Marathon Oil (NYSE: MRO) put the wraps on a strong year by delivering solid fourth-quarter results, which came in slightly ahead of expectations. With that, the company exceeded its initial growth projection for the year while sticking to its budget, and was thus able to generate and return lots of cash to shareholders. The company expects more of the same in 2019 as its drilling machine aims to continue printing money.
Drilling down into the numbers
Guidance or Expectations
400,000 to 420,000 BOE/D
Earnings per share
Data source: Marathon Oil. BOE/D=barrels of oil equivalent per day.
Marathon's production came in right above the midpoint of its guidance range, pushing its full-year total to 412,000 BOE/D. Driving that growth were its U.S. resources plays, which combined to produce 298,000 BOE/D for the year, including 171,000 barrels of oil per day. That oil output was up an impressive 32% year over year, and outperformed the initial midpoint of the company's guidance for 22.5% growth.
What made that outperformance even more impressive is that Marathon Oil achieved it while sticking to its $2.3 billion capital budget. "2018 was a year of differentiated execution for Marathon Oil," stated CEO Lee Tillman in the earnings press release. "While many in our industry talked about capital discipline, we delivered. In 2018, we budgeted conservatively and never wavered, getting more for every dollar of capital we invested."
Image source: Getty Images.
The Eagle Ford was the company's largest producer during the fourth quarter, pumping out 107,000 BOE/D, which was 2% higher than the year-ago period. Behind that growth were the 38 wells the company brought on line during the quarter, which combined to deliver solid initial production rates.
The Bakken followed with an average of 94,000 BOE/D during the quarter as its output rocketed 37% year over year. Driving that surge in production was the ramp-up of the company's drilling activities in the region, which included the completion of 27 high-rate wells during the quarter, including several successful test wells that extended the company's core position.
Oklahoma, meanwhile, produced 67,000 BOE/D during the quarter, up 4% from the year-ago period as the company only brought 12 wells on line.
Finally, Marathon's position in the northern Delaware Basin produced 26,000 BOE/D during the quarter, up a remarkable 138% year over year as the company ramped up drilling on the land it acquired last year.
Not only did Marathon deliver stronger-than-expected production growth last year, but because it stuck to its capital budget, the company generated a gusher of free cash flow thanks to higher oil prices throughout most of the year. Overall, the company produced $865 million in free cash flow after paying its $169 million dividend. The company used that excess cash to buy back $700 million in shares, which allowed it to return more than 25% of its net operating cash flow to shareholders last year.
Image source: Getty Images.
A look at what's ahead
"As we turn to 2019 and beyond," said Tillman, "we remain committed to this same framework for success. With the foundation of a peer-leading balance sheet and the competitive advantages of our multi-basin portfolio, our 2019 capital program will drive improving corporate returns and generate organic free cash flow above $45 WTI [West Texas Intermediate], as we continue to prioritize return of cash to our shareholders."
Overall, Marathon Oil plans to spend $2.4 billion on developing new wells plus another $200 million to lease land in emerging areas. As a whole, that figure is down roughly $55 million from what last year's spending plan allocated to those two activities. The investment will provide the company with enough money to grow its total production by 10% while delivering a 12% increase in U.S. oil output.
Marathon Oil's conservative spending plan positions the company to generate significant free cash flow during the next two years. At $50 oil, it can produce more than $750 million; that number would balloon to $2.2 billion at $60 oil. The company intends on returning a sizable amount of that cash to investors through continued share repurchases, with its current authorization having $800 million remaining.
A strategy to succeed
Marathon Oil has taken a bit of a differentiated approach to developing its U.S. shale assets. Instead of aiming to grow as fast as it can, the company set a conservative budget and stuck to it last year, resisting the temptation to increase spending as oil prices improved. As a result, the company was able to generate a boatload of free cash flow, the bulk of which it returned to investors. Marathon plans to stick with that winning strategy over the next two years, which has the potential to richly reward its investors.
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