDP, but also, as you mentioned, Lee, some really nice undrilled inventory. And I'm just wondering, number one, how do you sort of think about valuing between the two? And then secondly, you know, now with almost $300,000, the Eagleford deal, will a good bit of this be, you know, focused on drilling a new enzyme next year in your Eagleford activity?
spk05: Yeah, I think just on the value component, Neil, you know, when we think about the valuation, I would say in general, we would kind of put it almost kind of 50-50 between PDP and future undrilled development opportunities. I think that was you know, one of the unique aspects of this deal was that it really hit the sweet spot between immediate and significant cash flow accretion inventory life accretion with inventory that competes immediately for capital. So that really stood out to us and made this feel, you know, quite unique. In terms of how we view it, I mean, obviously we're still in the midst of going through our detailed budget for 2023. We've modeled this from a valuation perspective as a maintenance program that would layer on top of an enterprise maintenance program that we're thinking about for 2023. We believe that the bulk of these locations and Ensign compete for capital in today's portfolio, and so that's just going to be part of the detailed allocation process that we're going through today. But for us, the case to beat remains maintenance capital, and Ensign would, in essence, be layering on top of the enterprise.
spk01: Great, great details. And then maybe just to follow up, second one for Mike, maybe on the Delaware. Mike, now with all the activity now that you've had recently, the Delaware, I'm just wondering if you have any different sort of thoughts or expectations on that play than you had, you know, obviously earlier this year prior to really stepping up activity there.
spk06: Yeah, Neil, I... So I'm going to take a run at that. I think, you know, the results that we've seen this year have been impressive. 13 wells to sales, obviously, in the quarter. Another five or so coming on in the fourth quarter. You know, most of those wells that we're bringing online this year, mile and a half to two milers. You know, what's pretty exciting as we look forward to next year, 23, we're probably only going to bring in on two milers. So when you look at the third quarter 2022, you know, very strong well performance and execution from the team. I think we mentioned it in the deck. You know, the 13 wells to sales, eight were two-mile laterals. I think that's mentioned more representative of the go-forward program. Again, as we touched on, those wells averaged over 2,700 barrels of oil equivalent per day over the first 30 days. That was a 72% oil cut. And then probably most exciting were the three Lee County wells that we brought online. Those were latest design upspace, larger completions, looked to be some of the best Delaware basins that we brought on this year, IP30, 3,800 barrels of oil equivalent per day. So I kind of share all of that and I think it tees it up well for next year. You know, we're probably going to be similar next year in terms of that 70-30 split on capital with 30% of the capital going to the Permian. But I think it tees it up well for next year. You know, the team got back, hit the ground running. So, yeah, we're pretty excited about what the future brings in the Northern Delaware for us.
spk05: And I would just add to that field, you know, the team continues to do some really good blocking and tackling to, you know, give us the ability to do extended laterals through trades, et cetera, across our position. And that was always kind of our theory when we made the original acquisitions that over time we would continue to build a more contiguous position, which would give us more access to extended lateral drilling. And that's exactly what the team has delivered.
spk01: Great details, guys. And again, congrats on the deal. Certainly looks positive.
spk06: Thank you, Neil.
spk03: Thank you. Our next question comes from Scott Hinold from RBC Capital Markets. Your line is now open.
spk09: Yeah, thanks. Hey, if we can touch base on the incentive acquisition a little bit. Obviously, you guys made a pretty good case that it's got very strong economics, especially in the condensate window. But could you give us a little color on you know, how you think about, you know, that acquisition, you know, holistically, it does have a little bit more balanced hydrocarbon mix. You know, I think, you know, traditionally, you know, Marathon is very, you know, had a very much higher oil kind of cut focus. So, you know, how do you think about that as you layer on this, you know, within the total corporation? And, you know, when you talk about maintenance activity next year, I think you historically talked about it on a barrels of oil kind of thought process. Does that change a little bit because this asset, again, has a little bit more of a gas mix?
