馬拉松石油 (MRO) 2013 Q2 法說會逐字稿

Welcome to the Marathon Oil Corporation's second quarter 2013 earnings conference call. I will now turn the call over to Howard Thill. You may begin.

Thank you, Dawn. Good morning, everyone. I too would like to welcome you to Marathon Oil Corporation's second quarter 2013 earnings webcast and teleconference. On the call today with me are Clarence Cazalot, Executive Chairman; Lee Tillman, President and CEO; and Janet Clark, Executive Vice President and CFO. As a reminder, today's call is being recorded. The call will include forward-looking information. As we've changed the format, with the prepared remarks being issued last night, I refer you to the forward-looking statement in that slide deck, along with the myriad of SEC filings, including our 10-K, 10-Q's and other filings, which provide additional risk factors.

Before we get started, I would like to ask you to block out an important date on your calendar. As Clarence mentioned last night in the prepared remarks, we're holding an analyst meeting in December. That meeting will be held on December 4 of this year, which is the day we will hold our meeting in San Antonio, Texas. More information will be sent to you on this in the near future and how to RSVP and details, et cetera. Also, if you've not RSVP'd for our September 10 reception in New York, please contact Paula Hooper at phooper@MarathonOil.com. With that, I'm very pleased to now hand the call over to Lee Tillman, our President and CEO, for some opening remarks.

Thank you, Howard. Let me add my good morning and welcome, again, to our second quarter earnings call. Prior to opening up for your questions, I'd like to share just a few thoughts as the new President and CEO for Marathon Oil. One caveat, today represents my seventh official day in my new position. So my remarks should be taken in that context. First, let me reiterate what an honor it is to be assuming this leadership role, for what is by every measure an outstanding company. I appreciate the confidence placed in me by Clarence and the Marathon Oil Board and look forward to earning the confidence of our employees and shareholders as well.

In 2011, Marathon Oil began a journey to become the leading independent oil and gas producer. Clarence and the leadership team put forward a compelling vision that would -- enhance our focus on our E&P objectives and strategies; that would create transparency for our stakeholders and our employees; that would provide clarity on portfolio management and risk tolerance; that would also establish the business imperatives around agility and a bias toward action; and finally, bring a relentless focus to long-term shareholder value and competitive returns. All of this supported by our steadfast commitment to the core values of safety, health, environment, security, business ethics and corporate citizenship. And our traditional strengths in operational excellence and large-scale energy project development.

We are focused on the fundamentals that will grow our volumes profitably; access to high-quality material resource; selectivity and development in capital allocation; execution and operational excellence; and continuous improvement through rigorous, external and internal benchmarking. We recognize that our most critical allocation decision is the deployment of human capital, our employees. We must continue to attract, retain and develop the best professionals in the industry to provide the necessary competencies and leadership that will drive business performance and ensure that Marathon Oil continues living our values.

Our focus on core values, profitable volumes growth and investing in people will deliver long-term value to our shareholders. A strategy that encompasses a base with strong cash flows; gross assets that leverage our strengths; high-impact exploration to open new opportunities; rigorous portfolio management to ensure robust capital allocation; and financial discipline, all combine to provide competitive returns for the long-term. We are early in our journey as an independent E&P Company but the results today are compelling and set the stage for the future. With that, I'd like to hand back over to Howard, who will facilitate our Q&A session. Thank you.

Thanks, Lee. Before we do get started, two items. Number one, the transcript that was sent out last night had a rather large font, I apologize for that and accept responsibility. But you can go to our website this morning and there will be a new transcript with a normal font, that won't be printed out in 50 pages. That's number one. Number two is, that I'd like to remind you to please keep your questions to two with associated follow-ups. By two questions -- and you know who I am talking to, I don't mean multiple part questions. So with that, Dawn, we'll open it up for questions.

(Operator Instructions)

Doug Leggate, Bank of America Merrill Lynch.

Lee, congratulations on your appointment. It seems a long time since Dag saw an upstream advisor.

