HOUSTON Aug 6, 2015 (Thomson StreetEvents) -- Edited Transcript of Marathon Oil Corp earnings conference call or presentation Thursday, August 6, 2015 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Chris Phillips Marathon Oil Corporation - Director of IR * Lee Tillman Marathon Oil Corporation - President and CEO * Lance Robertson Marathon Oil Corporation - VP North America Production Operations * JR Sult Marathon Oil Corporation - EVP and CFO * Mitch Little Marathon Oil Corporation - VP of International Offshore Exploration and Production Operations ================================================================================ Conference Call Participants ================================================================================ * Ed Westlake Credit Suisse - Analyst * Evan Calio Morgan Stanley - Analyst * Doug Leggate BofA Merrill Lynch - Analyst * Ryan Todd Deutsche Bank - Analyst * Brian Singer Goldman Sachs - Analyst * David Heikkinen Heikkinen Energy Advisors - Analyst * John Herrlin Societe Generale - Analyst * Scott Hanold RBC Capital Markets - Analyst * Guy Baber Simmons & Company - Analyst * Phillip Jungwirth BMO Capital Markets - Analyst * Pavel Molchanov Raymond James & Associates - Analyst * Jeffrey Campbell Tuohy Brothers - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Chris Phillips, Marathon Oil Corporation - Director of IR [1] -------------------------------------------------------------------------------- Good morning, and welcome to Marathon Oil Corporation second-quarter 2015 earnings call. I'm Chris Phillips, Director of Investor Relations. Also on the call this morning are Lee Tillman, CEO and President; JR Sult, Executive Vice President and CFO; Mitch Little, Vice President, International and Offshore Exploration and Production Operations; Lance Robertson, Vice President, North American Production Operations; and Zach Dailey, Director of Investor Relations. As has become our custom, we released prepared remarks last night in conjunction with the earnings release. You can find those remarks and the associated slides at MarathonOil.com. As a reminder today's call is being recorded, and our comments and answers to questions will contain forward-looking information subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. I refer you back to the aforementioned slides where you can find our full Safe Harbor statement. With that, I will turn the call over to Lee. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [2] -------------------------------------------------------------------------------- Thanks, Chris. Let me add my good morning. I'd like to open with just a few comments regarding the elements of our business that we control, cost, efficiencies, and execution, and discuss how our actions will enhance returns and have us positioned for the current environment, as well as when commodity prices show a sustained improvement. We find ourselves in a continued low and volatile pricing environment. We've taken decisive action, consistent with our business plan released in first quarter, activity in CapEx reductions, capital efficiency and productivity gains, operating and G&A cost reductions, and non-core asset divestments. We have successfully and efficiently achieved our planned activity reductions in the three resource plays to yield a program that will hold production volumes for the balance of 2015 while still progressing our strategic objectives in all three plays. Those objectives are co-development in the Eagle Ford, integration of completion and downspacing pilots in the Bakken, and protecting our valuable leasehold in both our SCOOP and STACK positions, while investing in high return, outside operated opportunities. Even with these planned reductions we will still deliver on our growth targets of 5% to 7% for the overall Company and 20% for the resource plays year-over-year. We've also raised the low end of our total Company E&P full year production guidance essentially increasing the midpoint despite the announced asset sale. Our planned deceleration and capital spend is evident in the sequential reduction in our capital program by almost $500 million and a significant decrease in wells to sales relative to the first quarter. We had already cut exploration spend by half from last year and are continuing to moderate forward commitments as we reset our strategy, including withdrawal from new country entries that do not compete for capital allocation. For capital efficiency we have captured greater than $300 million in D&C savings in the US resource plays or about 20% and are driving for more. Our completed well cost continue to fall, and our well productivity continues to improve. We have reduced unit operating costs in both of our E&P segments from the year-ago quarter, more than 30% in North America and 25% in international ex-Libya, and have reflected this in our forward full year guidance for unit cost, lowering them $1.25 and $1 for BOE, respectively. We were quick to address G&A costs in the first quarter as we finalized our activity plans and implemented a work force reduction of about 400 people that is expected to generate annualized net savings of approximately $100 million. Our non-core asset sales are progressing with signed agreements for approximately $100 million toward our target of over $500 million. This recent transaction confirmed that the right assets will generate a competitive process and yield compelling deal metrics even in the current environment. All of these actions combined to give us confidence in driving toward cash flow neutrality in 2016, inclusive of non-core asset sales. We're only just beginning the budget process for 2016, but we'll focus capital allocation to the high return US resource plays as several longer cycle investments run their course by the end of this year, and exploration spend continues to decline. Our forward look positions us well below our 2015 $3.3 billion capital program, and while our 2015 quarterly exit rate will be in the range of $700 million to $750 million, we still have the ability to flex down or up as required. Additionally, we expect expense reductions and capital efficiency to continue into 2016. We are optimizing our business around a lower cost structure, holding production levels and protecting our investment in our high return US resource plays, while challenging all other spend in excess of that. Our US resource plays continue to deliver solid returns at current pricing with capital efficiency and enhanced productivity lowering breakeven prices. Our last disclosure on our five-year drilling inventory showed 70% of our inventory profitable at $50 a barrel WTI, and that analysis did not incorporate our most recent completed well cost savings and productivity enhancements. We have multiple years of high-quality inventory that can deliver competitive returns in the current environment. We do not believe this is a time to be accelerating inventory and associated production from short cycle investments. We believe it's a time for discipline, continuous cost reduction, sustainable efficiency, maximizing returns, and balance sheet protection. We continue to have a strong balance sheet with $5.5 billion in liquidity at quarter end. As we move into the second half of 2015 we look forward to providing more results from our co-development in the Eagle Ford, operated downspacing activity in Oklahoma, and resource updates for the US unconventional plays. I want to conclude by taking a moment to recognize our Marathon Oil employees, who have been the driving force behind our results in this very dynamic environment. They have stepped forward to lead our efforts in cost reduction and efficiency gains and have kept their focus on execution despite the distraction of the macro environment. Our employees are committed to an enterprise first view for which I am both thankful and proud. With that, I'll hand it back to Chris to begin the Q&A. -------------------------------------------------------------------------------- Chris Phillips, Marathon Oil Corporation - Director of IR [3] -------------------------------------------------------------------------------- Thanks, Lee. Before we open the call to questions, we like to request that you ask no more than two questions with associated clarifications. You can re-prompt as time permits. With that, Cynthia, we will open the lines for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ed Westlake. -------------------------------------------------------------------------------- Ed Westlake, Credit Suisse - Analyst [2] -------------------------------------------------------------------------------- Yes, good morning. I just wanted to touch base on completions in the Eagle Ford. Obviously, the whole industry has been experimenting further with completion technology and seeing some incremental results. I just wanted to get a sense of how you see completions where you are in terms of testing, and what improvements that you've seen, particularly in the Eagle Ford? -------------------------------------------------------------------------------- Lance Robertson, Marathon Oil Corporation - VP North America Production Operations [3] -------------------------------------------------------------------------------- Ed, I would say for the second quarter and actually the previous couple of quarters, the focus in the Eagle Ford has been to maintain the very high initial production and high EURs we have. We have some of the highest of each