spk05: Yeah, no, all great questions, Scott. Let me start a little bit on, if you will, the product mix of Ensign. First and foremost, we're driven by returns and economics. And the Ensign inventory is extremely competitive within our portfolio in terms of delivering economic returns, which in essence then translate into our sustainable free cash flow and return of cash model. So it's It's, that's what that, those locations will underpin for us. So, you know, I wouldn't say we're agnostic to product mix, but we're much more focused on the economic returns and the competitiveness of these locations. So the, if you will, the one-third, one-third, one-third mix that we see at Ensign, that to us in and of itself is, it's a bit arbitrary and we're more focused, again, on returns. When, you know, when we think about maintenance going forward, you know, certainly oil is still what we're flattening on. I mean, we still, when we talk about maintenance, we're referring to oil production. And the positive there is that Ensign will contribute to continuing to hold that maintenance level of oil production, but now at a higher level. And just to maybe even step back, when you think about even Ensign coming into the enterprise portfolio, we still, masa manis, are around 50% oil. I mean, we may drop down a little bit with Ensign in the mix, but at an enterprise level, we still have balance between nominally 50% oil, nominally 50% gas. and EGNGLs. Now, at Eagleford, at a basin level, we will be getting a little bit more gassy, but the reality is that we're still 50% plus oil in the Eagleford, even with bringing the ensign asset into play.
spk09: I appreciate that context. And, you know, if we could pivot a little bit to shareholder returns, I mean, your buybacks, you know, this past quarter was was pretty impressive the level that you guys were able to accomplish. And, you know, now thinking about this acquisition and obviously, you know, the, you know, the debt you'll have to take on for this acquisition, should, should we think about at least in the near term until, you know, I guess, obviously visibility on, on, you know, I guess commodity prices is a little bit better in the next year. Will you, you know, obviously still hit your commitment, but maybe temper from, from existing, you know, your, your, your recent pace? And also, does hedging, your thoughts on hedging differ now, you know, since you've taken on a little bit more leverage?
spk10: Scott, this is Dan. I'll take the first cut at that. Thank you for acknowledging the fact that we blew the doors off. The shares repurchases 82%. CFO went to share repurchases in the quarter, and that was certainly a high watermark for us historically, but I think really demonstrates our commitment to driving that high return when we have the capacity to do it. We also reloaded the share repurchase authorization in the quarter the Board did, the $2.5 billion, which should be a strong signal that, post Ensign, we're going to continue with that kind of a very aggressive share repurchase strategy. The acquisition itself is 17 percent accretive to our CFO. So, the quantum of cash available to return to shareholders is greater. Think about it as pre-ensign 50 percent return equals a post-ensign 40 percent return. So, it's a significant increase in the quantum of cash that we can allocate to shareholders. We certainly are going to be meeting our minimum 40 percent return to shareholder threshold. That's our minimum. We've shown the ability to exceed that up to this point pretty consistently, and we would look to do that opportunistically going forward. The debt that we're going to be taking on is not, you know, our leverage is going to be in pretty good shape post-close. And I think our ability to service that debt is going to be – we'll have lots of flexibility around that. And that's why we're using new prepayable debt and credit facilities, so that we can really have a lot of flexibility at the pace that we repay that. The priority – obviously, we're going to pay back the debt in an appropriate timeframe, but the priority in our framework, given our strong balance sheet, is going to be returns to shareholders. So we're going to stay focused on that. You might have asked one other hedging question in there. Pat, did you want to take that?
spk08: Yeah, sure. I would just say in general that our philosophy hasn't changed. Hedging is just one part of commodity risk, managing that. And so Dane talked about the balance sheet. Our balance sheet is still going to be strong, even with incremental debt. And I think it's important to focus on our really low free cash flow break even of some $35. So we're in good shape in almost any range of commodity prices. So we don't see a need to just go into the market and hedge because we did this acquisition. That said, we'll be very opportunistic as we have been in the past if we see some opportunities that would provide us a little downside protection. take those, but we don't feel compelled to do that unless the market shows us something that is compelling.