But two questions if I may. First of all on the Eagle Ford. So you're going to wait until December to give us downspacing results but for all intents and purposes, I guess, EOG has very -- and a lot of peers are pretty much already showing us what the asset can do. I guess my question is, on a downspacing scenario you have a 10-year drilling inventory. Is that an inventory that you would want to accelerate, bring forward? Or is the current drilling pace optimal in your mind? Then, I have a follow-up, please.

Yes, Doug, this is Clarence.

I think you're right, that others are more advanced, perhaps in their overall understanding of the reservoir in terms of the potential for downspacing and recognizing that the geology does change a bit across even the core of the Eagle Ford. I think it's important for us to do our diligence, to do the right technical work, so we, indeed, can make the right capital allocation decisions as Lee indicated earlier.

I will say, part of what you will hear, I believe in December, will be spot on relative to your question, which is the issue of acceleration. We all recognize the value of acceleration, but at the same time, as we've spoken to before, it's very important that you not outrun, certainly, the capabilities to process, transport, market, the hydrocarbons or indeed outrun the capabilities of the overall industry infrastructure. So, I think what you will see from us is a plan that, we believe, optimizes the value of the resource we have there, but does it in an appropriate way and is the right pace.

Thanks for that, Clarence. I apologize, I should offer you congratulations as well, with everything you have done here while you've been here. If I may, my follow-up I guess is to either of you two gentlemen then, in terms of the portfolio. Clarence, you are leaving the Company with a great deal of cash flow, a tremendous balance sheet, but also an international declining asset base. Beyond the Eagle Ford, one could argue not a great deal of visibility. So I'm just kind of thinking about how -- what's the next part of the story for Marathon? Is it an acquisition story, in terms of, do you feel as if you have the inventory to sustain the current visibility? Or how do you see using that cash now? I'll leave it there.

Yes. Doug, hi, this is Lee. Thanks for the kind words.

In terms of looking forward, Doug, I think we want to keep the opportunity aperture wide open. I think we've talked already about potential acceleration in the Eagle Ford. I would also add that probably applies to the Bakken, as well. We have a lot of running room in both of those areas, I think we'll be able to talk more in depth about that in the December analyst meeting that Howard has already mentioned.

All of that work will be underpinned by the sound science that we're currently doing, certainly in the Eagle Ford on the downspacing pilots. As we look more broadly, we are looking at high impact exploration wells in some key plays around the world, that would have the net effect of potentially strengthening our international portfolio. Within our international portfolio of base assets, there are still strong, performing assets if you look at the uptime and reliability performance. Clearly, it's top-tier in the industry. Those barrels are some of our most profitable barrels. We'll continue to look for incremental investments in those base assets.

In addition to that, we remain open to acquisitions that make sense to our portfolio. We'll continue to look for bolt-on acquisitions in North America that are going to be accretive to our overall portfolio. So I think we have a lot of levers to pull to continue to drive the portfolio. We'll also continue to look at those assets that may no longer fit our portfolio. Most recently, of course, we announced the sale of the block in Angola. I think that's indicative of us continuing to high-grade our portfolio and look to develop a very competitive portfolio in our peer group.

Doug, I would simply say you're right. Our international assets, particularly in the North Sea are declining. But you'll recognize that our overall 5% to 7% growth rate incorporates that decline. So indeed, we're managing that. As Lee said, these are assets that generate very significant cash flow that help fund, if you will, our domestic growth. So, again, I would simply say, we recognize those declines. They're built into our projections. Our projections don't include any acceleration, which indeed could enhance or increase even the 5% to 7%, if we believe that's the right thing to do.

Thanks, guys. Again, congratulations to you both.

Thank you.

Arjun Murti, Goldman Sachs.

My thanks to the new format of e-mailing out the prepared remarks the night before. Didn't mind the font, Howard, but I, regardless, appreciate the, get all the stuff ahead of time and just going straight to Q&A.

At least now you don't have to decide whether we are live or Memorex.

Definitely cuts out that risk.

Yes.

