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Marathon Oil's 2017 Three-Track Race: Oklahoma, Bakken, Eagle Ford

For 2017 Marathon Oil Corp. plans to spend where it can get the highest returns: its leading U.S. resource plays in Oklahoma, Texas and North Dakota.

"This year's $2.2 billion capital program underscores our strategic shift as we allocate over 90% to the U.S. resource plays," said CEO Lee Tillman. "We're ramping up activity in Oklahoma as we progress our STACK and SCOOP acreage toward full-field development, and in the Bakken where our enhanced completions recently achieved record results in the basin. Additionally, our Eagle Ford asset will contribute significant free cash flow while continuing to drive operational efficiencies."

Marathon Oil said it will allocate $2 billion to the U.S. resource plays, which will be split about one-third to each of the three basins, with Oklahoma occupying the company's "first call" on capital.

In Oklahoma the company will focus on Sooner Trend of the Anadarko Basin, mostly in Canadian and Kingfisher counties (STACK) leasehold retention, STACK delineation and infill pilots in preparation for 2018 full field development. The company plans to increase its Oklahoma rig count to average 10 rigs, while bringing 90 to 100 gross company-operated wells to sales. This includes four to five STACK infill pilots and two South Central Oklahoma Oil Province (SCOOP) infill pilots to sales, as well as testing additional secondary horizons.

In the Eagle Ford, the company expects to maintain a six-rig program and bring 155 to 170 gross company-operated wells to sales. With about two-thirds of the program focused in the high-margin oil window, the company said it expects this asset to generate significant free cash flow in 2017.

In the Bakken, Marathon Oil plans to focus on its highest-return West and East Myrmidon areas, where it completed several "basin-leading" wells last year. The company said it will progress multiple enhanced completion trials as well as continuing its focus on optimizing base production, while bringing 70 to 75 gross company-operated wells to sales. About six drilling rigs will be run in the Bakken in 2017, it said.

"...[W]e're going to make sure we achieve our strategic objectives in Oklahoma, and that's around protecting our valuable leasehold, delineation and doing the downspacing and completion work that we need to have in hand to drive that asset toward full field development in 2018," Tillman said in response to a question during a conference call Thursday. "We feel that the program we've designed this year allows us to deliver across all of those strategic objectives."

Following that, Tillman said, "The Bakken opportunities compete head to head with the best in our portfolio. We challenged the Bakken team to really step up last year, and they did so, and really demonstrated their ability to go head to head with even the oil window in the Eagle Ford. And based on that, we struck a balance between those two assets, with Eagle Ford already operating at scale and very efficiently, we wanted to drive Bakken into more of a development mode..."

Less than 10% of the company's capital program will be allocated to its international E&P business, oilsands mining, corporate and "other."

For 2017, the company forecasts production available for sale from the combined North America and international segments, excluding Libya, to average 335,000 to 355,000 net boe/d, about 5% higher than 2016 at the midpoint on a divestiture-adjusted basis. U.S. resource plays are expected to return to sequential growth during the second quarter, and exit 2017 with oil and boe production 15-20% higher than fourth quarter 2016.

First quarter 2017 volumes have been affected by severe winter weather in North America, as well as scheduled and unscheduled downtime internationally. For the first quarter, North America production guidance is expected to average 195,000 to 205,000 net boe/d and international is expected to average 120,000 to 125,000 net boe/d, excluding Libya.

During 2016, Marathon Oil added proved reserves of 342 million boe through additions and acquisitions. This was virtually all in North America and largely from oil and condensate. Excluding dispositions, the reserve replacement ratio for the year was 112% with a finding and development (F&D) cost of just over $13/boe. Organic reserve replacement was 214%, excluding acquisitions, dispositions and revisions, at a drillbit F&D cost of less than $4.00/boe. Net proved reserves were 2.1 billion boe at year-end.

North America production from the exploration and production segment available for sale averaged 212,000 net boe/d for fourth quarter 2016 compared to 216,000 net boe/d in third quarter 2016. On a divestiture-adjusted basis, production was flat with the prior quarter and down 8% from the year-ago period. Production from the three U.S. resource plays was also flat sequentially. Fourth quarter North America unit production costs were $5.66/boe, down 1% and 18% for the previous and year-ago quarters, respectively. Full-year unit production costs were $5.96/boe, below the low end of guidance of $6.00-7.00/boe.

The company reported a fourth quarter 2016 net loss of $1.37 billion (minus $1.62/share) and an adjusted net loss of $83 million (10 cents/share). Fourth quarter 2016 results included a charge of $1.36 billion, which had no cash flow impact, to establish a valuation allowance against net deferred tax assets. For the year-ago quarter the company reported a net loss of $793 million (minus $1.17/share) and an adjusted net loss of $323 million (minus 48 cents/share).

Marathon Oil reported a full-year 2016 net loss of $2.14 billion (minus $2.61/share). The adjusted net loss for the year was $693 million (minus 85 cents/share). This compares with a net loss of $2.2 billion (minus $3.26/share) and an adjusted net loss of $869 million (minus $1.28/share) for 2015.

"We're entering 2017 with a simplified portfolio more concentrated on our high-return, low-cost opportunities in the U.S. resource plays," Tillman said.

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