spk05: Yeah, I think it's very important that, you know, because of our leverage profile and where it sits, that, you know, future debt retirement and achieving our capital return to shareholders, those are not mutually exclusive. We're going to be doing both of those things. How we gauge those will obviously be dependent a bit on commodity price, but the way we've modeled it is that we're doing both of those over time. And as Dane stated, with the 17% uplift, and CFO by virtue of the Ensign transaction, you know, the 40% minimum is kind of now 50%. In other words, 40 is the new 50, if you will. So we are seeing that accretion and our ability to get return back to shareholders.
spk07: I appreciate that. Thanks.
spk03: Thank you. Our next question comes from Janine Way from Barclays. Your line is now open.
spk02: Hi, good morning, everyone. Thanks for taking our questions. Good morning. Dave, maybe just following up on a couple of your comments there. So buybacks are expected to be $300 million in Q4, which will help rebuild the cash balances. In terms of how the deal impacts 23, can you provide a sense of the rough split envisioned between the cash revolver and the new debt for funding the deal, and whether your view on cash levels has changed for 23?
spk10: Yeah, so I think I would think about a big cash versus debt split to be cash roughly 45 percent of the funding and the balance from a mix of revolver borrowings and new prepayable debt, which could be term loans or go to debt capital markets to get that. We're still assessing the most advantageous approach there. I'm sorry, what was the cash balance? Oh, the cash balance, yeah. Sorry about that. So obviously we're going to dial back share of purchases toward the end of the year. We'll use a portion of the $1.6 billion or so that we forecast at the end of the year for the acquisition. As we head through next year, I still think this sort of $300 million to $500 million cash balance to enable us to You know, manage, work in per month, working capital is a good number to work with. And within that quantum of cash that we're generating, we'll be able to service the debt and make the shareholder distributions like we have historically, but at a higher quantum.
spk02: Okay, great. Thank you for all that detail. Maybe pivoting to another asset in the portfolio here in EGM, There's certainly upside to EG income starting in 2024 relating to striking the new contract, as you all mentioned in your prepared remarks. In terms of other upside, I think that LNG plant was originally meant to have a footprint so that it could be twinned. And just wondering if that's on the horizon anywhere on your radar, maybe in the medium or longer term. Thank you.
spk05: Yeah, Jenny, yeah, there is a tremendous value proposition for us, you know, in EG. You know, we've talked about it in, you know, really two areas. You know, one, of course, is the ALBA gas condensate field or equity production there. And then there's this world-class infrastructure that we have there in Punta Europa, the LNG plant storage offloading as well as the gas plant and the methanol plant. Our number one objective right now is to continue to load the existing LNG train. One of the first steps in that was to bring in some third-party gas, which was by virtue of the Elen development. Basically, the Elen partners brought that gas to our flange, essentially. They invested in the infrastructure, built the pipeline, and we've been able to take advantage of those third-party molecules through both if you will, tariffing through the facility, but also percentage of proceeds, hence our exposure to global LNG pricing. And so our vision is that there will continue to be opportunities that are not dissimilar to a LEN, where we'll be able to drive more molecules and continue to at least base load the current LNG train. We're sitting in one of the most gas-prone areas of West Africa, both in terms of indigenous gas and EG, but also cross-border opportunities, including Cameroon as well as Nigeria. They look for an accretive home to their gas molecules as well. You are correct in that the facility was designed for expansion beyond the base load, but today our number one priority is ensuring that we have the gas that can help us load the current train really through the next decade.
spk02: Great.
spk03: Thank you. Thank you. As a reminder, if you'd like to ask a question, please press 01 on your touch-tone phone. Our next question comes from Doug Legate from Bank of America Merrill Lynch. Your line is now open.
spk07: Thanks, everyone. Thanks for getting me on. Dan, I wonder if I could ask you a question on cash tax, there is an interesting footnote or comment on the acquisition slide deck about the, I'm not going to get this description exactly right, but it looks like some of the acquisition costs can help your cash tax position. So I wonder if you could just walk us through how has that evolved with the AMT and how does Ensign help you? How should we think about cash tax?