Just a few follow-up questions on the portfolio. You may not be able to comment on all of this. But there have been some reports about whether you continue to have an interest in Libya, if you can address that. On the Norway piece, I think the declines are meeting your expectations. Can you talk about things that you can do that can either alleviate that decline? Or is it just kind of normal course there? Then maybe for Lee, comments on the Oil Sands, which at various times have been talked about as a potential divestiture candidate. How you're feeling about that asset? Thank you.

Yes. Maybe first of all, with respect to Norway, Arjun, I think the declines thus far this year have been less than we expected. That has really helped drive stronger performance or stronger results out of our international production side. Again, I would attribute it, as Lee said earlier, very strong reliability, our teams are really outstanding in keeping those assets running at the optimum rate.

But the reality is, as we talked about before, that asset is going to go into decline. It's a managed decline, because we have a number of offsets, satellite fields we'll tie back, you know the boiler project, which is under development currently will come on stream in the fourth quarter 2014. All of which will begin to flatten that decline, but nonetheless, a decline.

But again, as we've discussed many, many times, the Norwegian barrels are high revenue and very low cost, cash cost. So very high, strong cash margin despite a 78% tax rate. But again that will be a portfolio decision Lee will have to make. And then I think with respect to Libya, as we have done with other assets that we are potentially reviewing, we don't comment on specific assets that we may or may not sell, Arjun. Again as we've discussed, that's -- puts us in an awkward position in terms of any negotiations we have or government approvals. So we'd prefer not to comment on that one.

Yes, I think it's important, Arjun, though, we recognize that we have delivered, though, on our asset high-grading, I think, commitments. We're at the upper end of the range of what we've talked about in the past. That doesn't mean that we've completed that process. It's an evergreen process. As Clarence said, we won't comment specifically on Libya or Oil Sands, but we do recognize that high-grading our portfolio is one of the tools that's available to us to continue to deliver competitive returns. We will continue to use that.

That's great. Thank you so much for your comments.

Thanks, Arjun.

Blake Fernandez, Howard Weil.

Firstly, Clarence, I wanted to congratulate you on a great career at Marathon. So, best to you going forward.

Thanks, Blake.

Sure. I had some questions on the buybacks. I know in the prepared remarks, you mentioned that the proceeds from Angola would primarily be used for buybacks. I was hoping you could give us a little more clarity on how we should think about timing? Do we need to actually have the deal closed before buybacks commence? Should we be thinking more ratable repurchases? Opportunistic? Then if possible, any kind of real specifics on exactly how much of that will be allocated toward buybacks?

A lot of questions there, Blake. But I think all I would say at this point is that, our expectation is the buybacks would be timed closer to when we get the proceeds. Now, how it gets done, whether it's ratable or accelerated, those are all decisions yet to be made and under evaluation. But as we've said, the largest part of the use of these proceeds will be for buybacks. So I think you should look to hear more about that in the coming months.

Okay, great. My second question is on the exploration side. I know it sounds like Sabisa had some positive indications, but the rig has moved off. Any indication of when you may get back on that target? Then secondly on Gabon. I know Total is the operator, but just any indication of initial shows would be great. Thanks.

Yes. I think on Sabisa, as you indicated, that we did find indications of a working hydrocarbon system in this first well. It's the first well in this Miocene basin so that's very encouraging. We had mechanical issues with respect to a BOP that really didn't allow us to get a full evaluation of that well. But rather than drill another well next to it, the decision was made to move into the center of the basin, to drill the next well -- the Tultule well, to give us more information to assess the overall prospectivity of that rift basin. So, again, as we've talked about in these rift basins, it really takes multiple exploration wells to get a full assessment of the potential. So, that's what we're trying to do with this second well.

Then I think with respect to the Diaman well in Gabon, Blake, we I believe have said about all we can say at this point in the press release that we are at total depth, and logging operations are underway, and other evaluations. Again, as those results are received and evaluated, it will be up to the operator, Total to announce those results. So, that's about all I can say. To me it's a matter of weeks, not months, that you'll be hearing those results.

