Even if oil prices continue to improve in 2022, Marathon Oil Corp. is planning to keep production growth flat in order to ensure market-beating returns for investors, executives said. 

During a conference call to discuss fourth quarter and full-year 2021 results, CFO Dane Whitehead said the Houston-based independent has a mandate to return at least 40% of cash flow from operations (CFO) to equity holders when West Texas Intermediate (WTI) oil prices are at $60/bbl or higher. 

CEO Lee Tillman said “for our company and for our sector to attract a broader universe of investors, we must deliver competitive financial performance with other investment opportunities in the market as measured by free cash flow generation and return of capital even when commodity prices are much lower than they are today, all the way down to $40 to $50 WTI range. We believe we have built that type of resilience into our business.” 

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In the United States, Marathon operates primarily in the Eagle Ford and Bakken shale formations, as well as in Oklahoma and the Permian Basin. Oklahoma operations target the South Central Oklahoma Oil Province (SCOOP) and the Sooner Trend of the Anadarko Basin, mostly in Canadian and Kingfisher Counties (STACK). Marathon’s Permian unit works in the northern Delaware sub-basin.

Internationally, Marathon has natural gas-weighted operations in Equatorial Guinea.

During 2021, “We stayed disciplined and did not waver from our reinvestment rate driven capital allocation priorities, generating over $2.2 billion of free cash flow, including about $900 million during fourth quarter alone,” said Tillman. “We dramatically enhanced our balance sheet quality by accelerating gross debt reduction initiatives. 

“We then successfully transitioned to market leading return of capital to our equity investors, consistent with our differentiated percentage of cash flow framework.”

Tillman said, “These financial outcomes are sustainable for years to come and are underpinned by over a decade of high-return, high-confidence inventory…” He also noted that Marathon “will remain disciplined and will not add production growth capital to our budget in 2022.”

Tillman added that during the fourth quarter, “we returned more than 70% of our cash flow from operations to equity investors, significantly exceeding our minimum 40% commitment.”

Eagle Ford, Bakken Focus

For 2022, Marathon’s oil and oil-equivalent production volumes are expected to be flat versus 2021 averages, “consistent with the objective to prioritize sustainable free cash flow generation over production growth,” management said. 

Marathon has set a capital expenditures (capex) budget of $1.2 billion for 2022. 

“The company does not plan to deviate from its announced capital budget in the event of continued strong commodity pricing,” management said. “By staying disciplined and maintaining a low reinvestment rate, Marathon Oil expects to exceed its commitment to return a minimum of 40% of CFO to equity investors, assuming an oil price of $60/bbl WTI or higher.”

Mike Henderson, vice president of operations, said about 75% of the 2022 capex is allocated for the Eagle Ford and Bakken, with the remainder going to the Permian and Oklahoma. “I want to make clear that should commodity prices continue to surprise to the upside, we will remain disciplined and have no plans to allocate production growth capital,” Henderson said.

“The resilience of our 2022 program is underscored by a free cash flow breakeven well below $35/bbl WTI,” assuming conservative gas and natural gas liquids (NGL) prices, he added. 

This year Marathon expects to turn 100-120 wells to sales in the Eagle Ford, 50-60 wells in the Bakken, and 20-25 wells each in the Permian and in Oklahoma.

ESG Failure ‘Not Acceptable’

On the environmental, social and governance (ESG) front, Tillman said, “We must take on the dual challenge of meeting the world’s growing energy needs while also prioritizing all elements of our ESG performance, including efforts to address climate change. This is not an either/or proposition and failure on either front is not acceptable. 

“However, our approach must be pragmatic and grounded in the free market, innovation and an all-of-the-above energy approach.”

The CEO added, “We are, unfortunately, experiencing firsthand the impacts of misguided energy policy and the dramatic role it can play on energy affordability, as well as geopolitical stability.” He did not specify the policies he was referencing.

Marathon in 2021 achieved its goal of a 30% reduction in greenhouse gas (GHG) intensity versus a 2019 baseline, Tillman said, as well as a natural gas capture rate of 98.8% across the company.

“During the third and fourth quarters of 2021, we achieved a gas capture of approximately 99%, and we expect to perform at or above this level in 2022 and beyond,” the CEO added. Marathon is aiming for a 50% reduction in GHG intensity versus the 2019 baseline by 2025.

Prices, Profits Soar

Marathon reported average realized prices during the fourth quarter of $5.24/Mcf natural gas, $34.99/bbl NGL and $77.03/bbl oil. These figures compare with $2.31/Mcf, $16.30/bbl and $39.71/bbl, respectively, in the year-earlier period. 

Production totaled 304,000 boe/d in 4Q2021, including 172,000 b/d of oil and 379 MMcf/d natural gas. This compares to 287,000 boe/d (162,000 b/d oil, 402 MMcf/d gas) in the corresponding 2020 period. 

The Bakken led Marathon’s U.S. oil and NGL production at 60,000 b/d and 27,000 b/d, respectively. Oklahoma led U.S. natural gas output at 146 MMcf/d.

Marathon in the fourth quarter brought online 47 gross operated wells, comprising 18 in the Eagle Ford, 25 in the Bakken and four in Oklahoma.

Marathon generated $898 million of free cash flow in 4Q2021, up from $161 million in 4Q2020.

Marathon reported net income of $649 million (84 cents/share) for the fourth quarter, versus a net loss of $338 million (minus 43 cents) in the fourth quarter of 2020. Full-year 2021 profits totaled $946 million ($1.20/share), compared with a loss of $1.45 billion (minus $1.83) in 2020.