spk10: Yeah, sure, Doug. Thank you for teeing up a cash tax question for me. My favorite. So prior to the Inflation Reduction Act, we were not going to be cash taxpayers for a couple of years under the traditional tax system. With the IRA, there's an alternative minimum tax structure that's 15 percent. And so we could be subject to that if we hit a certain threshold. The threshold is a billion dollars of pre-tax income on average for the three years 2020 through 2022. So we're still in that measurement, you know, living through the end of that measurement period. When we do our forecasting, we're pretty close to that billion-dollar threshold for that three-year average as a kind of a coin flip. And so you look at that and go, too close to call. What else can move the needle for us? And there are a couple of things that we have line of sight to, one of which relates to Ensign, but just to give you a little more color on the whole playing field. There is a question about whether we can deduct foreign tax credits for that threshold calculation. We think if we get favorable Treasury interpretation on that, which would be very consistent with precedent, that we will be able to, and that will help us with that threshold calculation. There's also the possibility of favorable new legislation on the deductibility of intangible drilling costs. And that's a big part of our capital program. That's got to be a legislative change, so kind of harder to predict at this point, but a significant needle mover if it does happen. And then the third one that directly relates to this M-Sign transaction is the acquired tangible asset, not the intangible asset, the tangible asset portion that's of the acquisition price, which is a fairly significant number. And if that's, that will be eligible for expensing in 2022 for purposes of this threshold calculation, assuming we close the deal as we plan this year. So without really kind of quantifying all those for you today, Doug, they're all moving sort of in the right direction. And on the margin, certainly this unsigned deal could help us defer paying AMT taxes until 2024, which would be nice.
spk07: That's really helpful. I guess that's kind of what I was trying to get at, is how much you can shield your tax from this transaction. So thank you for that. I guess my follow-up, there's so many things that we could try and address today, but I want to try and hit the comment about the Shell marketing agreement on LNG. Obviously, there's been a lot of moving parts when you go from equity gas to a land gas And then this transaction, I guess, of the legacy contract rolls over at the end of 2023. How should we think about the delta? If all things were equal on LNG pricing, let's say flat, no change in the commodity, how would your exposure shift on January 124 versus where it is today, given the mix of all of those things? I'll leave it there. Thanks.
spk05: Yeah, Doug, yeah. Just, you know, first of all, just a little bit just for clarity on kind of how things flow today, you know, through the facility. In fact, we included a chart just because it gets a little complex through all the equity companies there. But today, of course, a LEN is third-party molecules, not equity molecules, that flow through the gas plant, the LNG plant. They're told through there, And then on the back end, we receive a percentage of proceeds from that contract. That will not change post-2024. That runs the term of the ELIN production. Relative to what we refer to as ALBA tails, which are the remaining ALBA production post the current shell contract, which runs its course at the end of 2023, those molecules are open for negotiation into the current marketplace. So we would move from essentially a Henry Hub-linked contract to more of a global LNG-linked on those equity molecules that would be flowing post-2024. Based on today's market conditions and obviously the arbitrage between something like a TTF to Henry Hub, we would expect to see a material uplift there, despite the fact, of course, that we are on a decline in the ALBA field. We would expect to see a financial uplift as we make that shift from more of a Henry Hovland to more of a global LNG basis. And those negotiations would be going on, you know, really starting next year to finalize those new contracts post 2023.
spk07: Presumably you'll quantify it at that time. Lee, would that be fair?
spk05: Yeah, no, I think just like we've done, I think we've tried to give a lot more visibility and transparency on EG by providing equity, income guidance, et cetera. As we get and understand what those new commercial terms are going to be like, we absolutely intend to share that with the market so that there's clarity on what that will do to the EG financials.
spk07: That's terrific. Thanks, fellas. Appreciate it.
spk05: Thank you, Doug. Thank you.
