馬拉松石油 (MRO) 2014 Q3 法說會逐字稿

Welcome to the Marathon Oil Corporation 2014 third-quarter earnings conference call. My name is Christine, and I will be the operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Mr. Chris Phillips. You may begin.

Good morning, and welcome to Marathon Oil Corporation's third-quarter 2014 earnings call. I'm Chris Phillips, Director of Investor Relations. Also on the call this morning are Lee Tillman, CEO and President; JR Sult, Executive Vice President and CFO; Mitch Little, Vice President International and Offshore Exploration and Production Operations; and Lance Robertson, Vice President North American Production Operations.

As has become our custom, we released prepared remarks last night in conjunction with the earnings release. You can find those remarks and the associated slides at marathonoil.com. As a reminder, today's call is being recorded, and our comments and answers to questions will contain forward-looking information subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. I refer you back to the aforementioned slides where you can find our full Safe Harbor statement.

With that, I will turn the call over to Lee.

Let me add my good morning. I want to open with a few comments on our outstanding operational performance, focusing on those execution elements that are within the control of our excellent asset teams. First and foremost, our three high-quality US resource plays continue to deliver on our growth objective, with over 40% year-on-year growth, and double-digit growth quarter over quarter.

The Eagle Ford had a record quarter, with 87 gross operated wells to sales, including eight Austin Chalk wells. We brought 19 gross operated well to sales in the Bakken, with 8 of those piloting enhanced completion designs with encouraging early results. We also spud three high-density Bakken pilots with 12 wells per drilling unit and brought 13 additional recompletions to sales.

Per our plan, we have added an incremental rig in the Bakken to provide additional capacity for our high-density spacing and completion pilots. And we are on track to add two incremental rigs in the Oklahoma Resource Basins before year end to continue SCOOP development, STACK delineation and new horizon testing in the Springer, Caney, and Granite Wash. We also grew our Oklahoma Resource Basin position by executing agreements for approximately 12,000 net acres in the SCOOP area, including acres perspective in the emerging Springer formation.

Internationally, we closed our Norway transaction for approximately $2.1 billion in proceeds and had excellent early results from our UK Brae platform drilling program, with both wells exceeding pre-drill expectations. In exploration, we spud our Key Largo inboard Paleogene prospect, our first well in a multi-year GOM exploration program, and expect to spud our first well in the EG exploration program before year end. Additionally, we successfully negotiated and executed our exploration and production sharing contract for Gabon Block G13, now named Tchicuate, and acquisition of 3D seismic is planned to begin in early November over this promising block.

Looking ahead to the fourth quarter, we expect growth in North America E&P production available for sale and remain on track to deliver over 30% year-on-year growth from the US resource plays. International E&P production available for sale, excluding Libya, is expected to increase in the fourth quarter, reflecting improved reliability and no significant planned maintenance activities.

Fourth-quarter oil sands mining production is expected to decrease from third-quarter volumes, due to planned maintenance at the mine. Our full-year volumes guidance has been narrowed to 350,000 to 360,000 net oil equivalent barrels per day for production available for sale from the combined North America E&P and international E&P segments, excluding Libya and discontinued operations.

The recent correction in commodity prices has rightly captured the attention of investors and operators alike. Marathon Oil, through the strength of our balance sheet, which has recently benefited from the receipt of proceeds from the sale of our Norway business, is well positioned for a lower product price market. Although we have yet to finalize our 2015 capital program, at the macro level, we are incorporating the latest commodity price volatility into our business planning but remain confident in our forward-growth plans, with strong cash flows and the proceeds from our completed asset sales to support the continued development of our deep and high-quality inventory in the Eagle Ford, Bakken, and Oklahoma Resource Basins.

Our US opportunity set remains economically robust across a broad range of pricing scenarios, and we continually high grade and enhance our single-well economics through the work of the asset teams via completion optimization, down spacing, capital efficiency, and the testing of additional horizons. We expect our resource-play programs to progress fundamentally unchanged, with no plans to reduce rig count except where productivity permits.

