Marathon Oil - Q2 2019

Transcript

Speaker 0

Welcome to the MRO Q2 Earnings Conference Call. My name is James. I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer And also note this conference is being recorded.

I'd now like to turn the call over to Guy Baber. Guy, you may begin.

Speaker 1

Thanks, James, and thank you to everyone for joining us this morning. Yesterday, after the close, we issued a press release, a slide presentation and an investor packet that address our 2nd quarter 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 Mitch Little, Executive VP of Operations and Pat Wagner, Executive VP of Corporate Development and Strategy. As always, 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. With that, I'll turn the call over to Lee, who will provide his opening remarks.

Speaker 2

We will then open the

Speaker 1

call up to Q and A.

Speaker 3

Thanks, Guy, and thank you to everyone joining us this morning. 2nd quarter featured truly exceptional execution, not just across our advantaged multi basin portfolio, but across all aspects of our business. This consistent differentiated execution against a transparent framework for capital discipline is driving compelling bottom line operational and more importantly financial outcomes. Financial outcomes that compete not only against our independent E and P peers but against the broader market as well. We are consistently and comprehensively delivering against our framework for success.

We are driving significant bottom line corporate returns We are driving significant bottom line corporate returns improvement. We are generating sustainable free cash flow at conservative pricing. We are returning a considerable portion of that free cash flow back to our shareholders through dividends and share repurchases. And we are improving our capital efficiency, cost structure and resource base through differentiated execution. Our strong operational and financial performance is powered by a transformed portfolio and a top tier balance sheet, providing the foundation for continued execution success through the commodity cycle.

Turning to Q2 highlights, the enterprise level proof points speak for themselves and signal a continuation of a trend that is now well established over multiple quarters. It all starts with our returns first orientation. During Q2, we realized an annualized cash return on invested capital of 20%, consistent with the prior year quarter despite a 12% decline in WTI price and meaningful weakness in secondary product pricing. The underlying improvement in our corporate returns underscores our success across multiple dimensions portfolio management, concentrated capital allocation, more efficient operations, high margin oil growth, cash cost reductions and lower completed well costs. 2nd is our commitment to sustainable free cash flow generation at conservative pricing.

For many, this objective remains aspirational, but our track record on this front is now well established with 6 consecutive quarters of positive organic free cash flow post dividend. We aren't just talking about free cash flow or forecasting it for the future, we are delivering it here and now. During Q2, we generated $137,000,000 of post dividend organic free cash flow. Since the beginning of 2018, we have now delivered over $1,000,000,000 of cumulative organic free cash flow post dividend for our shareholders. Our annualized organic free cash flow yield is about 5% year to date and 8% since 2018, placing us competitively not only with our E and P peers but also with the broader market.

Our portfolio is resilient and capable of generating free cash flow below current pricing with a peer leading enterprise breakeven oil price. Yet we also retain significant upside leverage to even modest oil price support. And rest assured, any higher pricing we realize will translate directly to higher free cash flow, not higher activity through our commitment to capital discipline. Importantly, our underlying free cash flow momentum is improving over the second half of twenty nineteen and into 2020, driven by strong productivity, declining well costs and cash cost reductions across our asset base. 3rd, we continue to return significant capital back to our shareholders through our dividend and share repurchases.

Year to date, we have repurchased $250,000,000 of our own shares with $230,000,000 executed during 2Q as we took advantage of our attractively valued stock. Almost 90% of the over $1,000,000,000 in post dividend free cash flow generated since the beginning of 2018 has been returned back to our shareholders through share repurchases, reducing our outstanding share count by over 6%. In combination with our dividend, we have returned over $330,000,000 to shareholders year to date and $1,200,000,000 since the beginning of 2018, equating to 25% of our operating cash flow. We have a well established track record of returning capital to our shareholders. To underscore that commitment, we are one of the only E and Ps that has incorporated a return of capital metric into our executive compensation scorecard.

And we are well positioned to build on this track record with our Board's recent decision to increase our outstanding share repurchase authorization to $1,500,000,000 We are generating free cash flow in the current environment at a time when our share price remains significantly disconnected from its fundamental value. We therefore believe that the disciplined repurchase of our own shares, funded entirely by organic free cash flow, is one of the highest return uses of our capital and represents a somewhat unique countercyclical opportunity. Finally, differentiated execution is the engine that powers our delivery against our commitments, both operational and financial. Our culture is built on continuous improvement in our capital efficiency, in our operating costs and in our resource base. And to that end, 2nd quarter was truly a standout from an execution perspective.

High margin U. S. Oil production exceeded the top end of our guidance and was up 17% from the year ago quarter. Our total company production exceeded the top end of our guidance range as well. I've said it multiple times and I will say it again, our budget is not a suggestion, it is a commitment.

