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Text: These documents can be found on our website at marathonoil.com.
We'll also hear from Mike, Dane and Pat before we get to our question-and-answer session.
While I get the privilege of talking about our company's impressive results and outlook today, it is their hard work that makes all of this possible.
Through our commitment to capital discipline and our differentiated execution, we are successfully delivering outsized financial outcomes for our shareholders, highlighted by more than $1.3 billion of free cash flow year to date.
For our $1 billion full year 2021 capital budget, at forward curve commodity pricing, we now expect to generate well over $2 billion of free cash flow this year, at a reinvestment rate below 35% and a free cash flow breakeven below $35 per barrel WTI.
We are successfully delivering on all of our financial and operational objectives and achieving bottom line results that we will put head-to-head against any other energy company and against any other sector in the S&P 500.
This strong financial performance has enabled us to pull forward our balance sheet targets.
And this further improvement to our already investment-grade balance sheet has given us the confidence to dramatically accelerate the return of capital to equity holders.
Under our unique return of capital framework, our shareholders get the first call on cash flow, a minimum of 40% of our total cash flow from operations in the current price environment.
Consistent with our commitment to shareholder returns and our objective to pay a competitive and sustainable base dividend, we have raised our base dividend by 20% this quarter.
This is the third quarter in a row that we have increased our base dividend, representing a cumulative 100% increase since the end of 2020, a sign of the increased confidence we have in our business.
We are also targeting approximately $500 million of share repurchases during the fourth quarter with $200 million already executed.
At a free cash flow yield north of 20%, we believe our equity offers tremendous value.
Additionally, there remains a dislocation between our equity and strengthening commodity prices coupled with a more mature business model that underwrites repurchases through the cycle.
Further, buying back our stock for good value provides the added potential of significantly reducing our share count, meaningfully improving all of our per-share metrics even under a maintenance scenario and increasing our longer-term capacity for continued per share base dividend increase.
Looking ahead to fourth quarter, including our base dividend and planned share repurchases, we expect to return approximately 50% of our total cash flow from operations to equity holders, fully consistent with our return of capital framework that prioritizes the shareholder first.
Our financial flexibility and the power of our portfolio in the current commodity price environment provided the confidence for our board to also increase our total share repurchase authorization to $2.5 billion, to ensure we can continue executing on our return of capital plans as we progress through 2022.
And perhaps most importantly, everything that we are doing is sustainable, backed by our five-year benchmark maintenance scenario and our ongoing pursuit of ESG excellence through top quartile safety performance, significant reductions to our GHG intensity and best-in-class corporate governance.
Third quarter operations were again solid, demonstrating that we remain on track to achieve or outperform all of the key 2021 financial, operational and ESG-related objectives that we established at the beginning of the year.
First and foremost, our consistent execution is translating to outsized financial outcomes, highlighted by over $2 billion of expected free cash flow, with a material sequential increase expected in the fourth quarter, a full year 2021, reinvestment rate below 35% and full year corporate free cash flow breakeven $35 per barrel WTI.
Our gas capture during third quarter also exceeded 99%, as we continue to reduce our GHG emissions intensity.
There is no change to our $1 billion full year 2021 capital budget.
Raising our spending levels this year has never been a consideration, consistent with our commitment to capital discipline.
There is also no change to the midpoint of our full year total company oil or total company oil equivalent production guidance.
We're also raising our full year 2021 EG equity method income guidance for the second consecutive quarter to a new range of $235 million to $255 million due to stronger commodity prices.
This is a 30% increase from the guidance we provided last quarter and a 120% increase relative to our initial guidance at the beginning of the year.
Our full year production and EG equity method income guidance truly contemplate an unplanned outage we experienced in EG late in the third quarter.
Looking ahead to fourth quarter, we expect to finish the year strong with our total company oil production increasing to between 176,000 and 180,000 barrels of oil per day in comparison to 168,000 barrels of oil per day during the third quarter.
Our quarterly production volumes are all subject to some normal variability associated with well timing.
But this more significant sequential increase is due largely to deferred Bakken production associated with third-party midstream outages, strongly well performance and solid base production management.
We also expect our fourth quarter total company oil equivalent production to be similar to the third quarter at 345,000 barrels of oil equivalent per day, with a sequential increase in the U.S. offsetting a sequential decrease in Equatorial Guinea associated with the previously referenced outage.