Our continued focus on capital discipline and portfolio management has us well positioned to invest intelligently through the commodity cycle. And we will use the optionality across our opportunity inventory to maximize returns while retaining flexibility. We have a comprehensive process for examining CapEx at the margin, and our investment portfolio has the requisite granularity to ensure all opportunities are fully tested for capital allocation. We have clear line of sight on our multi-year commitments, as well as those areas of our business that are more discretionary and scalable in nature.

Our resource plays are not the marginal capital dollars. So, the key question will be more around pace and further acceleration as we balance growth with returns. We will also focus on protecting and expanding margins through continued expense management and commercial leverage with our service providers. We readily acknowledge our inability to predict pricing but are in good stead to progress profitable growth and drive shareholder value across a range of macro economic environments.

Let's now open for your questions. And, as a reminder, we do have our two operational vice presidents joining us today, so please take full advantage of their participation. Back to Chris to kick us off.

Before we open the call to questions, we'd like to request that you ask no more than two questions, with associated clarifications, and you can re-prompt as time permits. With that, Christine, we'll open the lines for questions.

(Operator Instructions)

Our first question comes from Ed Westlake from Credit Suisse. Please go ahead.

Congratulations on the cash flows and the well productivity and performance across the Shell portfolio. I just wanted to -- I mean obviously you have said in your opening remarks that you don't see a need to change, but say oil prices continue to trade lower, get a sense of what it is that you think would be the first thing that you might defer in terms of the over all CapEx spending?

Yes, well of course Ed, we're going to be releasing our full view of the capital program in December, but to address your point specifically, I want to emphasize that our portfolio in the US is robust across a broad range of pricing scenarios. We don't view the US portfolio as our marginal capital dollar.

We are well positioned to look at our full portfolio, look at the elements that may be nonreserve adding or more discretionary in nature, if we do see more moderation in the pricing environment. We want to be intelligent as we move through this commodity price correction, but we certainly feel very strong about the quality of our inventory.

Right. And then some good progress up in the Bakken. Maybe talk a little bit about EUR expectations and IPs. Obviously you have some core acreage there, but you've been behind the peer group in terms of using the latest technology, so just an update on where we are.

I will make a few opening comments and maybe I would ask Lance to chime in. We are moving much more aggressive in the Bakken. As we stated in our release, we have added an incremental rig effective in September to help us move forward, not only with the down spacing program but also with the enhanced completion designs.

And some of the wells of course we brought the sales were in fact part of our pilot testing of completions, some of these enhanced completions, which have shown some very promising early results. But maybe I will ask Lance to comment specifically on some of the enhanced completions that we have been able to test thus far.

Thanks Lee, and good morning Ed. We have had a very busy Q3, and actually in the second half of the second quarter this year in terms of testing those. We recognize the need to continue to move forward with the most effective and best available technologies.

To date we have actually had 17 of the 45 wells that Lee talked about originally at Barclays online to sales in that testing. That group has been comprised of wells testing most specifically, increased profit loading on a number of those wells. In fact, a majority of them have had up to 6 million pounds of proppant.

We've also tested incremental stages in those wells, surfactants in two or three of those wells, as well as incremental stages adding for smaller, more finite stage delivery. And then a change in fluid volume, both a decrease and in most cases an increase of fluid volume.

I would say in the overwhelming majority of those wells, the early response, so the 30-day IP, has been at or above type curve, so it's early. We would like to see those cumulative production volumes mature a little bit, but we're very encouraging by those results. We will have the balance of those wells probably two thirds to three quarters online in sales in the fourth quarter, with a few of those completion pilots trailing into the first quarter, Ed.

Just very quickly, the breakeven oil price for you think that core Bakken or maybe too early to say?

I think we recognize that across our portfolio, Myrmidon, Hector and Ajax, very different between the middle Bakken and the Three Forks in all three of those areas. So there's a range of pricing in there.

Our focus is how much better we can make each of the areas in this current commodity price environment, or any environment, to compete for capital. As we move through the budgeting process, we're going to focus on the wells that deliver the highest returns for next year.

I think building on that a little bit, Ed, certainly in our core areas in the Bakken, we have a lot of confidence going forward in their ability to compete for capital allocation, even with the commodity price correction. Those are very strong wells for us.

Thanks.

Thank you, Ed.

Thank you. Our next question comes from Paul Sankey from Wolfe Research, please go ahead.

Good morning, Lee.