Fair enough. Thanks Lee, welcome as well.

Thank you, Blake.

Edward Westlake, Credit Suisse.

Congratulations as well, Clarence. Not just on the Eagle Ford, but also the demerger into two Marathons. Also, welcome, Lee. I guess, two questions just on shale. First on the Eagle Ford. You've discussed the Austin Chalk, at least in one result. I think it's fair to say, the Austin Chalk probably doesn't have the best rap in the industry just because of its more chalk not shale, decline rates, perhaps where other people have been drilling. Are there any comments you could make to help us understand why the Austin Chalk might be better within the acreage that you guys hold?

Yes, I guess I'd say, Ed, the comment we made back when we first entered the Eagle Ford and people questioned some of the prices we paid, we said, the Eagle Ford is not the same across this entire area. The same is true for the Austin Chalk. I think we've talked in the past that, when you look at the core data here in the primary core part of the Eagle Ford here and you look at the Austin Chalk compared to the Eagle Ford, they look very, very similar. Certainly, I'd say, based on the wells we've drilled so far, the production and the rates we've gotten, that seems to be the case. They're much more Eagle Ford like in terms of their performance.

It's early days. We've got four wells. We'll look to continue to evaluate this and determine just how extensive this prospective Austin Chalk is. But when you think about the fact these were shorter laterals than what we've been drilling in the Eagle Ford, and yet achieved pretty strong rates, the performance so far looks like the type curve for the condensate window in the Eagle Ford. So, a pretty strong performance, very encouraging. I think certainly upside to what we previously thought.

Then on the Bakken, I mean you've got a target to go to 50 to 60. You announced an intriguing Three Forks well. Obviously you've got some acreage that looks good and some other acreage that's further off [peak], but what's the restriction on going faster?

Well, that is certainly one of the things, and Lee mentioned it earlier, as we evaluate our business plans for 2014 and beyond, acceleration is certainly an opportunity we have in the Eagle Ford and the Bakken. We'll be looking at that. Certainly some of the past transportation bottlenecks have diminished. We certainly see quite a bit of takeaway today, some more profitable than others. Rail is certainly no longer as attractive as it was a few months ago. But we'll certainly look at the potential to accelerate our development of that. To your point, we have had good results in the Upper Three Forks. We'll continue to do some of the pilot work and additional evaluation we need to look at the second and third benches as well and begin to develop our plans for those additional zones.

Thanks very much. Good luck.

Guy Baber, Simmons.

I understand it might be a little early for this question, but I was just wondering if you could talk a little bit about your early expectations for production growth in 2014? I'm basically just wondering if you see yourself able to grow at those long-term rates that you've highlighted before, so at least 5%? How important is hitting that target for any individual year? Or are you just more concerned with the longer-term production potential of the portfolio?

Guy, the 5% to 7% we gave was 2010 to 2017. Of course we got the slide here in the deck to show what that looks like in terms of general magnitude. But for any given year, again, it depends upon what projects we have coming on, how quickly we develop some of our assets.

With respect to 2014, our business planning process is getting underway now. As I've indicated and Lee said as well, a good deal of what we do in the Eagle Ford will depend upon the results of the downspacing. Again, you'll hear about that in December. Let me say, the December analyst meeting isn't just about the Eagle Ford. You'll be hearing about the entirety of our portfolio.

So, to the extent we look at acceleration in the Eagle Ford, the extent we look at acceleration in the Bakken, those would all be things that we would discuss at that time. I would point to that, Guy, as to the timetable in which we would give you guidance on 2014 production.

Okay, great. Then my follow-up is, you had some positive commentary around realizations out of the Eagle Ford. Was just hoping you could elaborate some on some of your more recent developments there? About the new LOS contract? Also some additional infrastructure that's maximizing netbacks? So my question is, is there just more detail you could provide around your outlook for Eagle Ford realizations over the next couple of years? Any plans in place you might have to maximize those realizations?