As I noted last quarter, our financial priorities are clear and unchanged, generate strong corporate returns with significant sustainable free cash flow, all prove our already investment-grade balance sheet and return significant capital to shareholders.
Early in the third quarter, we retired $900 million in debt, bringing total 2021 gross debt reduction to $1.4 billion and achieving our targeted $4 billion gross debt level.
With this milestone, we no longer feel the need to accelerate additional debt reduction.
And going forward, we plan to simply retire debt as it matures.
And please note that we have no significant maturities in 2022.
This balance sheet repositioning was achieved well ahead of our original schedule, which opened the door to begin returning a significant amount of capital to equity holders.
To be clear, these are returns beyond our base dividend which we just increased for the third consecutive quarter.
Our base dividend is actually up 100% over that time period, now at $0.06 a share per quarter and the $50 million of annual interest savings were realized due to lower gross debt will help fund a significant portion of this base dividend increase.
Our equity return framework calls for delivering a minimum of 40% of cash from operations to shareholders when WTI is at or above $60 a barrel.
This is a peer-leading return of capital commitment.
It is also competitive with any sector in the S&P 500.
Our fourth quarter is shaping up to be an exceptionally strong free cash flow quarter due to a combination of higher commodity prices and oil volumes quite a bit stronger than the third quarter.
At recent strip pricing, this could take our operating cash flow to approximately $1.1 billion or about a 25% sequential increase versus the third quarter.
Add to that an expected increase in dividend distributions from EG and lower capex relative to the third quarter peak and fourth quarter free cash flow could almost double to north of $850 million.
So in Q4, we expect to have lots of flexibility to exceed our 40% of operating cash flow, a minimum threshold for equity returns.
In fact, through our base dividend and approximately $500 million of share repurchases, we expect to return approximately 50% of our operating cash flow to investors during the fourth quarter while further improving our cash balance and net debt position.
As we also mentioned, we believe that buying back our stock in a disciplined fashion makes tremendous sense.
There are many opportunities in the market right now that provide a sustainable free cash flow yield north of 20%.
Stepping back, the full year 2021 financial delivery is exceptional, $140 million in base dividends, $1.4 billion in debt reduction and $500 million of share repurchases representing a total return to investors combined debt and equity of over $2 billion or over 60% of our expected full year operating cash flow at strip commodity prices.
Our actions in 2021 have successfully repositioned the balance sheet and kicked off a strong track record of equity returns.
Going forward, we're going to stay laser-focused on our financial priorities and our return of capital framework, taking into account our cash flow outlook when making return decisions.
Because our framework is based on a minimum percentage of cash flow from operations and not free cash flow, the equity investor will have the first call on cash, not to drill a bit.
We recently completed our 2021 REx drilling program, which was focused on the continued delineation of our contiguous 50,000 net acre position in our Texas Delaware oil plant.
As a reminder, this is a new play concept for both the Woodford and Meramec that was secured through grassroots leasing at a very low cost of entry and with 100% working interest.
This is essentially an exploration bolt-on that is complementary to our already established position in the Northern Delaware.
We brought online our first multi-well pad during the third quarter.
And while it is still very early, initial production rates in both Woodford and Meramec are exceeding our predrill expectations.
More specifically, one of the Woodford wells achieved an IP30 of almost 2,100 barrels of oil per day at an oil cut of 66%.
This appears to be the strongest Woodford oil well ever drilled in any basin.
And while we don't yet have 30-day rates for the other two wells, early indicators, including IP24s are all very positive.
A primary objective of this three-well pad was to execute our first spacing test in the playing.
To date, we are seeing no evidence of interference between the Woodford and Meramec, consistent with our expectations due to over 700 feet of vertical separation between the two zones.
As I stated, it's still early and we need more production history to draw stronger conclusions, but we are certainly encouraged by the initial results from this first spacing test, including the record Woodford productivity.
The second objective was to continue to progress our learnings and cost improvements and completed well costs.
We expect to ultimately deliver well costs comparable to those achieved in the SCOOP and are aggressively leveraging our substantial experience in Oklahoma to that end.
In total, we have now brought online nine wells since play entry that have successfully delineated our position.
The six wells with longer dated production have collectively demonstrated strong long-term oil productivity.
Oil cuts greater than 60%, low oil ratios below one and shallow declines.