Good morning, Paul.

I'm sure you can imagine we want to slightly pad along on the same theme of sensitivity of CapEx --

I'm shocked, Paul.

Hello?

I said I'm shocked, Paul.

Yes, right. Apologies by the way, if there's noise issues here. Someone seems to be fracking Park Avenue right now.

But, if you can talk about where the sensitivity does lie. You mentioned there's other areas that don't add reserves directly, or I wasn't quite -- if you could be more specific about where you would be looking to cut back, if you needed to, and at what type of point you feel you would have to cut back CapEx, as well. If you could talk about that for next year, thanks.

And again, Paul, I don't want to push this out in time, but we do plan to come back in a comprehensive way in December, and really detail out our plan. We're right if the midst of our planning process, and like many of our peer group, I think our planning process has been a bit overtaken by the change in the commodity price environment.

But when we talk about looking at the full portfolio, when we test our US resource plays, again they are not our marginal capital dollars. We look at those moving forward, largely unchanged, meaning that we're still committed to the two incremental rigs in Oklahoma, plus the rig that we have already added in the Bakken.

Beyond those elements of our portfolio, we do have aspects that are more discretionary in nature that are either nonreserve ad bearing, or particularly longer term investments including even within our exploration portfolio, that we will take a hard look at from a CapEx at the margin standpoint. But we haven't put any limiter to this point on our budget process, but we want to make sure that we invest intelligently, recognizing the change in commodity pricing.

Yes, so I understood that about the unconventional US not being the marginal barrel. Could you talk a little bit about the parameters of cash balances and cash flows that you want to work within, just remind us of how you see credit rating, how you see dividend obviously, et cetera?

I will maybe say a few words and invite JR to also chime in. First and foremost, I think we have been very clear on this point, we do not view our operating cash flows per se as a limiter on our investment program. If we have good investment opportunities to pursue, then we certainly are going to take those on and leverage the strength of our balance sheet to support that.

Now, over the long-term, is being within cash flows good discipline, absolutely. But when it comes to calls on our capital, maybe I will turn over to JR and just let him emphasize how we view that.

Well, I think when you think about it more broadly, as Lee indicated in his earlier remarks, not only where the balance sheet exists today, but now with the incremental $2.1 billion of capital from the disposition of Norway, that really gives us tremendous optionality as we're doing this almost as plug and play exercise with regard to determining what the right capital allocation is throughout the portfolio. It gives us that ability to use as much of those proceeds as we think is prudent to either both grow and to earn the requisite return that we think is necessary for our shareholders without in any way jeopardizing the strength of that balance sheet.

I mean, honestly, as you know, commodity price environment is where it is: could present opportunitiesin the future, as well. We want to make sure we are well positioned to take care of and pursue those potential opportunities.

Thanks. I will let someone else have a go. Thank you.

Thanks Paul.

Thank you, our next question comes from Doug Leggate from Bank of America Merrill Lynch. Please go ahead.

Good morning everybody. I have got a couple also, Lee, if I may, same theme, as you can imagine. If I go back to Oklahoma where you gave us the resource update back in September, that was one of the biggest drivers of your bitelog increase. Obviously, it is a bit more gassy, and some of the acreage in gassy has still been added.

I'm trying to understand what is the tradeoff between a very large position and very small rig count? In other words, you could probably do a lot more if the economics are competitive, and really what was the tradeoff between holding acreage out of necessity, as opposed to drilling for economic return? Then a follow up, please.

Well, first of all, let me try to address your question around product mix in Oklahoma. First and foremost, we have been drilling primarily leasehold, and essentially all leasehold this year in Oklahoma. In fact, even this quarter's well, the four in the SCOOP, the two in the STACK, are essentially drilling leasehold.

Now, within that we quoted one particular IP that I believe had liquids content around 55%. That's actually a lean condensate well.

When we look across the wells that we drilled in this quarter, the liquid yields on those wells were from the low 70%s to the low 80%s. So these were relatively high liquids content wells and competed very favorably for capital allocation.

And as we move and transition from a mode of holding leases to optimizing our development plans, we will have a lot more opportunity to move closer into the core areas, which we also feel will have higher liquid yields. And then as we test further some of those exploration horizons, including the Springer, our view of those very early on is mainly on the back of our participation in some of our OBO wells, is that those are also going to be very high liquid yields.

