Houston-based Marathon Oil Corp. will stick to its $1 billion capital expenditures (capex) budget in 2021 even if oil prices keep rising, according to management.
Assuming a $60/bbl West Texas Intermediate (WTI) oil price, the independent expects to generate $1.6 billion of free cash flow (FCF) this year, CEO Lee Tillman said during a call to discuss first quarter earnings.
This is up from previous guidance of around $1.5 billion.
Although the assumed oil price is below the current forward curve, Tillman said, “there will be no change to our capital budget even if oil prices continue to strengthen.
“We will simply generate more free cash flow and further solidify our standing as an industry leader when it comes to capital discipline, a hard-earned reputation we have established over multiple years.”
Tillman said Marathon’s five-year benchmark maintenance scenario can deliver around $5 billion of FCF from 2021 to 2025 in a flat $50/bbl WTI environment, or closer to $7 billion of FCF at the current forward curve.
The breakeven WTI oil price for Marathon to generate positive corporate FCF is now sustainably below $35/bbl WTI, Tillman said.
Marathon has a mandate to return at least 30% of cash flow from operations to investors, said CFO Dane Whitehead, who added, “we’re actually on track to return well over 40% of our cash flow back to investors this year.”
Whitehead said Marathon aims to allocate up to 10% of cash flow from operations toward the base dividend, assuming a $45 to $50 oil price, and that the company aims to maintain its post-dividend breakeven cost “well below” $40/bbl WTI.
“We can generate free cash flow yield competitive with the S&P 500 assuming an annual oil price down to approximately $40/bbl WTI,” Tillman said.
Citing the Bakken and Eagle Ford shale plays as “the most capital-efficient basins across the Lower 48,” Marathon’s Mike Henderson, executive vice president of operations, said those two plays will receive about 90% of the firm’s capital spending this year.
“However, both our Oklahoma and Permian assets are high return opportunities that can effectively compete for capital today.”
From 2022-2025, Marathon expects 20-30% of capital allocation to go to the Permian and Oklahoma.
Swing to Profits
Marathon reported net income of $97 million (12 cents/share) for the quarter, versus a net loss of 46 million (minus 6 cents) in 1Q2020. Total revenue and income reached $1.07 billion, down from $1.23 billion.
Capital expenditures (capex) totaled $184 million, down from $569 million in the year-earlier period.
Marathon generated $443 million of free cash flow (FCF), versus negative free cash flow of $18 million in 1Q2020.
Tillman said the company’s year-to-date FCF largely funded a $500 million reduction of gross debt. Marathon also is targeting additional gross debt reduction of at least $500 million this year and has raised its quarterly base dividend, he said.
Total net production was 345,000 boe/d during the first three months of 2021, down from 383,000 boe/d in the comparable 2020 period.
Oil accounted for 172,000 b/d of the 1Q2021 total, near the high end of guidance.
Eagle Ford net production averaged 77,000 boe/d, including 51,000 net b/d of oil.
Bakken output averaged 112,000 net boe/d, with oil accounting for 77,000 b/d.
In natural gas liquids (NGL) rich Oklahoma, production averaged 53,000 net boe/d, of which 12,000 b/d was oil. In the northern Permian Delaware basin, meanwhile, net production averaged 26,000 boe/d (15,000 b/d oil).
Net sales volumes of natural gas totaled 378 MMcf/d, down from 454 MMcf/d in 1Q2020. Oklahoma accounted for 145 MMcf/d of the total, followed by the Bakken (93 MMcf/d) and Eagle Ford (91 MMcf/d)
NGL net sales volumes, meanwhile, totaled 53,000 b/d, down from 57,000 b/d.
Marathon reported average realized prices of $55.38/bbl for crude and condensate, $23.94/bbl for NGLs and $6.31/Mcf for natural gas.
This compares to $44.23/bbl, $9.97/bbl and $1.60/Mcf in the year-earlier period.
Marathon said production impacts from Winter Storm Uri in February were minimal.
On the environmental, social and governance front, Marathon said it reduced its greenhouse gas (GHG) emissions intensity by about 25% in 2020 versus 2019.
The company is aiming for a 30% reduction in GHG intensity in 2021 and a reduction of at least 50% by 2025, both relative to 2019 levels.
This metric is “hardwired into our compensation scorecard,” Tillman said, adding that Marathon has budgeted $100 million of investment over 2021-2025 under its benchmark scenario to achieve the emissions target.
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