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Marathon Oil Corporation's Growth Engine Continues to Accelerate

Matthew DiLallo, The Motley Fool

Marathon Oil Corporation's (NYSE: MRO) transformation into a shale-focused oil growth company is starting to pay dividends. That was evident in the second quarter as the company reported strong production results across all four of its U.S. resource plays. Because of that, the oil producer was able to boost its full-year growth forecast for the second time this year without increasing its capital budget.

Drilling down into the results

Marathon Oil earned an adjusted $126 million, or $0.15 per share during the second quarter, which was $0.05 per share below analysts' expectations due to higher costs. However, while earnings might have underwhelmed expectations, the rest of the company's numbers were excellent. Operating cash flow, for example, was $767 million, which was enough to fully fund capital spending during the quarter with $250 million left over. Overall, cash flow jumped 18% from the first quarter and was up a jaw-dropping 82% versus the year-ago period.

An oil pump with a beautiful sunset in the background.

Image source: Getty Images.

Meanwhile, Marathon's operational results were outstanding. Total production averaged 419,000 barrels of oil equivalent per day (BOE/D), which was not only 5% more than the first quarter's average but came in above the high end of its 395,000 to 415,000 BOE/D guidance range. Fueling the company's strong production was its operations in the U.S. where output averaged 298,000 BOE/D, which was well ahead of its 280,000 to 290,000 BOE/D forecast range thanks to strong results across all four of its U.S. resource plays:

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

Data source: Marathon Oil. Chart by author.

The Bakken Shale led the way this quarter as output rose 11% from the first quarter after the company brought several high-rate wells online. The company noted that two wells set new basin records for the best 30-day initial production rates in the Three Forks formation.

Marathon also delivered strong results in the STACK Shale play where output rose 7%. One of the drivers was an exceptional four-well pad that produced an average of 2,630 BOE/D apiece in their first 30 days online.

The company also delivered solid results in both the Eagle Ford and Delaware Basin. Output in the Eagle Ford rose 2% from last quarter after the company brought 39 new wells online while production in the Delaware Basin rose 6% thanks to several strong wells in the quarter.

A look at what's ahead

Marathon's stronger-than-expected second-quarter production results have the company on pace to produce more from its U.S. resource plays in 2018 than initially anticipated. As a result, the company is increasing its full-year guidance once again. It now sees output from these regions rising 28% to 32% in 2018, which is up from the 25%-30% increase it anticipated last quarter and the initial 20%-25% range it gave in mid-February.

Marathon pointed out that it can achieve this higher production rate without increasing its capital budget, which remains at $2.3 billion. That's worth noting since large peers ConocoPhillips (NYSE: COP) and Anadarko Petroleum (NYSE: APC) recently increased their budgets. In both cases, two factors drove the spending boost: Cost inflation and a ramp-up in activity from some drilling partners. Marathon, on the other hand, has been able to keep spending on target while boosting output at a faster pace through increased efficiency. In fact, the company noted that it was able to reduce its rig count in the Delaware Basin from five to four entirely due to efficiency gains while still anticipating that it can complete 50 to 55 wells in the region. While both ConocoPhillips and Anadarko are also delivering efficiency gains, they haven't been enough to offset a spending increase.

A good quarter with more on the way

Marathon might not have made as much money as analysts thought it would during the quarter. However, it was still an excellent one overall as the company delivered strong cash flow and production growth. Because of that, output from its U.S. resource plays is on pace to increase at a higher rate than it initially anticipated even though it's not boosting the budget. That sets Marathon up for an outstanding year, especially since oil prices are about $20 a barrel higher than it budgeted for the year.

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