of those in South Texas. Even as we've taken, for example in the second quarter, more than a third of the total wells are outside of the Lower Eagle Ford in either of the Austin Chalk or the Upper Eagle Ford, we've really accelerated the co-development in multiple horizons, three and in some cases four horizons, developed across our acreage position, particularly in Karnes County to see how much vertical density in that total package we could create, as well as the 40 acre in some cases 30 acre spacing we have horizontally in that. What we're really most excited about is that even as we've materially increase the complexity of the co-development through the stack-and-frac pilots, what we've seen is that the production per well in the other horizons, specifically the Upper Eagle Ford and Austin Chalk, have competed very favorably with the traditional Lower Eagle Ford. We're still getting great results that are competitive, with returns among the best in our portfolio from all three of those horizons, which helps our long-term inventory, and really helps our capital efficiency as we can move to develop more wells per pad across the Eagle Ford. -------------------------------------------------------------------------------- Ed Westlake, Credit Suisse - Analyst [4] -------------------------------------------------------------------------------- That's clear, and very helpful. There's an optimization and the science phase, and then perhaps as you go forward and you settle down you go for more. Once you've proved it, you go for more completion efficiency improvement. Is that a logical thought process? -------------------------------------------------------------------------------- Lance Robertson, Marathon Oil Corporation - VP North America Production Operations [5] -------------------------------------------------------------------------------- We're always looking for more efficiency, Ed, into that. We continue to get among the most stages per frac fleet in South Texas out of each of those fleets by very carefully planning our logistics, both on the water and proppant side and managing those. I think in the release you saw that we indicated we're going to drill about 20 more wells this year within the same capital in Eagle Ford. We're really just going to use the balance of those wells to manage full fracked fleets of activity to drive highest efficiency on the completion side, which is where we have the most cost exposure. We want to make sure that side is very well supplied with inventory, just so they stay at maximum efficiency. -------------------------------------------------------------------------------- Ed Westlake, Credit Suisse - Analyst [6] -------------------------------------------------------------------------------- Okay, very clear. Thanks very much. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Evan Calio. -------------------------------------------------------------------------------- Evan Calio, Morgan Stanley - Analyst [8] -------------------------------------------------------------------------------- Good morning, guys. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [9] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Evan Calio, Morgan Stanley - Analyst [10] -------------------------------------------------------------------------------- In your prepared comments, you talked about $2.8 billion to $3 billion annual CapEx run rate, 2015 exit. I know you mentioned it's early, but clearly the market is focused on 2016. Philosophically, how do you think about relative outspend into 2016 and balancing the attractive returning assets in the current environment, your financial flexibility, and the dividends? Any comments there on our outspend range, or how you are thinking about approaching 2016? -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [11] -------------------------------------------------------------------------------- Evan, let me maybe talk a bit about our CapEx views as we exit 2015, and look ahead to 2016, and then perhaps I will let JR talk a little bit on the cash flow outspend question. As we think about the current prices and look ahead to 2016, we would envision certainly a material lower budget than where we are below that $3.3 billion. Certainly as you mentioned our run rates coming out of this year are certainly south of $3 billion. We're, honestly though, Evan, right at the beginning of the budget process for 2016, and clearly any actions that we take, our capital allocation will be governed in large part by what we see in the commodity price environment. In general, our strategic approach is going to be to prioritize our available capital to those highest return investments that we have in the North America resource plays. The balance will go to any previously committed non-discretionary, longer cycle requirements. I would also expect in 2016 that our exploration CapEx is further reduced. It was cut in half this year, and as you think about even for a flat to reduced budget into 2016, the North America component of that will still grow in that context because we have some long cycle investments running their course in 2015. We have further reductions, as I mentioned, in exploration spend. We also have some nonrecurring US infrastructure investments this year in 2015 that are going to provide some accommodation space, if you will, for additional North America investments. Again, our goal is going to be to target as much investment as we can to the US resource plays based on the prevailing commodity environment and available cash flows. We still have the inventory to deliver strong and long-term growth, and we're going to protect that optionality as we move into 2016. With that, maybe I'll offer it over to JR just to talk a little bit about cash flows. -------------------------------------------------------------------------------- JR Sult, Marathon Oil Corporation - EVP and CFO [12] -------------------------------------------------------------------------------- Evan, this is JR, and I think Lee summarized it really well. It's early in the process, but philosophically from my standpoint, he referred to the balance sheet strength is going remain a priority. Again philosophically, I want to see 2016 be as close to free cash flow neutral including asset sales as we possibly can. Many variables to that equation. Capital, clearly, capital activity, capital efficiency, capital spend, operating cost efficiency, and of course our success on the ongoing asset sales programs are all variables in dialing up and down that prospective capital profile. I think your takeaway should be that we continue to have a great deal of flexibility to manage that and to really achieve all of what we want to achieve in terms of protecting that balance sheet, if the commodity price environment is supportive of it, to continue to put those North American unconventionals back on the growth track going forward. The one point you did bring up, and I'll go ahead (inaudible), you brought up the question with regard to the dividend. As you might imagine in this environment, it's a question we frequently get. Evan, it's still a very important element when you think about the total shareholder return for our shareholders, even more so in this environment. It does continue to be the first call of capital at our capital allocation process. The Board is very thoughtful and very considerate when they address this issue each and every quarter. They are making sure that it's still meeting our long-term capital allocation objectives, and they will continue to fulfill that role each and every quarter. Honestly, sitting here today I feel very good, good solid balance sheet, $5.5 billion of liquidity, $2.5 billion of that in cash and cash equivalents. I think we have a tremendous amount of flexibility to still continue to deliver that important element to our shareholders. -------------------------------------------------------------------------------- Evan Calio, Morgan Stanley - Analyst [13] -------------------------------------------------------------------------------- Great. That's helpful. Let me ask a second question or segue into an area which I presume would continue to get an increased allocation of capital in Oklahoma. You've added small working interest across a larger number of wells into the second half of the year versus prior spending plans, and it appears to be a very attractive neighborhood. Could you discuss how far away you think you are from putting Oklahoma, particularly STACK, into full development mode? Could you talk about that shift going into non-op, and whether that's planning to leverage a fuller data set in helping you to end or lease or subsequently develop that resource? -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [14] -------------------------------------------------------------------------------- Yes, a let me maybe start on that one as well. I think we're still in the very early days in the development and Oklahoma, in both the STACK and the SCOOP. As we've said in the past, we certainly believe with well over 1 billion barrels of 2P resource that this is a tremendously important growth engine for the Company going forward. Because again of capital constraints in the current environment, we are running a two-rig operated program there. That is designed to ensure that we protect our very valuable leasehold in both the SCOOP and the STACK. As you mentioned what we're doing is we're participating at a lower interest