So we do not necessarily see Oklahoma driving us per se to being more gassy. In fact just the opposite, we see very good liquid yields, particularly as we move into the core areas of the play, and those wells will compete head to head with the wells that we have in the Bakken and the Eagle Ford. Hence we're very comfortable with the two incremental high spec rigs we will be bringing in later this year.

Lee, what I'm getting at is that leaves you with a relatively limited rig count compared to the size of the opportunity. I'm trying to understand right now, you've got multideck head drilling inventory it would appear with only a few rigs running. I'm just trying to understand where that stacks up in terms of competing for capital relative to the rest of the portfolio.

You're correct. We're in the very early days in Oklahoma. We're in the early days of understanding down spacing, completion design, the key core areas in delineating the core areas of the field, and certainly in the early days of things like the Springer and the Caney and the Granite Wash.

So we are, but I think adding that additional rig capacity is going to first and foremost allow us to ensure that we protect our leasehold, but secondly is going to allow us to get out in front of really understanding the full potential of that area, and then we will make a progressive and measured and thoughtful ramp up from there. I mean, bear in mind we have moved from two rigs in 2013 to basically four rigs this year, moving to six, and so we're moving up quite aggressively, in terms of rig count.

And we see that rig capacity being very well justified based on the inventory we see in front of us. So I think it's just a question as we learn more about the play, Doug, we will generate more confidence to move more aggressively with that ramp up in activity, just like we've done in most of the other resource plays.

Thank you. My quick follow up is for JR. Just now that you have cleaned up the portfolio with Norway, JR, can you give us an idea of what the current tax, that is the deferred tax guidance should be on a go forward basis, and I will leave it there. Thanks.

Yes, Doug, we wouldn't necessarily say we have cleaned up the portfolio with Norway. We've definitely simplified the portfolio and concentrated it more towards North America.

I don't think you should in any way think we are done with portfolio management. It's very integral to capital allocation, but when I think about deferred taxes going forward, we are going to be a very US-centered cash flow company.

We have given guidance from an effective tax rate standpoint in the 30% to 35% standpoint. And I think you should assume that I do not expect to be a US taxpayer, excuse me, US taxpayer for the foreseeable future and adjust your deferred taxes accordingly.

Thanks for that. Appreciate it.

Thanks Doug. Thank you Doug.

Our next question comes from Ryan Todd from Deutsche Bank. Please go ahead.

Great thanks, good morning gentlemen. If I could do one follow up question on CapEx from a slightly different angle.

If, I know that the absolute level of the CapEx budget is probably still quite a bit in flux, given the current environment, but if we think year on year, your ability to shift CapEx within the portfolio toward the US onshore, obviously you have got lower CapEx year on year from the Norway sale. How should we think about how much CapEx you might be able to flex within that portfolio towards the US on shore in 2015 at a flat CapEx environment?

Yes, well certainly, Ryan, our intent is to always prioritize and flex our capital allocation towards highest returns, and in this case, there's no doubt that the three US resource plays are in very good stead to compete for that capital allocation. In fact, that was part of the basis for moving more aggressively with the additional rigs that we're bringing in before the end of the year.

As we think about CapEx broadly, as you rightly state, Norway accounted for about $500 million-ish of our $5.9 billion in CapEx. And so as we look at re-baselining our CapEx spin going forward, you have to reorient back to that $5.4 billion type number.

And so that's a bit of a starting point from us, from where we are today, and then we will test to see how much more aggressive we want to be in that in terms of, really, the pace and the acceleration level that we want to step into in the US resource play. Beyond that, we will look very hard at CapEx at the margin outside the US resource plays to make sure we make reasonable decisions based on the commodity price environment, which, as everyone knows is still moving and really hasn't found equilibrium yet.

Great thanks. And then, maybe one follow up on the Eagle Ford. Stronger than expected results, at least from our expectations in terms of production in the quarter.

And obviously a lot of that was driven by record completions. But can you talk as well about, you mentioned 59 wells at over 180 days production on the enhanced completions and 25% improvement relative to type curves. Can you talk about what you have seen today in terms of how much you think about earlier capture, and how much might, sorry, float towards higher EURs?

