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Marathon Stepping Up in STACK as Eagle Ford Sees Decline

Marathon Oil Corp. staffers wasted no time in locking down the company's latest acquisition in the Sooner Trend of the Anadarko Basin (mostly in Canadian and Kingfisher counties) which producers refer to as the STACK. Oklahoma will be getting a lot of attention from the company in the months ahead, executives said Thursday.

"Within six weeks of announcing our acquisition of high-quality assets in the STACK oil window, we've already closed the transaction and will accelerate an additional rig on this acreage in the third quarter while still decreasing our 2016 capital budget. This deal expands our inventory and further positions Marathon Oil for growth in Oklahoma at a competitive valuation. Coupled with recent noncore divestitures, we're delivering on our objective to further concentrate our capital allocation to the lower cost, higher-margin U.S. resource plays," said CEO Lee Tillman during an earnings conference call.

North America exploration and production (E&P) unit production available for sale averaged 224,000 net boe/d in the second quarter. On a divestiture-adjusted basis, production was down 6% from the prior quarter and 13% from the year-ago period. Second quarter North America production costs were 5% lower than the previous quarter and 28% lower than the year-ago period. Unit production costs were $6.28/boe, down 13% from the year-ago period and essentially flat with the prior period.

Three New Meramec Wells Online

Oklahoma production averaged 27,000 net boe/d, flat to the prior quarter and up compared to 24,000 net boe/d in the year-ago quarter. During second quarter, Marathon brought online two gross company-operated STACK Meramec extended lateral (XL) wells in the volatile oil window. The Irven John achieved a 30-day production rate of 1,710 boe/d (70% oil), and the Olive June averaged 1,570 boe/d (75% oil) over 30 days. Additionally, three SCOOP Woodford XL wells were brought online, with the Eubank well averaging 1,950 boe/d (30% oil) over 30 days.

The company closed on its STACK acquisition on Aug. 1 (see Shale Daily, June 20). Since announcing the deal, three additional Meramec wells -- Moeller, Blackjack and Post -- have reached 30 days of production with rates of 1,925 boe/d (51% oil), 1,365 boe/d (47% oil) and 780 boe/d (51% oil), respectively, and at an average completed well cost of $4 million. Marathon continues to operate the drilling rig on the acquired STACK acreage and plans to add one incremental rig late in the third quarter. This will bring consolidated drilling activity to four rigs in Oklahoma primarily focused in the STACK. The company expects eight to 10 STACK Meramec wells to be turned to sales in the third quarter.

"Our Oklahoma asset team delivered two outstanding STACK Meramec wells with oil cuts above 70% while continuing to balance leasehold demands with acreage delineation," Tillman said. "This same team also closed our PayRock acquisition on Monday, just six weeks after announcing the deal and are rapidly integrating that asset into our Oklahoma business. The team actually had a countdown calendar in the office as they marched toward the accelerated close date."

Eagle Ford Production Down

Second quarter Eagle Ford production averaged 109,000 net boe/d, compared to 120,000 net boe/d in the prior quarter and 135,000 net boe/d in the year-ago quarter. The sequential production decrease was due to lower completion activity with 40% fewer gross operated wells brought to sales and reduced contribution from 2015 high-density pads drilled at tighter well spacing. During the second quarter the company brought 30 gross (21 net) operated wells to sales, of which 19 were lower Eagle Ford, three upper Eagle Ford and eight Austin Chalk, compared to 50 gross (32 net) wells to sales in the previous quarter. The Hollman six-well pad, an Austin Chalk and lower Eagle Ford co-development, was brought online with 30-day production rates averaging 1,055 to 2,020 boe/d (45-53% oil). Second quarter completed well costs were $4.2 million, down approximately 30% from the year-ago quarter. Wells were drilled at an average rate of 2,400 feet per day and an average spud-to-total depth of less than eight days.

"The Eagle Ford continued seeing uplift from tighter stage spacing while feeling the effects of a planned step down in activity and challenging base production declines. And despite their move to higher intensity completions, their completed well costs are down significantly year-over-year," Tillman said.

Bakken Shale production averaged 53,000 net boe/d during second quarter compared to 57,000 net boe/d in the prior quarter and 61,000 net boe/d in the year-ago quarter as strong well productivity and high reliability continued supporting the base production. Four gross wells were brought to sales in the second quarter -- two Middle Bakken and two Three Forks -- all with higher intensity completions of 12 to 18 million pounds of proppant per well and about 45 stages per well. The Clarks Creek Middle Bakken well achieved a 30-day initial production rate of 2,840 boe/d (84% oil) making it the highest rate well in the Williston basin in the past three years. Additionally, the Juanita Middle Bakken well and the Charmaine well in the first bench of the Three Forks achieved 2,700 boe/d (84% oil) and 2,530 boe/d (84% oil), respectively, over 30 days. Despite the higher intensity completions, completed well costs averaged $6 million per well.

"We had an exceptional quarter in the Bakken, delivering a record well on our West Myrmidon acreage through a combination of great reservoir quality and enhanced completion designs," Tillman said. "The Bakken asset team has truly embraced this time of lower activity to prepare for what's next. They've dropped their production costs materially and upped their game on well returns to place West Myrmidon in the mix for 2017 capital allocation."

Marathon said it expects third quarter North America E&P production available for sale to average 200,000 to 210,000 net boe/d which reflects the divestment of the majority of the Wyoming assets, the inclusion of the STACK assets in Oklahoma acquired Aug. 1, and decline from the Eagle Ford high-density pads drilled in 2015.

The company is adjusting its full-year 2016 E&P production guidance range resulting in a new range of 330,000 to 345,000 net boe/d, which reflects divestitures and acquisitions closed to date. Full-year guidance for North America unit production costs was adjusted down by $1.00/boe to a range of $6.00-7.00/boe.

Additionally, the company expects its full-year 2016 capital program to be $1.3 billion, or $100 million less than the original budget, despite the inclusion of increased activity from the Oklahoma STACK acquisition.

Marathon reported a second quarter net loss of $170 million (minus 20 cents/share) compared with a net loss of $386 million (minus 57 cents/share) in the year-ago quarter. The adjusted net loss for the quarter was $196 million (minus 23 cents/share) compared with $155 million (minus 23 cents/share) in the year-ago quarter.

Stay up to date on 2Q2016 earnings and projections for the remainder of the year with NGI's Earnings Call and Coverage sheet.

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