Our teams understand this and we have spent exactly one half of our development capital at the midpoint of the year fully consistent with our plan. We are solidly on track to deliver on our original $2,400,000,000 annual development capital budget, while also achieving our key 2019 objectives and ensuring operational momentum into 2020. Importantly, we are driving a declining trend in completed well cost per lateral foot in each of our basins. We also continue to drive a declining trend in our cash costs as U. S.

Unit production costs were down 14% from the year ago quarter, the lowest since we became an independent E and P in 2011. Similarly, our international unit cost is also the lowest it has been since we became an independent. Following the successful divestment of our interest in Kurdistan and the UK, our 9th and 10th country exit since 2013. Our portfolio of assets has never been stronger, simplified to our high performing U. S.

Resource plays and our free cash flow generating integrated business in EG. And all this is supported by a balance sheet that is investment grade at all 3 primary ratings agencies with upgrades from both Moody's and S and P this quarter. Turning now to the asset specific highlights that are driving the enterprise level success I just highlighted. In the Eagle Ford, we are delivering financial returns and free cash flow that compete with any basin across the Lower forty eight. 2nd quarter was highlighted by record well productivity as measured by average IP30 despite a majority of our quarterly activity concentrated outside of Karnes County, demonstrating the strength of the expanded core and the value in acreage that just a few years ago was viewed as lower tier.

We delivered excellent results across our Eagle Ford footprint. We established a new IP30 pad record in Karnes County. We delivered tremendous results from 15 wells across the oil window of Atascosa County and successfully applied enhanced completions in Gonzales County, a specific area last tested by us over 2 years ago as we continue to uplift the inventory quality across our Eagle Ford acreage. Most importantly, the bottom line capital efficiency of the Eagle Ford continues to improve with 2019 productivity tracking ahead of the prior year while completed well cost per lateral foot are on a declining trend. In the Bakken, we are delivering bottom line results that build on a well earned reputation as best in basin.

Our industry leading productivity is well established and conclusively validated by public data. On a 90 day cumulative oil production basis, we now account for 20 of the top 25 wells and 60 of the top 100 wells in the Williston Basin despite accounting for only 9% of total wells drilled. We are relentlessly focused on capital efficiency with year to date completed well costs down 15% from the 2018 average and half of our 2nd quarter wells delivered at an average completed well cost of $5,000,000 or below, a number not thought possible just a few years ago. Additionally, extended production history is validating critical prior year core extension tests, highlighting the strength of our broader acreage footprint as well as our operational capability. Turning to Oklahoma, with a firmly established foundation of strong and predictable results at optimized spacing designs and supported by another quarter of productivity outperformance, our team has been focusing on improving capital efficiency and their efforts are paying dividends.

Most notably, our 2 most recent over pressured STACK infills achieved industry leading drilling and completion costs. These 6 wells were delivered at an average completed well cost of just $6,300,000 normalized to a 10,000 foot lateral. Over the second half of the year, our Oklahoma activity will be overwhelmingly concentrated in the oilier areas of the play, including the Springer formation where we plan to leverage our own operated success in addition to our learnings from others. In the Northern Delaware, we are protecting our leasehold, delineating our position and improving our margins, all while delivering significant early development drilling success. Specifically, we saw our Upper Wolfcamp wells in Malaga deliver an average IP30 of 340 boed per lateral foot.

As further evidence of our improving margin profile, our cash costs were down 10% sequentially during Q2. 100% of our produced water was on pipe and our oil on pipe is at 70% and rising. Stepping outside of our 4 U. S. Resource plays, our commitment to portfolio optimization continued with our international portfolio now streamlined to our free cash flow generating integrated business in EG.

With the 2 most recent country exits from Kurdistan and the UK, we have reduced our asset retirement obligation from $2,000,000,000 in 2014 to less than $200,000,000 today. In summary, 2nd quarter was truly exceptional with every asset contributing to our bottom line success. And while we are frustrated by market volatility and by our sector's equity underperformance, we believe in our strategy and our framework for success. And within that context, we will focus on what we control, which is our execution and the consistent delivery of compelling bottom line financial and operational outcomes quarter after quarter. Our challenge is less E and P and more S and P.

We must deliver financial results that are competitive with the broader market that are attractive to both generalists as well as energy investors. While many speak aspirationally on this point, Marathon Oil is already competing in this broader space with year to date annualized free cash flow yield of 5% and 8% annualized free cash flow yield since 2018. And since the beginning of 2018, we have returned around 1 point $2,000,000,000 of capital to shareholders through our peer competitive dividend and disciplined buybacks, equating to over 10% of our market value and representing about 25% of our operating cash flow, all funded entirely by organic free cash flow generation. Consistently superior financial results coupled with shareholder friendly actions will over time be rewarded in the market. As we look ahead to 2020 beyond, our conviction in our framework for success is unchanged.