Maybe I will let Lance. He's smiling though, because you acknowledged the great performance in the Eagle Ford.

So I'm sure I'm going to pay for that later. So Lance, why don't you talk a little bit about the enhanced completion design?

I would say directionally, Eagle Ford is performing where we expected it to this year, starting the year knowing we would gain efficiency through the year. So some part of what you have seen in the production growth is driven by at a constant activity in the field, getting more and measure efficient with the existing equipment and people. Certainly a credit to the team for their drive on that basis.

The second part of the growth is driven, and perhaps a large part of it by the stimulation design. We have tested stage basing, proppant loading, perforation clusters and rate. We found a better completion design. And through the third quarter, almost 60 wells had reached 6 months of cumulative production, and that uplift is about 25%. And so, as we have a relatively constant pace of activity in the field and we get better well performance across a large group of wells, you're really seeing that move through and create that broad production lift in the field. So this current design is working very well.

As you would imagine, we're out testing additional enhancements to that design for future improvement. I think we're very satisfied by that this year, and what we have learned from that will take us to the next steps in terms of enhancement and future growth.

Is it too early to speculate as to whether that, whether you have shifted the entire curve up, or whether you've just pulled forward production?

Yes, that's a great question. And right now, what we see is early well performance is very strong. We'd like to see those wells mature.

We're focused on creating more value per drilling spacing unit by bringing those volumes forward in time, and doing it in a very capital efficient manner. I think as those wells mature, and we have that history, we will reevaluate the EURs and talk about the potential for resource growth late this year or early next.

Congratulations on the great result.

Thank you, Ryan.

Thank you, our next question comes from Jeoffrey Lambujon from Tudor, Pickering, Holte. Please go ahead.

Thanks for taking my questions. Just one follow up on capital allocation. You talked about the US on shore and international CapEx, just focusing specifically on exploration, what's your view on capital spend there over the next few years?

Certainly as we included in the investor package, our near term focus is really wrapped around the Gulf of Mexico. We're really bringing that into full view right now. We've got multiple wells that we're executing in the Gulf. Our operated Key Largo well, in addition we have an appraisal well, and another exploration well that's nonoperated.

So a lot of focus on the Gulf of Mexico in the near term. But I think what you will find is that the program is much more focused in the next couple of years. So we would expect to see some moderation in the overall exploration spend regardless of the pricing environment. This is not really linked directly to pricing. This is just a function of us continuing to drive focus toward oil prone emerging plays that we think can be accretive and can compete for capital allocation across our full portfolio.

So, you will also see that we have a focus as we move through toward the end of the year on our EG program, which we think is also quite promising and also plays right to that fairway on oil prone emerging plays. And maybe I could and our vice president on the international side just to comment just briefly on the EG program which we hope to kick off at the end of the year.

Yes, thanks Lee, and thanks for the question. Just quickly following up on Lee's comments, we will start a two-well exploration program most likely towards the very end of the year this year. It's in an area offsetting a couple of proven fields, just across the international border.

We're very encouraged with the revised interpretations from integrating reprocessed seismic. We see chance of success for these in excess of 50% based on integrating all of the data available to us.

And on a gross resource basis with the multiple follow on prospects, we see potential ranging from 200 to 500 million barrels. So certainly a material opportunity that we will be testing late this year.

Thanks, Mitch. So bottom line is certainly in the near term next couple of years, we see a much more focused, a bit of moderation, in our exploration spend, but really driving at these high impact oil prone prospects.

Great, that's really helpful. Thank you, and then lastly on the oil sands mining, can you talk about progress towards improved reliability there, and then plans for that long-term, as well?

Yes, absolutely. I will maybe make a few comments, and then I will offer Lance an opportunity to chime in, as well. I think we had had a strong performance in the third quarter, but the reality is one quarter a trend does not pick.

We still have some hard work left to do on the reliability front. Lance and his team are working with our other joint venture partners, as well as the operator on the reliability front. Maybe Lance, I will let you comment on how that work is progressing.

I think the operator and the joint venture partners, of which we are one, are clearly focused on reliability. We are making progress there. The variability and quarterly performance is higher than we would like it to be. I think the peers would agree.