in the non-operated part of our portfolio to really leverage our funds to continue to grow our data set in Oklahoma in a very cost effective manner. In fact, in total we've redeployed about $60 million into the Oklahoma non-operated business, and of course we gain the information and the data from that investment in addition to the barrels, which allows us to continue to move toward that vision of what a full field development will look like ultimately in the SCOOP and the STACK. I would just emphasize that we are early days, but we're making good progress. Already you have seen some movement in our completed well cost downward in Oklahoma, reflecting some good efficiency as well as commercial work by the teams. I think as we move to scale, we move out of leasehold mode, we get into pad drilling, those efficiencies are simply going to increase over time. We could see even more reduction in those costs. -------------------------------------------------------------------------------- Evan Calio, Morgan Stanley - Analyst [15] -------------------------------------------------------------------------------- Any update what you added in the quarter lease-wise? -------------------------------------------------------------------------------- Chris Phillips, Marathon Oil Corporation - Director of IR [16] -------------------------------------------------------------------------------- This will be the last question, Evan. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [17] -------------------------------------------------------------------------------- I'm sorry, Evan? -------------------------------------------------------------------------------- Evan Calio, Morgan Stanley - Analyst [18] -------------------------------------------------------------------------------- Sorry, any update on leasing activity in the quarter in Oklahoma in particular? I'll leave it at that. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [19] -------------------------------------------------------------------------------- No real update there that is material. -------------------------------------------------------------------------------- Evan Calio, Morgan Stanley - Analyst [20] -------------------------------------------------------------------------------- Great. Thank you. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Doug Leggate. -------------------------------------------------------------------------------- Doug Leggate, BofA Merrill Lynch - Analyst [22] -------------------------------------------------------------------------------- Good morning, Lee. Good morning, JR. Good morning Chris. I guess I'm trying to think of how to word this question so it doesn't count as two. On the dividend, Lee, I understand you've been very clear in the past about your commitment to why you think the dividend is important. When you talked about cash breakeven, does that include covering the dividend? I guess what I am really trying to get at when you look at who your peer group is nowadays, folks who generally don't have that dividend commitment or obligation, they are able to redeploy (inaudible) $600 million, or $570 million in your case, towards accelerating something like the STACK or the SCOOP. Why is it better value for shareholders to see that dividend payout in this environment as opposed to moving it towards those high graded assets, and if you could clarify the breakeven comment, please? I do have a follow-up. Thank you. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [23] -------------------------------------------------------------------------------- Absolutely, Doug. No worries. On the cash breakeven that JR was addressing in his earlier comments, we view that as inclusive of the dividend. When we think about cash flow neutrality, we're certainly wanting to cover all of our obligations from a capital allocations standpoint. The dividend (inaudible) one of those. Obviously, with our dividend yield where it sits today that's a bit different looking than it was in a different commodity price environment, but we still feel that this is an important way to deliver value to our shareholder. We tend to look at the dividend in the context of our overall capital allocation, and in conjunction with the growth that we can generate organically within our very strong North America resource play. We view those two things as needing to be viewed collectively, from an investment standpoint. I think in this lower price environment, although you are correct in that it perhaps puts a bit more pressure than some of our peers, I do believe that is a key element of the return that we offer in this type of environment. As JR very well put it, we are sitting with $5.5 billion in liquidity. We do not feel that we need to make any alteration in the way the dividend competes for capital allocation today. -------------------------------------------------------------------------------- Doug Leggate, BofA Merrill Lynch - Analyst [24] -------------------------------------------------------------------------------- I appreciate the clarification. Just to be clear on the yield comment, you were not indicating any intent to cut the dividend are you? -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [25] -------------------------------------------------------------------------------- No. -------------------------------------------------------------------------------- Doug Leggate, BofA Merrill Lynch - Analyst [26] -------------------------------------------------------------------------------- My follow-up is a similar question, this time on exploration because clearly you are building up your on-shore resource backlog, which by definition is lower risk. I'm wondering if you could touch on the bigger than expected exploration charge in the current quarter, and how you see exploration as the strategy fitting in to a lower for longer oil price environment, and I'll leave it there. Thank you. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [27] -------------------------------------------------------------------------------- Let me take a high level question first, Doug, which is more around exploration strategy. How does that fit into our portfolio? As we've shared previously, Doug, we've been assessing our conventional exploration strategy and really in the context of its ability to compete for capital allocation within the current portfolio, which does include as you well stated the North America inventory, and it must compete really on our risk-adjusted return basis. We really started this assessment some time ago. It really wasn't prompted by the current macro environment. It was really prompted by the depth and quality of the inventory that we saw on the North America resource play, so we're a bit ahead of the curve. We've already taken the step to reduce exploration essentially by half in 2015, and we certainly see a path that will allow us to moderate that further into 2016. I also mentioned in my opening comments that we most recently withdrew from some new country entries that we simply felt in the current environment did not compete for capital allocation. When you consider the current commodity price environment, when you consider the depth of our resource inventory in North America, and the limited capital to invest, it's just simply getting tougher and tougher for conventional exploration to compete for capital on our risk-adjusted basis. Back to your specific question on the uptick in exploration expense. We did have a write-down in Birchwood, which is our in situ property in Canada which contributed to that, Doug. -------------------------------------------------------------------------------- Doug Leggate, BofA Merrill Lynch - Analyst [28] -------------------------------------------------------------------------------- Very clear. Thanks a lot, guys. I appreciate the answer -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [29] -------------------------------------------------------------------------------- Thank you, Doug. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Ryan Todd. -------------------------------------------------------------------------------- Ryan Todd, Deutsche Bank - Analyst [31] -------------------------------------------------------------------------------- Great. Thanks, gentlemen. If I could maybe with my first question follow up a little bit on CapEx, you show in your presentation effectively a flat-lining of production in the second half of 2015. Is it reasonable? I know you can't give a 2016 outlook, but is it reasonable to think of the level of that $700 million to $750 million CapEx level as a reasonable idea of maintenance CapEx, and its ability to hold the production flat for longer? You also mentioned the roll-off of long cycle spend exploration reduction potential and nonrecurring infrastructure spend. Could you maybe put some numbers around those that we could get? Maybe a bit of a better pro forma estimate for what the run rate for CapEx looks like into 2016? -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [32] -------------------------------------------------------------------------------- Let me maybe start with addressing what I think is more a question around maintenance capital. I think first and foremost, Ryan, the $700 million, $750 million run rate includes the whole portfolio. When we talk about maintenance capital, we tend to focus in on the resource plays themselves in aggregate. Our best estimate of CapEx required to hold those