There won't be any surprises. Corporate returns first, sustainable free cash flow at conservative pricing, returning cash to shareholders and differentiated execution. High value oil growth will be an outcome of our rigorous multi basin capital allocation, not an objective. Importantly, our 2019 plan already has us well positioned for both operational momentum and capital efficiency going into 2020. We are delivering against our framework.

This is our 6th consecutive quarter of post dividend organic free cash flow. Our capital discipline and our peer leading enterprise breakeven are a powerful and winning combination across a wide range of commodity environments. Thank you all for listening. And with that, I'll hand it back to the operator to begin the Q and A session.

Speaker 0

Very good. Thank you. We can now begin our Q and A session. And our first question is from Arun Jayaram of JPMorgan Chase. Arun, is your line muted?

Speaker 1

You can move to next question, James.

Speaker 0

Okay. Our next question is from Brian Singer, Goldman Sachs. Brian, are you there? Is your line muted? Let me we might have a problem here.

Let me check with the next one. Scott Hanold of RBC. Okay, let me restart the Q and A queue and perhaps that will take care of this. Okay. Arun, are you there?

JPMorgan Chase? And Brian Singer? Let me try one more thing.

Speaker 4

Is your call okay?

Speaker 0

No. The Q and A is not working. Arun, are you there?

Speaker 5

Yes. Can you hear me?

Speaker 0

Yes, I can. Go ahead, please.

Speaker 6

All right.

Speaker 2

Thank you.

Speaker 5

Okay. Sorry about that, gentlemen. There is a little bit of technical issues on our end, so apologies about that. But let me begin with my question. Okay.

Lee, it's obvious that the Board's action indicates that free cash flow will be put back into buybacks. I did want to get your perspective regarding public market acreage valuations in the Permian, which are now well below historical average transaction levels, including your entry in the basin. And just your general thoughts on portfolio enhancement, just given the wide disparity in public market valuations relative to what we have seen recently in the asset market?

Speaker 3

Yes. Well, first of all, good morning and apologies to everyone for the technical difficulties. Hopefully, we're back on track. You're exactly right, Arun. I think that the reauthorization to the $1,500,000,000 mark by the Board signals a strong intent for us to continue to deploy free cash flow and to share repurchases.

And again, fundamentally, it's driven by the returns that we see there based on the current valuation of our share price. It's something that we'll continue to look at over time. We continue, of course, to have a dividend yield that's sitting around 1.5%, which is very competitive within our direct peer group. I think on your broader question about the market and where things are valued currently, I think first of all you have to recognize that that might be the value from a market perspective, but in terms of what might actually transact could be very, very different than that. We remain very focused though as we always have been in those core our 4 core areas looking for those unique opportunities that fit our acreage position hand in glove.

So, we're very mindful of small bolt ons and as well as trades that can continue to help to build out, our position, make it more contiguous, increase our working interest, give us more optionality for longer laterals. So that is front and center and I think as we continue to see this dislocation in the market, we want to be opportunistic. And I think that's one of the reasons that we want to continue to protect the strength of our balance sheet such that we can be opportunistic and that we can act quickly if the correct opportunity in fact does present itself.

Speaker 5

Great, great. And just my follow-up, Lee, the results from the Bakken have been relatively volatile for the industry. There's been some gas processing headwinds that have impacted some of the SMID cap players in the basin. It seems like you were able to successfully navigate some of these headwinds. Just wanted to get your thoughts on what drove, call it, the differentiated performance and how you're set up in the Bakken for the rest of the year from a gas processing standpoint?

Yes.

Speaker 3

I'll start off by just saying, Arun, that first we remain fully compliant with the gas capture requirements in the state of North Dakota and we don't expect any impact going forward on our business plans or the associated oil production. I can't comment on the issues that other operators may be having. I think everyone has a unique position in the basin. It is a little frustrating for us though to perhaps be painted with the same brush. I think we have established a pretty strong credibility in the Bakken on delivering against our commitments there.

When you look at almost any metric, it's hard not to argue that we have a very unique position there as a best in basin operator. So we continue to see the Bakken as a key element of our portfolio. I think you saw that performance this quarter sequentially. Bakken oil was up nominally a little over 10%. So it's all about planning your business and getting ahead of the curve on some of these things that could in fact be bottlenecks in the future.

And so our team is very diligent about assessing our takeaway and our ability to again to be fully compliant with the regulations there. And I think that planning has put us in a very good stead.

Speaker 1

Great. Thanks a lot, Lee.

Speaker 3

Thank you, Arun.

Speaker 0

Okay. Our next questioner is Brian Singer of Goldman Sachs.

Speaker 6

Thank you. Good morning. Can you hear me okay?

Speaker 3

Yes, Brian. Loud and clear. All

Speaker 6

right. Great. I was going to start in the Eagle Ford. First, can you speak to the cadence that you expect in drilling, completing and bringing wells online there as we go forward and the impact that has sequentially on production? And then could you also address decline rates that you're seeing from some of your older wells beyond the first 90 to 180 days and how that impacts your assumption on terminal decline rates in the Eagle Ford?