Well, again, I would just say, we've done a very good job, I think, in terms of getting our infrastructure in place, moving our barrels off of trucks onto pipelines and allowing us to get to where we can realize the highest value for our crude. I know there's been a lot of commentary in the past about some of the weakening prices for condensate and NGL's and different gravities. As we've talked about before, we have about 72% of our liquids that we are realizing LOS minus $8 a barrel at the wellhead.

About 28% that's LOS minus $12 a barrel. That's -- all the higher gravity and the lower gravity we do a good job of blending as much as we can to stay below 55 degrees. Again I think we're maximizing our commercial advantage in the Eagle Ford. The new contract we talked about is really a pipeline to sell into the enterprise line, going into the Houston Ship Channel that frankly is LOS minus $6 a barrel at the wellhead, our best realization to date in the basin. So, our midstream teams, our commercial teams are doing a good job of staying out in front of our production growth and ensuring we're getting the best value for our barrels.

Okay, great. Thanks very much, Clarence. Congrats to you, and to Lee as well.

Thank you.

Thank you.

John Malone, Mizuho Securities.

It looks like you increased guidance a bit on North American operating costs. Can you just elaborate on what's behind that?

John, let us take a look at that and get back to you. I'm not sure that we -- but we'll have to get back to you on that.

Okay, fair enough. Then second question, clearly you've got a lot of news flow coming out of Kurdistan in the near future. How are your reviews on the politics that are involved? If you were successful, what would inform the decision between farming that down, selling out of it entirely versus sticking around and developing it?

Well, I think, Kurdistan, like all of our opportunities, we're still in the very early days. We've got the two non-operated blocks, as well as the two operated blocks. We're very early in the exploration phase, we're just getting results. Clearly, Kurdistan is a long play in terms of gaining material production out of Kurdistan.

I think we need to see these latest exploration results and we'll get some clarity around next steps. It's a stellar hydrocarbon province and it's one of the plays that we need to be involved in. Once we get sufficient data, we can take a view of how best to monetize the resource. Whether that is through our own operations or by some other means. But Kurdistan is still a very early day play for us.

Okay. Thank you.

You bet.

John Herrlin, Societe Generale.

This is one for Clarence and it is somewhat expository. You been getting a lot of congratulations on the restructuring. I just have kind of a postmortem question for you, Clarence. Clearly, Marathon today is a lot different than when it started. One, did you ever envision this type of radical transformation? Specifically with upstream, do you think a lot of your decisions were based on changes in technology more than resource access? Could you kind of give a brief postmortem as to that thought process?

You mean in terms of the rationale behind the split, John?

No, no. Not the split, just how you've changed your E&P business. You've reduced your risk exposure for exploration, you've added a large exploitation compound or lag. I was just wondering how you envision the portfolio versus when you came in and upon your exit?

Well I would simply say it's -- Lance Robertson said something to me yesterday about the last couple years that he's watched me, said it looks like I'm having a lot more fun. It really is. It's been a lot of fun running an E&P company. All the things we've talked about as the advantages of a resource driven Company in terms of lower risk, scalability, the ability to accelerate, indeed if you want, production in order to optimize value. Frankly, the kind of detail that we're getting into on this call, of really getting into the business, it to me is a great deal of fun.

Lee has jumped in with both feet into this. You can imagine it's a little different than Exxon. But it's, I think, absolutely -- it's been absolutely the right decision for the Company. I think we've positioned the Company well. We've got a great deal of resource for the future. I would do it all over again, John.

Okay, thanks. Last one, it's a simple one. How long is the Madagascar well? The 2d?

Let's see here. We'll get it for you here. We'll give that comment, John, on the line here in just a moment.

All right, thank you.

You bet.

(Operator Instructions)

Duane Grubert, Susquehanna.

Lee, as we look forward to meeting you and your style, I was wondering if you could comment a little. If I was to suggest three buckets of style, one being a technical focus, one being a focus on numbers and one being a strategist, how do you see your style evolving at Marathon? What are your natural biases?