Looking ahead to 2022, you should expect us to continue to integrate our learnings and progress our understanding of this promising play.
However, we will do so in a disciplined manner and within our strict reinvestment rate capital allocation framework.
I will close with a quick summary of how we have positioned our company for success and a preview of what to expect from us in 2022.
Spoiler alert, there will be no surprises in 2022 and no compromise with respect to our capital return framework.
If we focus on the financial benchmarks that matter, we are delivering top-tier capital efficiency, free cash flow yield and balance sheet strength.
Our 2021 capital rate of sub-35% and capital intensity as measured by capex per barrel of production are both the lowest in our independent E&P peer group, a strong validation of our leading capital and operating efficiency.
We are also one of the few E&Ps expecting to deliver a 2021 reinvestment rate at or below the S&P 500 average.
We're also delivering top quartile free cash flow yield this year among our peer group and well above the S&P 500 average.
And we are doing all of this with an investment-grade balance sheet at sub-onetime net debt to EBITDA, a 2021 leverage profile also well below both our peer group and the S&P 500 average.
In short, we are successfully delivering outsized financial performance versus our peer group and the broader market with the commodity price support we are experiencing this year.
Yet perhaps more importantly, we are well positioned to deliver competitive free cash flow and financial performance versus the broader market at much lower prices than we see today, all the way down to the $40 per barrel WTI range.
This is the power of our sustainable cost structure reductions, our capital and operating efficiency improvements and our commitment to capital discipline, all contributing to a sub-$35 per barrel breakeven.
Looking ahead to 2022, our differentiated capital allocation framework that prioritizes the shareholder at the first call on cash flow generation will not change.
Our commitment to capital discipline will not waver with maintenance oil production, the case to beat, as we finalize our 2022 budget.
We believe the right business model for a mature industry prioritizes sustainable free cash flow, a low reinvestment rate and meaningful returns to equity investors, not growth capital.
Recall that we introduced a unique five-year maintenance scenario earlier this year that featured $1 billion to $1.1 billion of annual spending, $1 billion of annual free cash flow at $50 WTI and a 50% reinvestment rate.
Given we are no longer living in a $50 per barrel environment and that prices are currently north of $80 per barrel, it is both prudent and reasonable to consider some level of limited inflation up to about 10% that would yield modest pressure on the maintenance scenario capital range.
Yet importantly, this modest level of inflation pales in comparison to the uplift to our financial performance in the current environment, with a 2022 maintenance scenario free cash flow potentially on the order of $3 billion at recent strip pricing or nominally three times the $50 benchmark outcome.
And under such a maintenance scenario, we are positioned to lead the peers once again with a 2022 free cash flow yield above 20%, far in excess of the S&P 500 free cash flow yield of approximately 4%.
Our minimum 40% of cash flow target translates to about $1.6 billion of equity holder returns next year.
But that is a minimum and we see significant headroom to drive that number higher.
At the expected 4Q run rate of 50% of CFO, 2022 equity holder returns would increase to approximately $2 billion, while still improving our cash balance and net debt position.
Even at a more conservative $60 per barrel oil price environment, our minimum 40% of cash flow targets still translates to about $1.1 billion of equity holder returns in 2022.
And applying 2022 consensus estimates to the return frameworks disclosed by our peers, only confirms our leading return of capital profile, with a double-digit cash distribution yield to our equity investors in 2022.
The confidence in this outsized delivery is further supported by recent board action to increase our share repurchase authorization to $2.5 billion to ensure we have sufficient runway to continue delivering on our return of capital commitment next year.
To close, our company was among the first to recognize the need to move to a business model that prioritizes returns, sustainable free cash flow, balance sheet improvement and return of capital.
We have also led the way in better aligning executive compensation to this new model and with investor expectations.
We are successfully executing on our model today, delivering both financial outcomes and ESG excellence that are competitive not just with our direct E&P peers but also the broader market.
With that, we can open up the line for Q&A.

user
q3 oil-equivalent production of 345,000 net boed.
no change to midpoint of 2021 total company oil or oil-equivalent production guidance.
marathon oil's 2021 capital expenditure guidance of $1 billion remains unchanged.
marathon oil - raising its fy 2021 equatorial guinea equity method income guidance for second consecutive quarter to new range of $235 million to $255 million.
company expects q4 total oil-equivalent production to be similar to q3 production of 345,000 net boed.

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