Speaker 3

Yes. Let me maybe start off with some high level commentary about cadence in general. We generally tend to talk about that more at a portfolio level, Brian, and then perhaps I'll let Mitch just chime in with a little bit more color on the Eagle Ford itself. We are spot on our development capital budget halfway through the year. We always communicated that we were going to be a bit front end weighted from a wells to sales standpoint.

But I also want to stress that gross company operated wells to sales is not necessarily a perfect proxy for development capital spend. And as we look forward into the second half of the year, we know that there are going to be some factors as we look into the second half of the year, including, of course, the fact that we're going to see a little bit longer lateral lengths. We're going to see a little bit higher working interest in some of our key basins. So that will be impacting it. Also, we are trending toward the, I would say, the upper end of our overall wells to sales guidance.

Additionally, even though wells to sales are down in the second half of the year, actually drilling activity is increasing and specifically we've added a rig in the Bakken. So there are a lot of factors that go into the second half of the year development capital spend. I would also though from a momentum standpoint point you to our guidance from a production volumes perspective and just say when you look at our 3Q guidance now, in addition to our full year guidance, it should become, I think, pretty straightforward that we continue to grow strongly 2Q to 3Q and of course going into Q4 that volume metric guidance moderates a bit, but we're finishing the year very, very strong. And with our activity as designed, we expect to carry quite a bit of operational momentum and capital efficiency into 2020. Perhaps I'll turn over to Mitch just to maybe make a few comments just about the performance in the Eagle Ford, which quite frankly has been pretty extraordinary this quarter.

Speaker 7

Yes. Brian, just maybe a couple of additional points. All of the things that Lee described around the portfolio in general would certainly apply to the Eagle Ford as well in terms of both cadence and some growing working interest and longer lateral lengths as we move into the second half of the year. It's exactly as we had it planned. As you're well aware, we've significantly upgraded the performance across the Eagle Ford and extending Tier 1 into the overwhelming majority of the play.

8 years in, we're delivering record IP30s, including the Gonzales County wells and the significant numbers

Speaker 8

the

Speaker 7

basis. And as with all of these fields, as we continue to grow the base production from prior year development, we're all aware that 1st year declines are relatively steep in unconventionals, but as the base grows and as the magnitude of that prior year program grows, it has a dampening effect over the longer term in terms of shallowing the decline.

Speaker 6

Great. Thank you. And then my follow-up is a bit more of the capital allocation on exploration versus inorganic opportunities. I realize there's not a resource exploration update this quarter, but can you talk philosophically perhaps to how you're thinking about the budget for resource exploration in 2020 higher versus lower assuming similar commodity prices to today and whether to the degree there is something you want to be opportunistic about, whether that's a knob to turn?

Speaker 3

Yes, I think when we talk about continuing to improve and enhance our resource base, we always talk about it in terms of really there's 3 buckets there that we're pursuing and investing in. The first of those is organic enhancement and we've talked a lot about that aspect in both the Bakken and the Eagle Ford. The second element is really around small bolt ons and trade, some of the things that we're doing in Northern Delaware, for instance. And then the 3rd element, like you said, is in fact our resource play exploration program. That program for us offers the ability to get in to greenfield leasing positions at a cost that allows us to really generate those outsized full cycle returns, but it does require a constancy of purpose and a commitment both in terms of talent as well as financial resource.

We continue to talk about the REX program as being nominally a couple of $100,000,000 a year. That's going to ebb and flow as activities and opportunities present themselves. Some years we may see heavier spend in exploration drilling and seismic. Other years it may be more biased toward leasing, which was exactly the case that we saw last year as we established our position in the Louisiana Austin Chalk. But it's obviously a bit early to talk about 2020 budget, but I think the guidance that we provided this year around the REX program going forward that it's a much more ratable couple of $100,000,000 a year that's still consistent with our current thinking.

Speaker 0

Okay. Our next questioner is Scott Hanold of RBC.

Speaker 9

Thanks. Good morning. Good morning, Scott. First, I want to commend you all on basically supporting your stock with buybacks, especially with where your equity prices. I mean, certainly that's I think a great thing to see.

Lee, you made a point that investing in buybacks right now provides a very competitive return in your portfolio. And can you tell us about like your thought at this point in time with the increased buyback authorization? Would you envision getting a bit more aggressive on short term buybacks in the short term given where the stock price is or would you still be a little bit more patient and wait for the free cash flow to support that?

Speaker 3

Yes. Our fundamental principle and we of course have had this dialogue with our Board as well is really wrapped around our share repurchases are going to be governed by our ability to generate organic free cash flow. We are not going to spend money on share repurchases that we have not earned. And we also believe that dollar averaging and taking advantage of that over time is the appropriate way to execute against a share repurchase program. So you should expect us to the extent that we are generating free cash flow that we're going to put that to work in our share repurchase program, but it is going to be governed by organic free cash flow generation.