Well, certainly I began my career on the technical side of the business, no doubt, Duane. Of course, our business remains a technical business that still has to be based and driven on sound science. A great example of that is what we're doing in the Eagle Ford with downspacing. We're being methodical, but also aggressive in our approach to technology there.

I think though, in terms of splitting that dimension versus the numbers or the financial side and the strategy side, I see needing to bridge across all three of those dimensions. You really can't separate the three. It's an integrated proposal here. At the end of the day, it's really about risk management and capital allocation for us. Really, to do that adequately, you have to have a focus on technical numbers as well as be guided by a long-term strategy. So, I actually look forward to discussing all three with you all in the future.

Yes, that's a great answer. Just a related follow-up. What's your biggest ingoing surprise as an opportunity?

Well, I think, for me, it's just the sheer running room that exists in the resource plays here in the US. It is a tremendous opportunity. We've talked at length already about the Eagle Ford and the Bakken and the primary zones that we're chasing there. But we've also talked about the Austin Chalk, as well. There's just an incredible amount of opportunity yet to be unleashed.

Putting the downspacing even to the side, some of these stack plays that exist I think we're just beginning to understand. I've also been very impressed with how quickly Marathon has ramped up from an efficiency standpoint. We're still relatively early to the resource play. But as you look at the efficiencies and the reliabilities that our teams have driven in the Eagle Ford and the Bakken, it's very impressive and certainly constitutes first quartile performance. That's been a very pleasant surprise to me.

Great, thank you.

Thank you, Duane.

If I could answer John Herrlin's question, the Madagascar well looks like about a 90-day well.

Matt Portillo, Tudor, Pickering, Holt.

Just two quick questions for me. I was hoping we could just talk a little bit about your Cana drilling program. In particular, the southern Cana and how that fits into an acceleration case? Given the results you guys have seen today, what commodity price environment you need to pick up drilling there? Then secondly, I just wanted to get an update on your views on the lower tertiary opportunity within your portfolio in the Gulf of Mexico? How we should think about your drilling plans over the next year or two, targeting some of those high impact prospects?

Yes. I think certainly in the -- we call it, the Knox area or it could be southeast Cana, we have two rigs operating today. That's been sort of a steady-state just to hold onto acreage, continue to advance our knowledge of the reservoir, continue to help drive down our drilling cost, which is a very important component for us there. As we noted in the press release, one of our more recent wells at East Knox was a record for us in terms of drilling times, down to 43 days and a very strong IP rate.

So, it is indeed an area that goes back to what Lee said before, we have a great deal of resource here across Knox and the Cana area proper to the north, as well as other areas of Oklahoma that right now, we have a sort of go slow strategy on, continue to advance our technical knowledge, continue to advance our drilling cost but significant opportunity to ramp up.

That's what we show in our investor presentations is, this is an area, as we see, particularly higher NGL prices. Natural gas prices will help as well but, to see NGL prices get back up into the high $40s, low $50 a barrel-type ranges would certainly be very helpful in terms of the economics of this area. But, I think we can envision, at some point in the future, as we see better prices, running double-digit numbers of rigs in this area. We think the potential is quite significant, we're quite fortunate that a good deal of our acreage is HBP. So, we don't have a compelling reason to be out there drilling wells just to hold a lot of acreage at this time.

I guess with respect to the Paleogene, we have significant prospect inventory today. When we take delivery of the rig next year with Conoco that we'll share, that's when we'll begin to execute on our operated paleogene prospect inventory, the vast majority of which are inboard, which as you know, based on the Shenandoah result, the inboard paleogene has much better reservoir properties. That's where our initial focus will be in our Gulf of Mexico drilling.

Thank you very much.

Thank you. I will now turn the call back to Howard Thill for closing remarks.

Thanks, Dawn. Before we close, I'd just, again, like to remind you to please mark December 4 on your calendars for our Analyst Day as Clarence said, for a total Company review in San Antonio, Texas. We appreciate very much your interest in Marathon Oil. We hope you have a wonderful day. Thank you, goodbye.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.