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Marathon Oil's Drilling Machine Delivers a Profit Gusher in Q1

Matthew DiLallo, The Motley Fool

Marathon Oil (NYSE: MRO) delivered solid production results during the first quarter thanks to good well productivity across all four of its U.S. shale plays. That set the stage for the company to generate a gusher of profitability and cash flow during the quarter as it benefited from higher oil prices and its ability to drive down costs. That kept the oil producer on track with its forecast.

Drilling down into the results

Metric

Q1 2019

Guidance or Expectations

Difference at the Midpoint

Total production

388,000 BOE/D

380,000 to 400,000 BOE/D

(0.5%)

Production from U.S. shale

296,000 BOE/D

295,000 to 305,000 BOE/D

(1.7%)

Earnings per share

$0.31

$0.07

342.9%

Data source: Marathon Oil. BOE/D = barrels of oil equivalent per day.

Marathon's production came in slightly below the midpoint of its guidance range during the first quarter, due to the impact extreme weather conditions had on its U.S. drilling operations. Production in the U.S., however, did rise 6% compared to the prior-year period, while high-margin oil output surged 11%.

Production grew across three of the company's four U.S. resource plays:

Marathon's production by U.S. resource play in the first quarter of 2019 and 2018.

Data source: Marathon Oil. Chart by the author.

The Bakken and Delaware Basin drove growth during the quarter. Marathon completed 29 wells in the Bakken that produced an average of 2,500 BOE/D during their first month online. On top of that, the company's wells over the past six months have outperformed those of its peers by an average of 45%. Meanwhile, the company completed 15 wells in the Delaware Basin that produced an average of 1,815 BOE/D during their first month online, fueling that region's growth during the quarter.

Marathon Oil continues to manage its Eagle Ford shale assets to generate cash flow by keeping production relatively flat. The company produced good results from new wells while driving down costs, which have fallen 15% in the past year.

The lone laggard during the quarter was Oklahoma, where output dropped compared to last year's first quarter. That's due in part to timing, as the company brought 16 of its 18 wells online toward the end of the quarter.

Marathon did an exceptional job managing costs, with U.S. unit production expenses falling 12% compared to the year-ago period. That enabled the company to generate stronger-than-expected profitability and cash flow. Overall, Marathon produced $80 million in free cash after funding its capital budget and dividend. The company used that money to repurchase another $50 million of its shares.

A oil pump in a field.

Image source: Getty Images.

A look at what's ahead

Marathon Oil expects its U.S. production to surge during the second quarter. The company sees total U.S. output rising to a range of 310,000 to 320,000 BOE/D more than the first quater. That keeps the driller on track with its full-year forecast to grow its U.S. oil production by 12%. Further, the company's $2.4 billion capital budget remains unchanged.

The oil company continued paring its portfolio of noncore assets during the quarter. It sold its U.K. business, which will eliminate the roughly $950 million that it would have eventually needed to spend on retiring the assets when they stop producing oil.

The shale-focused strategy is paying dividends

Marathon Oil has slowly been selling off assets to focus its attention on its four high-growth, high-margin shale plays. That strategy continues to pay off, enabling the company to deliver strong earnings and cash flow. The company currently remains on pace to produce more than $2.2 billion in free cash over the next two years, assuming oil averages around $60 a barrel.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.