Speaker 9

Understood. Appreciate that. And my follow-up is on EG. Obviously, internationally, you guys really have streamlined things. And certainly I think as you go into 2021 beyond, it looks like that's going to be an opportunity kind of be I guess upside optionality with the new Tollan agreement.

Can you give us some context of like what that can mean in terms of like the size of incremental cash flow to Marathon?

Speaker 3

Yes, I can probably give some directional views on that. I mean we can't give specifics today on exactly the impact that will have on EBITDAX, but what you should expect is that we're going to continue to give full transparency on the financial delivery out of the EG asset so that it's very clear what that asset is doing within the broader portfolio. And even though it is a long life low decline asset, meaning the Alba field itself, with the addition of the Alen arrangement, which is a combination of tolling and profit sharing, there is certainly an opportunity to continue to drive financial performance there even off the back of non equity molecules. And as we stated before, we believe that the arrangement that we have with Alen is simply a first step of fully leveraging that extremely valuable infrastructure that we have sitting on Bioko Island, which of course is a gas plant, methanol plant, LNG plant, storage, loading, etcetera. And we believe that it will in fact fulfill the promise of kind of a natural aggregation point for both regional and local gas in that area which will continue to bring additional profitability to the EG asset.

Speaker 9

Okay. Appreciate that. I look forward to hearing more on that.

Speaker 3

Sure.

Speaker 0

Okay. Our next questioner is Doug Leggate of Bank of America.

Speaker 2

Thanks. Good morning, everyone. Can you hear me, Lee?

Speaker 3

Yes, absolutely. Hi. Good morning, Doug.

Speaker 2

Good to see you. I'm looking forward to seeing you in a couple of weeks.

Speaker 10

Got you.

Speaker 2

Lee, the comment you made about S and P 500 been one of your aspirations, I guess, been able to compete against that. There's a little caveat there, I guess, which is visibility on dividend growth and capacity for dividend growth. You're obviously growing the inherent cash flow of the organization, but you're continuing to emphasize the buyback over perhaps sustainable dividend growth. I'd just like to know how you think about the balance between the 2 just in terms of that relative metric because free cash flow is certainly competitive, but dividend growth is the other piece of that S and P 500 metric. How do you think about that?

Speaker 3

Yes, well I think you rightly point out Doug that the first step is sustainable generation of free cash flow and let's be honest, we are not an industry that's been doing that on a regular basis. I mean this is our 6th quarter of achieving that because you can't have a conversation about returning cash to shareholders unless you are actually generating free cash flow. So the first step is having a model, a business model and a portfolio that consistently and sustainably delivers that free cash flow yield. Once you get your yield to where you are competitive, then you're simply talking about the best mechanism to deliver that cash back to shareholders. Today, we very much favor the share repurchase because of the volatility in the market and where we sit from a value perspective on our shares relative to our, I would say, our own internal NAV calculation.

So we truly believe that with our returns first hat on, that is the right answer for shareholders. That split, that mix between dividend and share repurchase is something that we will continue to assess each and every quarter. And we'll look at it and make a thoughtful decision about how to continue to balance that mix. Today, again, we're sitting at about 1.5% yield on the dividend. We think that is truly competitive within the peer group.

It's clearly part of your cost structure moving forward in time. So you have to be very mindful and patient about how you continue to ramp into the dividend. But at the end of the day, I believe that our ability to essentially return over 90% of our free cash flow back to shareholders in one form or another, that's really the most important metric. And I will also emphasize that return of cash to shareholders is a metric on my scorecard as well.

Speaker 2

That's very good point. Maybe just a quick follow-up to that. So assuming your let's be aspirational and say it go back to where we all thought it was reasonably valued, your dividend yield would obviously be not competitive because it would significantly lower. Would we expect the pivot to the dividend at that point?

Speaker 3

I think at that stage, I think that's a very valid consideration. It's clearly going to be based on what we see in the market and do we have that sustainability to take that step forward in the dividend. But yes, I mean it's absolutely on the table as part of the mix. It's just today it's we so the returns are so overwhelming for us on the flip side of that equation and then you factor in the inherent volatility of the forward curve right now and I think it just lends itself to the share repurchase as the best mechanism to get value back to our shareholder.

Speaker 2

Last one for me, if I I'm taking that as Part 1A and Part 1B. So hopefully last one

Speaker 3

from you. Come on now, Doug.

Speaker 2

Last one real quick is, you inherited a fairly onerous contract in EG as it relates to the British Gas offtake agreement, which expires in a couple of years. How should we expect the cash flow from EG to evolve once you gain back control of destination, if you like, for the offtake? And I'll leave it there. Thanks.

Speaker 3

Yes. Well, certainly, that contract and that agreement was put in place at a different time, so I don't want to go back and hindsight that. But what I will say is that going forward as that agreement runs its course, we absolutely can go out and get full market exposure and we think through that we'll have the opportunity to continue to enhance the profitability of the EG asset.