spk03: Thank you. Our next question comes from Paul Chang from Scotiabank. Your line is now open.
spk04: Hey, guys. Good morning. Two questions. One is, I think I have to apologize first. In terms of the new debt that you take on or that we're looking at, the $3 billion, in a perfect external environment, how quickly you want to or you feel is the optimum pace of paying that down or that you get the net debt back, reduce that three billion. So that's the first question. You know, I feel worse. So if the commodity price is as good as you hope, then how quickly that you want to pay it down. The second question on the 600 NSI inventory, do you have a split between the condensate window, wet gas and dry gas? Thank you.
spk10: I'll take a cut at the pace of the debt reduction. You know, sort of our base case, if we model this out and just use the sort of backwardated forward curve, we think it's very comfortable for us to pay this off over, say, a 24-month period without being incremental debt. if we get a tailwind on commodity prices or help on AMT, things like that, it's going to give us much more flexibility to both deal with the debt in a more expeditious fashion if we want to, or increase shareholder distributions and in a perfect world, both. So there's quite a bit of flexibility with You know, revolver borrowings, I guess technically they aren't due until 2027. That's when the revolver has been extended to, so we have a lot of flexibility in there. But my bias, I guess my personal bias is to get the debt and the interest cash payments out of the system as quickly as possible without stressing something else like the distributions.
spk08: This is Pat. I'll take the question on the inventory. Without going into too much specific, I would just say that the vast majority of the locations that we've described value to are in the condensate and wet gas window, and as Lee and I mentioned, those compete very favorably in our inventory today, and those will be the ones that we attack in the first few years.
spk05: Yeah, and if I could, just to maybe amplify that, I want to emphasize again that We've taken no credit in that inventory count for the potential upside that exists in redevelopment and refracking the 700 existing wells. And I think it was probably Janine that also pointed out that the teaser that had come out on Ensign originally had quoted 1,200 wells. And so we're taking a very conservative approach and really putting our own technical view on that inventory. So we feel very confident in the over 600 unreal locations that we are quoting. We believe that to be conservative. It was a strong basis for the valuation that continues to protect potential upside for us as well in the future.
spk04: And can I ask that whether you guys have any preliminary, I know you're certainly on, but preliminary potential cost synergy benefit from this deal, and what is the op-ex cost for anti-operation?
spk05: Yeah, I'll maybe say a couple things, and then Mike might jump in. Right now, we included none of that, Paul, into the valuation equation, but our expectation is that you know, our excellent, you know, Eagleford asset team is going to find ways to drive even more value out of this acquisition. It's so contiguous to, you know, our legacy position. You know, we believe those savings will come. And, Mike, you may want to just talk a little bit about kind of the unit kind of cash cost that we think we're bringing in with Ensign and how that looks relative to the Eagleford and, quite frankly, the rest of the enterprise.
spk06: Yeah, I mean... Fairly short answer on that one, Paul. The OPEX that we're bringing in is actually lower than Eagleford and it's lower than the company total at the moment. So that should be a net positive. Maybe a little bit in terms of just some of the synergies as well. Just the fact that it doubles our footprint, increases our size and scale, I think that's a positive. Shout out to the Ensign team. They've done a great job with some of these recent wells that they've brought online. I do think, just given our expertise and our scale, that we can continue to optimize both on wealth, productivity, and cost. There's some potential upside there that, again, isn't baked in. Just that increased scale and basin as well is going to help us with the supply chain side of things. It's still a tight market out there, so I think any leverage that we can bring there is there is a positive. And then the other one is obviously the potential positive implications with regards to AMT that Dane mentioned a little while ago. Again, I think the positive thing is that we've not baked any of that in. That's potential upside for us as we get into the asset proper.
spk05: So stay tuned on that one, Paul. I'm sure we'll be talking more about that in the future.
spk04: Thank you.
spk03: Thank you. We have no further questions at this time. I'd like to turn the call back to Lee Tillman for closing comments.
spk05: Thank you for your interest in Marathon Oil, and 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.
spk03: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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