resource plays flat is around $2 billion to $2.1 billion. Of course, as capital efficiencies and productivity improvements kick in, there will be actually downward pressure on that maintenance capital. When you think about looking ahead and how long could maintenance levels be sustained, my answer to that really would be that we have multiple years of high-quality, high return resource play inventory that could ostensibly drive a maintenance level program even in a $50 barrel WTI environment. Again, you will recall as I mentioned in my opening comments that when we took a look in our most recent disclosure on our five-year drilling inventory, over 70% of our wells were profitable at that $50 per barrel WTI, so you are right. We've had this rapid deceleration from first to second quarter in our overall capital program, that $500 million that I quoted. We've now settled into, I'd say, a maintenance capital mode in the resource plays. Bear in mind, riding on top of that are some of our other investments that will be a little bit more lumpy and bumpy, including we may even see a little bit of an up in third quarter because of some nonrecurring infrastructure investments and a few other nonrecurring items in our international portfolio. As you look that lumpiness in the second half of the year, that $700 million, $750 million exit rate feels about right with some plus or minus there. Your other question was around how much of some of these longer cycle investments may run their course in 2015. The items there that we talk about when we mentioned those items are things like the work we're that doing currently on the EG compression project which is now heavily in fabrication mode, the work that we did in the EG drilling program, the work that we did also in the UK drilling program. Those are the types of items that we talk about. When we look on a net-net basis, as those come off in 2016, there will be some puts and takes, but you're probably in the couple hundred million dollar range in terms of the accommodation space that that might create within the budget. -------------------------------------------------------------------------------- Ryan Todd, Deutsche Bank - Analyst [33] -------------------------------------------------------------------------------- Thanks. That's very helpful, and maybe if I could ask a follow-up, if we switch over to maybe resource in the Bakken, you've got some results out there, 180 day update on the high-intensity completions, some pilot test results. Can you talk a little bit about maybe your thoughts on the results of the tests, on the pilot test for spacing, and the implications for spacing going forward, and whether the high-intensity completions, whether 180 days is long enough to maybe start seeing it impact the type curve, or whether you're still waiting to see an eventual EUR impact? -------------------------------------------------------------------------------- Lance Robertson, Marathon Oil Corporation - VP North America Production Operations [34] -------------------------------------------------------------------------------- Sure, Ryan. I think in general I'd say we're really pleased with the progress broadly from the Bakken completion pilots. If you step back and look at what we've accomplished over the last several quarters that material improvement in initial production now with the cumulative production of a group of wells reaching 180 days, you start to see that improvement hold up over time. We've consistently taken those new designs and applications and spread it across our entire portfolio. I would add that even as we've demonstrated these results that are review mirror looking, we are continuing to progress even more intensive stimulations. I think we noted in the notes that this group you're looking at has 40% more proppant and about 10% more completion stages. We continue to see opportunity even beyond that for more intensity to drive those results further. I think based on the results you are seeing and referencing, there's certainly some pressure on us to look at overall EURs and talk about those, perhaps later this year provide some more color and context on that. Obviously, with more EUR combined with the Bakken well cost trending down to plus or minus $6 million of material reduction there, I think you can see the value implication to the portfolio in Bakken from that. Again, we're very pleased with it, and by all means we expect that momentum to continue. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [35] -------------------------------------------------------------------------------- Maybe if I could add too, on our last update on completed well performance, our single well economics, we have reflected some of the early IP results that we were seeing from the Bakken completion trials. We as of yet have not introduced the full EUR benefits that potentially we could garner from those wells, so that's still yet to come. -------------------------------------------------------------------------------- Ryan Todd, Deutsche Bank - Analyst [36] -------------------------------------------------------------------------------- Great. Thank you. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Brian Singer. -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs - Analyst [38] -------------------------------------------------------------------------------- Thank you. Good morning. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [39] -------------------------------------------------------------------------------- Good morning, Brian. -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs - Analyst [40] -------------------------------------------------------------------------------- I wanted to follow up on that couple of the items surrounding free cash flow, and then capital allocation priorities. You mentioned earlier the potential or free cash neutrality after asset sales. I wanted to check whether that was before dividend or after dividend, and if that dividend is priority number one, how you are thinking about the secondary priorities of growing production versus letting it decline, allowing leverage to increase, and I think I know the answer to the last one, issuing equity. -------------------------------------------------------------------------------- JR Sult, Marathon Oil Corporation - EVP and CFO [41] -------------------------------------------------------------------------------- Hi, Brian. This is JR. Those are all the variables that we're trying to balance to achieve the optimal outcome of what we're trying to reach. In response to the question, my comments with regard to trying to target is close to free cash flow neutrality as possible is with dividends. At the end of the day, I think that's vitally important that we manage the business to where we are not overextending the balance sheet. That balance sheet strength is going to remain important, but as you and I have talked about before, Brian, during this low commodity price environment, I'm definitely leaning on it. I want to lean on the balance sheet during this period. I just want to make sure I don't stress it too much. When I look forward into an early forward view of 2016, it will be in terms of the leaning on that balance sheet will be I'd say impacted by the timing of ultimately our asset sales programs. There will be periods in which we are leaning on that more than not, but that at the end of the day, I want to try and ensure that when we get through the year in 2016 that we still have a good solid balance sheet when we get to the end of the year. -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs - Analyst [42] -------------------------------------------------------------------------------- Great. Thanks. It would seem like then from an asset sale perspective, the ideal opportunity would be something that doesn't take a ton away from your cash flow generation, but where there's value. Kurdistan comes to mind as on of those opportunity, and perhaps you could give us an update how you're thinking about what to do there? Then if there are other opportunities out there you see in the portfolio that (inaudible) there's room for a targeted asset sale that wouldn't take away from the cash flow profile? -------------------------------------------------------------------------------- JR Sult, Marathon Oil Corporation - EVP and CFO [43] -------------------------------------------------------------------------------- No. I will take a crack at the asset sale comment, and if you wanted to hear a little more about just specifically what's going on in Kurdistan, Mitch can answer that. We have not been really explicit, Brian, with regard to where in the portfolio. We've highlighted that they would be non-core. They would be assets that candidly are not competing for capital in the portfolio. I think the one transaction we announced this quarter was a non-core natural gas, candidly a high cost asset as well, that was sold for what we think very compelling economics, for $100 million. Step one in our target of achieving greater than $500 million of asset sales. I think you should think that we're looking across not only the operating portfolio for non-core assets, but also the exploration portfolio as well. -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs - Analyst [44] -------------------------------------------------------------------------------- Thanks, and if there is a Kurdistan, how Kurdistan fits in, I'll take that as part of the