Speaker 2

Great stuff. Thanks so much.

Speaker 10

Yes. Thank you.

Speaker 0

And next is Neal Dingmann of SunTrust.

Speaker 11

Good morning, guys. It's a great answer so far. My question is first just pertaining to your Permian. Could you speak there's obviously been increased scrutiny there on just how people are looking at spacing, not only just in terms of per zone, but I guess you can talk about multi well or multi zones. And I'm just wondering, can you talk a bit about what you think about your development plans remainder of this year, next year in terms of multi zone target and spacing?

Speaker 7

Sure, Neal. This is Mitch. Probably not going to spend a lot of time on 2020 as we haven't set our capital program for 2020, but I think we've been pretty consistent with our messaging around our focus in Permian, which is kind of strategically pacing our investments to both delineate the position and move into development in areas like Malaga where we've reported on the Upper Wolfcamp, continued strong productivity. We've had a fair bit of focus in that area over the past few quarters. We also revealed in the slides as we move into the second half of the year, there's a bit stronger component of delineation over into the Red Hills area.

In the backdrop of all of that, of course, we're focusing on improving our margins with getting water and oil on pipe. We're up to 80% of our water on pipe, driving cost structure down, capturing efficiencies from various completion trials and drilling programs across that position. So it's right on track. We're executing the plan that we expected to, in early when we set the budget early this year. And so it's going to continue to be in the near term more of that mix between some localized development in areas like Malaga, Upper Wolfcamp and then a delineation element across the position as we move towards maturing into more full field development.

We do have trials in multiple benches as part of that delineation program, but the concentration has been more in the Upper Wolfcamp and some other Wolfcamp and Bone Spring zones.

Speaker 11

Very good. And then could you talk a bit about, maybe, Lee, I guess my question is just sort of a broader one. There's been some reallocation out of the Mid Con by a few players. I'm just wondering, really, when you look at you have obviously some very great basins. I'm just wondering, is it purely just when you look at your development plan, just purely return driven?

And I guess that's one. And would you consider some more reallocation out of that like others? Or how do you sort of how does that mid comp play of your stack up versus the others?

Speaker 3

Yes. Well, absolutely, it's going to be all about returns for us and how we allocate. And just maybe as a little bit of a reminder, backing up to our original budget allocation that we talked about earlier in the year, just recall 60% of our development capital is going to the Eagle Ford and the Bakken, about 40% to Northern Delaware and Oklahoma. Having said that, our original Oklahoma program was really designed to concentrate activity in the oilier parts of both the STACK and the SCOOP because those offer the advantage of more competitive returns. In addition, this kind of targeted development also allowed us to really bear down on completed well costs to continue to enhance our capital efficiency and we've demonstrated that.

Case in point, the print that we just made on the completed well costs for the last 2 Sac Meramec pads where we're getting these wells done for basically 6.3 $1,000,000 And so as we kind of take that and even look at the second half of the year, our Oklahoma activity again is going to be overwhelmingly concentrated in the oilier areas of the play including the Springer. And again, that is all driven by a returns orientation. And our view is those opportunities obviously compete head to head with the other aspects of our portfolio. No one, I don't believe anticipated some of the headwinds in the secondary products, which for certain of the phase windows in Oklahoma do in fact have a pretty significant issue. But I just point to this and say this is part of our multi basin advantage.

If we see the need to move capital, we have a lot of flexibility to do so.

Speaker 11

Great, great details. Thanks, Lee. Thanks, Mitch.

Speaker 0

Okay. Our next questioner, David Heikkinen of Heikkinen Energy Advisors.

Speaker 8

Good morning, guys. Thanks for the time. Thinking about the last six quarters of building a track record and I do think that's commendable and is eliminating uncertainty for investors. As I listened to some of the earlier questions and really trying to think about the intent, I think they're trying to eliminate uncertainty around the comfort you have of your existing portfolio versus acquisition. And can you talk about like the dividend could be locked in very simply, but it seems like you're leaving yourself flexibility, which I understand.

Can you just talk about your existing portfolio, your existing stock price and your thought process of how much time Marathon people spend on looking at outside acquisitions?

Speaker 3

Yes. I think, David, first of all, I think with our very extensive portfolio transformation and what we believe is a differentiated position in the 4 best U. S. Resource plays. Large scale M and A is not really a consideration for us nor is it really required for forward success.

So I think that multi basin model gives us a lot of competitive advantages that we've talked about before. So the hard work for us, particularly with the exit from the UK and Kurdistan, the hard work on the portfolio is really behind us, not in front of us. And we believe the right approach as we again look to continue to enhance and grow our resource base going forward is the one that I've already addressed, which is it really comes into looking at enhancing what we already have, which could be elevating the economics or even adding incremental sticks in the basins that we currently operate. But it's also looking at smaller accretive bolt ons that fit within our kind of core basins as well as trades, even lease sales like we participated in, in New Mexico last year. And then finally, the 3rd element of that is really our REX program, which albeit it's risked money.

We have to get out there and expose some money from a lease standpoint on things that are truly exploration. There are no guarantees in it. But we think we've got the right approach there and that we will generate success there as well. So think the bottom line is we've got a very comprehensive strategy in place to continue to replenish and improve our resource base and that does not require really large scale M and A.

Speaker 8

I guess following on that, your slide number 5 shows your free cash flow, but to the right of the line is REX CapEx and A and D net. As you think about enhancing the portfolio versus organic or total free cash flow, a couple of $100,000,000 into REX a year, You could use up that free cash flow pretty quickly with the accretive bolt on trades and lease sales. So how do you think about that flexibility and outlook for repeatability of building on the track record?

Speaker 3

Yes, well I think first of all it obviously is highly dependent upon the commodity price environment that we find ourselves in. I think that our focus on continuing to drive our enterprise breakeven down as low as we can and really having that mindset of continuing to drive that breakeven even lower gives us that headroom to continue to operate to meet all of those needs, to generate free cash flow across a very broad range of commodity price outcomes and then we can redeploy that as we see fit between not only returns back to shareholders but also funding some of these accretive opportunities and resource capture which could be wrecked some years, could be bolt on some years. And it's just really striking that balance and selecting the best opportunities that are going to have the most meaningful impact on our business. Okay.

Speaker 0

Our next question is from Jamal Darder of Tudor, Pickering and Holt.

Speaker 12

As I kind of listen in on the commentary for second half of the year, mentioning kind of longer laterals and higher working interest, Is there any color you could give on the magnitude of working interest increase we could see? As I look at some of the charts, it looks like Q1 and Q4 were relatively low on working interest, but it snapped back a little bit in Q2. Should we expect something kind of similar to the Q2 trajectory or something higher?

Speaker 3

Yes. Well, certainly the way I would think about, Jamal, is that directionally, certainly in some of our basins where we do have relatively high capital allocation, we are going to see materially higher working interest in those basins. So that does make a difference. And again, I don't want to get into basin by basin specifics and we can certainly follow-up with you on that. But that is a driver.

I would also remind you that beyond working interest in lateral length, the fact that we have been very efficient and we are trending toward the higher end of our wells to sales will also be an element of that as well.

Speaker 12

All right. Fair enough. And as I look at some of the moving pieces in the second half of the year, it looks like the Springer is going to get some attention, which is much oilier than the Oklahoma region. And you're moving a little bit up dip in Gonzales, which could be oilier than the average Eagle Ford as well. Just wanted to get a sense of just kind of overall, are there any moving pieces on oil cut that we should be expecting in the second half of the year?

Speaker 3

Yes. Well, certainly it's a metric that we watch very closely because of that is our high value product. That's what's really the key to delivering our financial outcome. So I would say directionally we are going to continue to try to keep that if not flat certainly improving over the second half of the year, particularly in those basins like you said in Oklahoma where we have a well mix that is going to allow us to drive a little bit more oil cut. In places like obviously the Bakken to some extent the oil cut is relatively fixed regardless of the well mix.

And Eagle Ford however as you pointed out as we continue to do more and up dip Atascosa County as well as Gonzales, there is the opportunity to continue to move that toward a higher oil cut.

Speaker 12

All right. Thank you.

Speaker 3

You bet.

Speaker 0

Next question is Jeanine Wai of Barclays.

Speaker 4

Hi, good morning everyone.

Speaker 3

Good morning.

Speaker 4

Good morning. So my question is on level loading and the consistent free cash flow that you spoke about regarding needing that to support dividend growth. So if we go back to the original 2019 plan in the U. S, the Bakken and the Delaware objectives both included growing oil and Eagle Ford is more in harvest mode, with you doing actually more with less given efficiencies, but we suspect the Eagle Ford will grow this year as well. But can you talk about if and when it's appropriate for the Bakken, Delaware and Oklahoma to be run with a more level loaded type program like in the Eagle Ford in which perhaps you could enhance what we already considered to be a pretty free cash flow pretty strong free cash flow story.

So our guess is just the Bakken is closest to getting to this maybe level loaded type of scenario, but we just wanted to check-in on the longer term view of how you are thinking about running the assets.

Speaker 3

Yes. Well, certainly, first of all, Jeanine, we manage our assets as a portfolio, not as individual assets. All of our assets have the capability to cycle between growth and higher free cash flow generation. Each of them have that implicit flexibility. So we start our capital allocation process with a view of driving a rate of change in our corporate level returns.