follow-up. -------------------------------------------------------------------------------- Mitch Little, Marathon Oil Corporation - VP of International Offshore Exploration and Production Operations [45] -------------------------------------------------------------------------------- Brian, this is Mitch Little. I think just in terms of thinking about where Kurdistan fits, we've got three blocks there, as I'm sure you know at different levels of maturity. The operated block at Harir, we've completed testing of our appraisal well. The well results were largely in line with pre-drill expectations. At this point, we demobilized the rig. We've substantially completed all of our work commitments there, and we're integrating that data into the rest of the technical database and commercial assessment headed towards a commerciality decision on that block later this year. You're probably also familiar with the Atrush block. Phase one development is progressing towards a 30,000 barrel a day gross facility. It should come online in 2016. Then our interest in the Sarsang block is progressing towards approval of the field development plan which will be a phased development ramp-up over time. -------------------------------------------------------------------------------- JR Sult, Marathon Oil Corporation - EVP and CFO [46] -------------------------------------------------------------------------------- Brian, I'm sorry. I should have stepped in or answered that before Mitch, but the reality is I think we generated an asset through the work that Mitch and the team have done that has had very solid subsurface success. I think the question we have to continue to ask ourselves is as we think about future investments in Kurdistan, and whether or not they compete for capital with the rest of the portfolio. If the answer to that is no, we want to ensure we can actually capture the value that's been generated by the team in order to redeploy that capital someplace else. I'm trying not to be explicit with regard to what particular assets so I don't put myself in a competitive disadvantage in the process, but you should expect that we are looking across the entire portfolio for candidates. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- David Heikkinen. -------------------------------------------------------------------------------- David Heikkinen, Heikkinen Energy Advisors - Analyst [48] -------------------------------------------------------------------------------- Every call. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [49] -------------------------------------------------------------------------------- You are good sport, David. -------------------------------------------------------------------------------- David Heikkinen, Heikkinen Energy Advisors - Analyst [50] -------------------------------------------------------------------------------- I am. I need to figure out a way to respell my name or something, (inaudible) pronounce it correctly. As I think about the profitable at $50 oil, are you using a well level economic, or is that asset level inclusive of all costs? How do you define that inventory and metrics for profitable at $50 oil? -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [51] -------------------------------------------------------------------------------- We tend to look at single well economics from an external standpoint which allows us to benchmark I think more effectively with what others put out into the public domain, David. I think internally though we also want to look and see from a fully burdened level what is the return, not only down to the well level, but as a program or even a rig line, in a particular area, in a particular play. We want to make sure that we fully understand the fully burdened economics of those wells. There's an aspect of it which is we want to be able to make sure we can compare externally, but certainly internally, we want to make absolutely sure we understand the total return from those investments. -------------------------------------------------------------------------------- JR Sult, Marathon Oil Corporation - EVP and CFO [52] -------------------------------------------------------------------------------- Just to be clear, what Lee's point is, is that when you look at our completed well cost that truly is just completed well costs. When you look at the returns that we share, those have been burdened by facilities, at least individual well facilities necessary for flow, not to the extent of broad central facilities, but individual well facilities. -------------------------------------------------------------------------------- David Heikkinen, Heikkinen Energy Advisors - Analyst [53] -------------------------------------------------------------------------------- It has all the surface everything needed? -------------------------------------------------------------------------------- JR Sult, Marathon Oil Corporation - EVP and CFO [54] -------------------------------------------------------------------------------- Correct. Artificial lift, etc. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [55] -------------------------------------------------------------------------------- Basically, the lifecycle cost of the well, ex any main centralized facilities, David. -------------------------------------------------------------------------------- David Heikkinen, Heikkinen Energy Advisors - Analyst [56] -------------------------------------------------------------------------------- Any particular area of where the other 30% falls? Is it Williston [back], Eagle Ford? In that order? It's probably what I would do. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [57] -------------------------------------------------------------------------------- The last disclosure that we offered up, and we showed the economics, the relative economics, of the various plays from a single well economics standpoint, it was clear that Eagle Ford and Oklahoma were at the most competitive portion of that plot. The higher quality in the Bakken was also in that same ZIP code, and that really is what drove our capital allocation as we came into 2015. I think what you have heard is that the Eagle Ford as well as Oklahoma have continued to also improve from a single well economics standpoint, from a cost and productivity standpoint, but also the Bakken has continued to improve its competitiveness as well. We'll hopefully be able to share a little bit more color on that a little bit later in the year as we are able to roll in some of the specific updates on EURs and single well economics. I think that order in terms of capital allocation is exactly what you see in our current portfolio, which is the Eagle Ford wells, particularly condensate and [high g oil] to a certain extent, are still very strong from a return standpoint. Both the SCOOP and the STACK still compete very favorably as well, and then in the higher quality areas of Bakken, such as the Myrmidon, they are also competing for capital allocation. -------------------------------------------------------------------------------- David Heikkinen, Heikkinen Energy Advisors - Analyst [58] -------------------------------------------------------------------------------- Then asset sales around $500 million next year as well, is a reasonable assumption? -------------------------------------------------------------------------------- JR Sult, Marathon Oil Corporation - EVP and CFO [59] -------------------------------------------------------------------------------- David, I think what you want to assume is what we talked about is greater than $500 million. I haven't been real explicit on timing. I thought give it 12 months from when we announced it. We wouldn't have put a target out there if we didn't have some degree of confidence, but you should expect that program to continue, not necessarily stop if we cross the $500 million level. -------------------------------------------------------------------------------- David Heikkinen, Heikkinen Energy Advisors - Analyst [60] -------------------------------------------------------------------------------- Okay. Thanks -------------------------------------------------------------------------------- JR Sult, Marathon Oil Corporation - EVP and CFO [61] -------------------------------------------------------------------------------- Thanks, David. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- John Herrlin. -------------------------------------------------------------------------------- John Herrlin, Societe Generale - Analyst [63] -------------------------------------------------------------------------------- Hi. Some quick ones. When you look at your portfolio, Lee, I want to get back to the short cycle, long cycle type activity. What do you think is an ideal balance? If you have more of an emphasis on short cycle, is the time to revisit hedging? -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [64] -------------------------------------------------------------------------------- Yes, I'll maybe let JR jump in on the hedging question, but let me first talk about long cycle versus short cycle. Right now, the bulk of our investment dollars are flowing into North America short cycle. The driver there is they have the highest risk-adjusted returns in the portfolio that we have today. For us, it's probably a little bit less about short cycle, long cycle than it is about where can we generate the highest risk-adjusted return? To the extent that we continue to see long cycle or longer cycle opportunities, great examples are the things we've done in Equatorial Guinea and the UK this year in terms of the program drilling that we have done there, that are very strong from a capital allocation standpoint and have added very profitable barrels to the portfolio. In no way are we necessarily turning our back on longer cycle type investments, but the balance is going to be dictated by the opportunities set we have in the portfolio and being driven by generating those highest risk-adjusted returns. From a hedging standpoint certainly we view that as just an element of overall commodity risk management. Maybe I will let JR comment on that. -------------------------------------------------------------------------------- JR Sult, Marathon Oil Corporation - EVP and CFO [65] -------------------------------------------------------------------------------- John, you and I have talked before. It's definitely a tool we need to be using. We are using. We've been far more active than, I think, Marathon has been in the past. Would I like to have had more hedges on today? Yes, but we have probably at least for the balance of 2015, the market is more concerned about 2016, we probably have got about 35,000 barrels a day hedged for the balance of 2015. We really just were able to begin to establish a position in 2016 before the market fell on us, but it's definitely going to be a tool we're going to continue to use. -------------------------------------------------------------------------------- John Herrlin, Societe Generale - Analyst [66] -------------------------------------------------------------------------------- Great. Thanks, JR. One other for me, in the Eagle Ford you had incredible drilling efficiency. Are you changing crews? Are you getting different rigs? How can you have this level of improvement in your well design or execution? -------------------------------------------------------------------------------- Lance Robertson, Marathon Oil Corporation - VP North America Production Operations [67] -------------------------------------------------------------------------------- John, I think what you're seeing is a just recognition by a team who refuses to accept that they've done their best work already. They continue to see in the future they can be innovative and thoughtful. In this case, part of the changes is as we have moderated activity, we have certainly kept the best rigs and the best crews because it helps both our operational efficiency, as well as environmental safety performance. We've retained rig with the highest specifications, so the right types of capabilities that we moved to in that rig fleet that can really drive it. Those unique attributes of those rigs allow us to use other types of downhole tools. The combination of those technologies together has really delivered this performance. I would say while 1,800 feet per day was materially better than the year-ago quarter, our best rigs are at 2,600, 2,700 feet per day already, which shows you the gap. If we can get the whole fleet to there, there's room to improve that overall. We see that as sustainable. In fact, as we move to the stack-and-frac pilots and the co-development of multiple horizons we actually think that enables the type of efficiency further because we're going to drill more wells on each pad as we go to development. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [68] -------------------------------------------------------------------------------- I think, John, too it's probably important to note that when we look at the true pacesetter drilling performance in the Eagle Ford, where we had one of our best rigs deliver 3,100 feet per day, it just gives you a feel for just how much more room we have to drive toward if we are averaging 1,800 feet for the quarter. It does show that there is continuing efficiency gains that can be made. Now, will we get that immediately across the whole fleet? No, but it does set that marker out there of what can be achieved with the best crews, the best equipment being brought to bear. -------------------------------------------------------------------------------- John Herrlin, Societe Generale - Analyst [69] -------------------------------------------------------------------------------- Great. Thanks, Lee. -------------------------------------------------------------------------------- JR Sult, Marathon Oil Corporation - EVP and CFO [70] -------------------------------------------------------------------------------- Thank you, John. -------------------------------------------------------------------------------- Operator [71] -------------------------------------------------------------------------------- Scott Hanold. -------------------------------------------------------------------------------- Scott Hanold, RBC Capital Markets - Analyst [72] -------------------------------------------------------------------------------- Thanks and good morning -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [73] -------------------------------------------------------------------------------- Good morning, Scott. -------------------------------------------------------------------------------- Scott Hanold, RBC Capital Markets - Analyst [74] -------------------------------------------------------------------------------- If I could step back, and again focus on big picture, where Marathon is going at this point in time, be somewhat agnostic to current low commodity prices with the resource potential that you are building in some of the North American resource plays, is there a transformation occurring where Marathon is going to become more focused on these lower risk, potentially higher returning, short cycle opportunities? Again, being somewhat agnostic to low prices right now? -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [75] -------------------------------------------------------------------------------- Absolutely, Scott. That transformation is underway, has been underway. I think as we have made this very decided pivot to North America resource plays for clear economic reasons, you are seeing that in where our investment dollars are flowing. You are right. We have this incredible 3 billion barrels of 2P resource inventory in the 3 core US resource plays that affords us a tremendous amount of future opportunity. Our challenge is ensuring that we get the appropriate investment levels driven to those 3 core plays and bring those up to scale of development. We are really at scale in the Eagle Ford. Certainly, we've been at Bakken at scale for some time as well, but Oklahoma is still an area where we would like to see more capital invested, and not just the non-operated but also the operator program. Certainly, as we think about that incremental amount of capital coming available to invest, we absolutely see that flowing to places like the Eagle Ford and Oklahoma. -------------------------------------------------------------------------------- Scott Hanold, RBC Capital Markets - Analyst [76] -------------------------------------------------------------------------------- Okay. Good, thanks. As a follow-up and I know both of you all have been in this industry for quite some time, and JR, you're obvious experienced in some of your past firms. With the low price environment we're in right now, can you discuss from an industry consolidation perspective your view on what could occur and how Marathon fits into that? -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [77] -------------------------------------------------------------------------------- It's always tough to speculate I think on the M&A space. I think right now with the dynamics that we're seeing in the marketplace, it's very challenging I think to see a lot of deal activity. In fact, that's really what's played out. There's been a few one-off opportunities that were probably taken. The decisions may have been taken in a slightly different environment that we find ourselves today, but with equities very depressed I think with everyone reacting to another dramatic downtick in pricing, it's hard to imagine there's going to be a lot of that type of activity, at least in the near-term. Now as you look further ahead, and we see a more persistent lower for longer price environment then I think the concept that there will be additional consolidation, additional opportunities come available to those that are prepared to take advantage of those, then absolutely. I would agree with that. -------------------------------------------------------------------------------- Scott Hanold, RBC Capital Markets - Analyst [78] -------------------------------------------------------------------------------- That's great. Thank you. -------------------------------------------------------------------------------- Operator [79] -------------------------------------------------------------------------------- Guy Baber. -------------------------------------------------------------------------------- Guy Baber, Simmons & Company - Analyst [80] -------------------------------------------------------------------------------- Good morning, everybody. -------------------------------------------------------------------------------- JR Sult, Marathon Oil Corporation - EVP and CFO [81] -------------------------------------------------------------------------------- Hello, Guy. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [82] -------------------------------------------------------------------------------- You fared a little better than David did on the last name. -------------------------------------------------------------------------------- Guy Baber, Simmons & Company - Analyst [83] -------------------------------------------------------------------------------- That's right. I have been called Gee numerous times, so Guy, I will take it. I was hoping to clarify a few comments you just made earlier in the Q&A, Lee. You mentioned that in this price environment capital spending would be down from the current year. You also said that even with the flat to lower budget in 2016 that the North American production component would grow, so could you just elaborate on that comment a bit? I want to make sure that we have that right. I'm really just trying to understand that assertion and square that with our understanding that the unconventional production would exit this year below the full year average, and then a maintenance CapEx levels you could hold that 4Q exit rate flat through 2016. I just want to make sure we understand that trajectory and some of the moving parts that we might be missing. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [84] -------------------------------------------------------------------------------- No, absolutely. Honestly, we're very early in the planning cycle for 2016, but just thinking about it conceptually, we know that our capital budget will be less than where we stand in 2015. In fact, the run rate that you mentioned as we exit 2015, that $2.9 billion run rate certainly less than the $3 billion, that really does entail an ability to direct more capital deployment to the North America resource plays. For a bit smaller pie, we are able to, today, dedicate a much larger slice to the North America resource plays even in that scenario. The ability to have that optionality to move from more of a maintenance capital mode in the resource plays to more of a growth mode, we still have that optionality within a reduced budget in 2016. -------------------------------------------------------------------------------- Guy Baber, Simmons & Company - Analyst [85] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [86] -------------------------------------------------------------------------------- Did that get you clarification, Guy? -------------------------------------------------------------------------------- Guy Baber, Simmons & Company - Analyst [87] -------------------------------------------------------------------------------- Yes, that helps a ton. Thanks, and that's the only one that I had. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [88] -------------------------------------------------------------------------------- Thank you, Guy. -------------------------------------------------------------------------------- Operator [89] -------------------------------------------------------------------------------- Phillip Jungwirth. -------------------------------------------------------------------------------- Phillip Jungwirth, BMO Capital Markets - Analyst [90] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [91] -------------------------------------------------------------------------------- Good morning, Phillip. -------------------------------------------------------------------------------- Phillip Jungwirth, BMO Capital Markets - Analyst [92] -------------------------------------------------------------------------------- On the Eagle Ford, you noted 40% sequential decline in activity as the reason for lower production. Looking at the expected wells to sales in the second half, it looks like the quarterly average is going to be a little bit lower than what you had in 2Q. Is the current activity run rate below maintenance CapEx (inaudible), or can volume still be held flat on better well productivity in the second half, or a shallower decline, given that you probably had a lot of [flush] production coming into the year? -------------------------------------------------------------------------------- Lance Robertson, Marathon Oil Corporation - VP North America Production Operations [93] -------------------------------------------------------------------------------- Philip, I think you're seeing that actually very well. Compared to the previous several quarters where we've had in excess of 90 wells to sales, in the second quarter we had 52 wells per sales, which is driving that production in Eagle Ford downward. Really, the wave of those higher productivity wells that are very early in their life coming down has overwhelmed the number of new wells to sales. I think from a perspective of activity across North America including Eagle Ford has come down about 45% for us. What you really see is we are managing that downward to a point of stability. We will have roughly the same number of wells, plus or minus, in the third and fourth quarter in Eagle Ford specifically. In any given quarter, our working interest moves around a little bit within that, so that number of gross wells and net wells can move a bit. I think in general we are guiding toward relatively flat production quarter-over-quarter, and we're managing that large activity downward in the quarter. I would say too some context on that is even as we said the wells to sales were lower in Eagle Ford, I think it's important to note we went from 5 fracked fleets to 2 by April. We were down to that lowest level of wells to sales driven activity by very early in the second quarter, which added to the deceleration impact. -------------------------------------------------------------------------------- Phillip Jungwirth, BMO Capital Markets - Analyst [94] -------------------------------------------------------------------------------- Okay, great. Can you discuss any results from the one Osage well brought on during the quarter? I think Marathon might be the first to drill a well in this zone. Based on what you know to date, how would you also compare this emerging play to both the Merrimack and the Woodford? -------------------------------------------------------------------------------- Lance Robertson, Marathon Oil Corporation - VP North America Production Operations [95] -------------------------------------------------------------------------------- Sure, Philip. Last year, we started and exploration program in STACK focused on the Merrimack and the Osage. That Osage well was the last well of the initial group, our initial foray into the STACK, in an operator basis. I think you may recall in the second half of last year, we actually increased activity in Oklahoma up to six rigs. That well was drilled effectively starting right after Christmas, and it's the last well in that program. We have evaluated some of the results from all of those. We continued to see the Merrimack as the most valuable zone in that area in general. I don't think we foresee more Osage activity anytime in the near term. -------------------------------------------------------------------------------- Phillip Jungwirth, BMO Capital Markets - Analyst [96] -------------------------------------------------------------------------------- Great. Thanks. -------------------------------------------------------------------------------- Operator [97] -------------------------------------------------------------------------------- Pavel Molchanov. -------------------------------------------------------------------------------- Pavel Molchanov, Raymond James & Associates - Analyst [98] -------------------------------------------------------------------------------- Thanks for taking the question. You are talking about selling some assets in an extremely depressed environment, where there are plenty of distressed sellers that are in far worse shape than you are. Isn't it leaving money on the table if you are monetizing just about anything right now? -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [99] -------------------------------------------------------------------------------- First of all, I don't view our non-core assets being distressed sales. The reason I say that, Pavel, is that when you think about the type of assets that we will put in the market, we believe that they are still a very strong competitive environment for those assets. I will use the East Texas-North Louisiana-Wilburton transaction as an example. We had a very strong response to the data room. We had well over 20 proposals for the property. When you look at the deal metrics, they were very compelling on a cash flow multiple basis over 9X. We feel like for the right type of assets, there is still a ready market out there, and I would not want to leave the impression that we are selling anything at reduced value or low value to our shareholders. We don't view these as distressed assets. We simply view them as part of our ongoing portfolio management. If we can't capture fair value, then we'll continue to operate. In the case of the East Texas-North Louisiana-Wilburton deal, it was a gassy asset. It was no longer competing for capital allocation. Relatively high unit cash cost. We had a strong competitive environment for it, and the deal metrics were very competitive in this pricing environment or others. I think we feel very good about our ability to continue to transact at fair values. -------------------------------------------------------------------------------- Pavel Molchanov, Raymond James & Associates - Analyst [100] -------------------------------------------------------------------------------- Understood. Just