The next really objective is to drive sustainable free cash flow on a conservative price deck. And then quite frankly, the oil growth that pops out of that is an outcome, not an objective. And so I would just say that it's a bit too early for us to give specifics around 2020, But I would just emphasize that all of the basins can make that flex and it's really going to be around delivering our financial metrics on how we actually allocate capital within those 4 basins. Some like for instance this year, Eagle Ford is a great example of a year where we generally speaking managed Eagle Ford relatively flat. So it was in a very high free cash flow generation mode.

In the case of Bakken for instance, it was being managed to growth but was also generating significant free cash flow. And so each of the basins will have a particular role based on what we need to drive our financial outcomes at an enterprise level. So I would say there's no, I'd say rule in effect on when we're trying to get a given basin to some terminal production or plateau level.

Speaker 4

Okay. Yes, I guess my point was that, at least listening to the commentary and some of the investor feedback is that the volatility in oil prices prevents companies like oil and gas, companies like you guys in terms of having a bigger dividend growth model. And so you can't control oil prices, but you can control your free cash flow and dampening the volatility of oil prices as if you kind of enhance the free cash flow to do that. So, we were just wondering how you were thinking about that.

Speaker 3

I think what I would say on that, Jenny, is that what we have tried to focus on is really driving our enterprise break evens as low as practical such that we can operate across the broadest spectrum of commodity prices while still generating sustainable free cash flow. I mean we're well sub-fifty in terms of our enterprise breakeven this year and with that sub-fifty enterprise breakeven, we're still growing our overall MRO oil by 10% and our U. S. Oil by 12%. So I think it's obviously it's an optimization process, but it starts with the financial objectives first and foremost.

Speaker 4

Okay, great. Thank you. That's

Speaker 3

very helpful.

Speaker 0

And our next question is from Pavel Molchanov of Raymond James.

Speaker 10

Thanks for taking the question. In highlighting the free cash flow metrics, I'm curious if you can disaggregate where that free cash flow is coming from. And in particular, if this year, guys end up doing maybe $300,000,000 $400,000,000 of free cash, how much of that is coming from EG?

Speaker 3

Yes. The way I would think about it, Pavel, is that when you look across our asset base, the strong free cash flow generators are Bakken, Eagle Ford and EG. All of those are contributing strongly to free cash flow generation. Because Oklahoma is still early in the development cycle, it is still probably a little bit of a cash taker to neutral. And then of course, Northern Delaware still being in the delineation and appraisal phase is at this point still cash flow negative as we continue to build the base production and gain economy of scale there.

Speaker 10

Okay, that's helpful. Is EG the largest contributor?

Speaker 3

No, it is not.

Speaker 10

In dollar terms?

Speaker 3

No, it is not.

Speaker 6

It is not. Okay.

Speaker 10

Your balance sheet, you highlighted investment grade from all of the rating agencies. Are you happy with the current level of ratings, just kind of on the cusp of investment grade or would you like to get further up into maybe A territory?

Speaker 3

Well, I'll maybe make an opening comment and then let Dane jump in. First of all, we're very pleased that we were the 1st split rated E and P company to get upgraded. Then we subsequent to the Moody's upgrade, we got an S and P upgrade from BBB- to BBB, which has strengthened our investment grade rating. Obviously, that brings benefits to it that we can now enjoy. But for us, I mean, we don't do things in order to necessarily drive ratings.

We try to do the right things to drive the business and we look at key metrics like net debt to EBITDAX that really help us determine the overall health of our balance sheet and we're also looking to make sure that we maximize the flexibility that we have. But I'll maybe let Dane jump in and throw anything else that he would like.

Speaker 13

Yes, thanks Lee. I'd say we're very happy with the fact that we're investment grade rated at all three agencies. We've worked really hard on accomplishing that. Really everything that we've talked about today, focusing on corporate level returns, generating free cash flow, driving down costs, increasing well productivity. It's all in terms of more financial strength.

And so I think rather than push on some key metric and accelerate it to see if we can get to another notch upgrade from the ratings agency, we're just going to keep focused on executing the business exactly in the model that we've described to you, and that's going to support the credit quality and the rating support with the agencies. They really like the model we're

Speaker 3

executing. I would maybe also add that we took a lot of balance sheet action back in 2017. I think we're a little bit ahead of the curve there. We took out quite a bit of gross debt, really reduced our interest cost, etcetera. All that contributes to the strength of our balance sheet as well as to our enterprise breakevens.

And so we got well out in front I think of the balance sheet question because we knew that that financial flexibility was going to be important in the kind of forward commodity environment.

Speaker 10

Okay, that's helpful. Appreciate it guys.

Speaker 3

Thank you.

Speaker 0

Thanks. This concludes our question and answer session. We turn the call now back to Lee Tillman for closing remarks.

Speaker 3

Thank you. We recognize that investors have choices and we appreciate your interest in Marathon Oil. Execution excellence leads the way in our company and I want to personally thank all of our dedicated employees and contractors who deliver on that mandate each and every day quarter in and quarter out. Thank you, and that concludes our call.

Speaker 0

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.