to clarify it's not your assets I was calling distressed. It's plenty of others in the market that are in that state. Now, my follow-up is you talked about flexing the balance sheet into 2016. Debt-to-cap is currently at 29%. How high would you be comfortable letting that metric go up? -------------------------------------------------------------------------------- JR Sult, Marathon Oil Corporation - EVP and CFO [101] -------------------------------------------------------------------------------- What I would tell you is I've always tried to be careful to draw hard and fast rules, but what I think of looking through 2016, when I take into consideration what I said before about the variables around capital, operating cost structure, asset sales programs, I still want to ultimately manage the balance sheet through 2016, to let's call it, as close to 2.5 times net debt to EBITDA as I can in this low commodity price environment. It's going to be lumpy. It's going to be dependent on the timing of various asset sales. That will become a bit higher than that. That's ultimately one of the variables I am trying to manage to. As commodity prices beginning to stabilize, whether that's early 2017 or you decide when, then ultimately you will see that leverage get back to its more traditional levels of 2 times and below. -------------------------------------------------------------------------------- Pavel Molchanov, Raymond James & Associates - Analyst [102] -------------------------------------------------------------------------------- Okay. Useful. I appreciate it guys. -------------------------------------------------------------------------------- JR Sult, Marathon Oil Corporation - EVP and CFO [103] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [104] -------------------------------------------------------------------------------- Jeffrey Campbell. -------------------------------------------------------------------------------- Jeffrey Campbell, Tuohy Brothers - Analyst [105] -------------------------------------------------------------------------------- Wow, I didn't think you can mispronounce Campbell, but that's okay. -------------------------------------------------------------------------------- Lee Tillman, Marathon Oil Corporation - President and CEO [106] -------------------------------------------------------------------------------- Good morning, Jeff. -------------------------------------------------------------------------------- Jeffrey Campbell, Tuohy Brothers - Analyst [107] -------------------------------------------------------------------------------- My first question regards the Oklahoma resource plays, the increase non-op participation. I was just wondering are the choices driven by any specific operator performance, or is it driven more by geography? -------------------------------------------------------------------------------- Lance Robertson, Marathon Oil Corporation - VP North America Production Operations [108] -------------------------------------------------------------------------------- Jeffrey, I think overall we are focused on value. We have a substantial core acreage position in both the SCOOP and in the STACK. When we see activity in that core high-value acreage, where we have seen great historical results and from recent data, we expect those results to be great in other areas. We are choosing to participate in those wells to capture the data and leverage both the collection of that data and integration of it to drive toward full field development. To some extent if you didn't participate in those valuable acres, it's an opportunity lost. We certainly want to capture all those opportunities, so it's not really driven by an operator. It's driven by our perceived value of the acreage and the opportunity. I'd say within the context of that we see more execution friendly operators than others and as you'd imagine based on that we make economic decisions based on how we feel they can execute. -------------------------------------------------------------------------------- Jeffrey Campbell, Tuohy Brothers - Analyst [109] -------------------------------------------------------------------------------- Okay, that's helpful. My other question was on slide 17 regarding the Bakken spacing pilots to this point. The ranges appear less prolific than some of the non-spacing data that's provided, yet a large production uplift was identified out to 180 days. I'm wondering if you can help me to understand how to interpret the data that's being presented, and as well if you could indicate how you feel the pilots are performing, relative to your expectations at this point? -------------------------------------------------------------------------------- Lance Robertson, Marathon Oil Corporation - VP North America Production Operations [110] -------------------------------------------------------------------------------- Sure. With three spacing pilots, I feel like we made a lot of progress at moving that forward on an operated basis. I will started work south to north, if you will. Those spacing pilots are in three different areas, starting in the south, it's Middle Bakken, so it's a six well per Middle Bakken pattern overall. There is a wide range of results there. I think in the case of that pilot in the Ajax area, when you look at the aggregate of all the wells on there, you will see some above type curve. You'll see some a little below, but when you put them together they look like they are performing very in line with early expectations for that despite it being closer spacing than standalone wells, so that gives us a lot of encouragement. We expected some differentiation. In some cases, what we will find is when we go in, and there is more than one parent or older well in the area, you will see some depletion impact in the new well that's near that older well. It will be impacted modestly by that. In aggregate, we tend to look at the entire unit. How many wells? How many total dollars invested? What's the total production coming out of that? That Ajax pilot for example is performing very much in line with those expectations. Moving further north to Hector and that pilot, again we see a diversity of results, but in aggregate they're performing very similarly to our expectations for the early production. Some of the wells in those groups are more mature than others, so several of those at 90 or 120 days, and they're continuing to perform well. We're very pleased with that result overall. These pilot, some of the wells, vintage-wise had more aggressive stimulations than others based on when they were drilled and completed. Then lastly in Myrmidon, we see a wide range there too. I think in the case of the one pilot, we intentionally looked at that pilot and said there are 4 older parent wells between those 2 sections or units that were developed together. The new wells near the parent wells are showing lesser production than the wells that are further outlying. That's not unexpected. In our case, we want to test that as we have parent well bores we need to work around, but I think in general, we're still very pleased with the overall production, and continue to see that as a validation of spacing assumptions moving forward. -------------------------------------------------------------------------------- Jeffrey Campbell, Tuohy Brothers - Analyst [111] -------------------------------------------------------------------------------- That's fantastic color. If I could add a little follow-up because the question was long enough to begin with, just to clarify, do these spacing pilots any cost advantages over a more typical production pattern? Or is this just purely about trying to capture the maximum resource? -------------------------------------------------------------------------------- Lance Robertson, Marathon Oil Corporation - VP North America Production Operations [112] -------------------------------------------------------------------------------- Jeffrey, any time we have the opportunity to pad developed groups of wells, we have a great opportunity on the drilling efficiency side to capture those cost savings. Similarly on the completion side, when we can leave a frac fleet on one pad and complete multiple wells, on both of those fronts, we gain tremendous efficiency. Then lastly on the surface facility, the ability to share those surface facilities also creates a scale efficiency. We constantly seek and desire the opportunity for pad development because it really does positively influence our capital. -------------------------------------------------------------------------------- Jeffrey Campbell, Tuohy Brothers - Analyst [113] -------------------------------------------------------------------------------- Okay, thanks very much. -------------------------------------------------------------------------------- Chris Phillips, Marathon Oil Corporation - Director of IR [114] -------------------------------------------------------------------------------- Thank you for the questions and interest in Marathon Oil. I'd like to thank everyone again for their participation this morning. Please contact Zach Dailey or myself if you have any follow-up questions. -------------------------------------------------------------------------------- Operator [115] -------------------------------------------------------------------------------- Thank you. This concludes today's conference call, and you may now disconnect.
|