So we're focused, and I would say broadly the third quarter shows some support on reliability focus, but there is a dedicated program that is focused and targeted at the key mine reliability impacts that we have experienced over the past few years. And so it's too early to tell, but certainly the rigger and focus is there. The consistent results remain to be delivered.

Yes, and I think, again, to also to the operators' credit, I think they did move the needle this quarter. I think they have also brought in some more focused mining leadership into the operation, and we think those are all positive signs, but again, we need to see that consistent performance quarter on quarter from the OSM operation.

Thank you.

Thanks.

Thank you. Our next question comes from Guy Baber from Simmons & Company. Please go ahead.

Good morning everybody. Thanks for taking my question. Surprise, surprise, but I wanted to start off with capital spending and this year's budget. But it would appear that you all have been able to accomplish more within the confines of that original budget than may have been initially planned.

Granted Norway's dropping out, but you're adding three rigs, albeit late in the year. You are testing various completion enhancements in the Bakken. You have enhanced completion designs in the Eagle Ford. You are more active in Oklahoma. It appears like you're doing more with the same amount of capital as the budgets have changed. Is that a fair observation that we have made, and can you discuss where you have driven efficiencies in spending and what some of those implications might be for 2015 as we think about your budgeting process?

Yes, well certainly we are on track on our capital budget this year. There have been pluses and minuses across the budget. Some of those have been timing impacts as we have had rigs arrive later than expected.

A good example of that is the EG program, which we thought would be kicked off before now, but the operator that has the rig has had some success and is currently testing. There are some timing impacts there. But I agree with we have been able to do more in this year's program from an activity perspective, particularly in the US resource plays.

The additional rigs really haven't put a lot of pressure on us, because they've come somewhat late in the year. But the higher intensity completion design certainly in the Eagle Ford, where we have such a high number of wells to sales, absolutely that has put some upward pressure into the budget. That's all been well justified based on economics. As as we look at the incremental returns on the higher intensity completion designs, you know those are generating a 100% incremental rates of returns. So we have been able to drive a bit more success, a bit more activity this year within the confines of the $5.9 billion budget.

Great. Then I had a follow up for Lance. Obviously across the portfolio, drilling longer laterals in the Bakken, testing enhanced completion design, it appears there's some experimentation going on, that I would imagine might make it difficult in driving continued improvement to cycle times and your spud to beat TD times. So could you discuss a little bit for us your view on the evolution of cycle times from where we stand today in the Eagle Ford and in the Bakken, and how you balance that with improved well performance, and just how we should be thinking about that?

Absolutely. Great question.

We continue to focus above all else on value in the resource plays, which requires us to continue to focus on completion enhancement every month, every quarter to find that opportunity to create that enhanced value. Within the chain, the teams are focused on that and that systemic development. So, I would start first within Eagle Ford: they have been systematically developing and they have been in a constant rate through this year if terms of activity. You see that activity quarter after quarter. They continue to get more efficient and bring more wells to sales, even as they continue to experiment. I look at that as a great success that we're controlling and managing that capital that Lee referenced.

So, while we are spending more per well to generate that value, it's certainly worth it, and the teams continuing to bring that per well cost down, even if they enhance it broadly through efficiencies. And I would say incumbent in that in the first half of the year, we actually achieved a substantial amount of savings in efficiencies and commercial leverage across our service lines, and from mid year forward it's been effectively flat. So that's really helped offset much of the capital spend you referenced earlier, as we achieved those savings early in the year.

Looking at Bakken, they are experimenting more. It's a very mature team. They continue to get faster this year. They're more than a day faster on the spud to TD cycle.

They are planning those completion optimization pilots putting though in a cue and managing those effectively. As you have seen our production grow 12% from Q2 to Q3, what I would say is, broadly their execution remains robust in the face of that experimentation, and we expect that to continue moving forward.

I would say in the resource plays that component of experimentation is just part of the business model. We have to do that to continue to drive optimization, capital efficiency into the resource plays, so our asset teams view that, just part of the expectations.

That's very helpful. And then just a final quick one for me. Do you all have a target Eagle Ford production exit rate for the year that you might be willing to share?

Not currently, Guy. We will spend some time at the end of the year chatting a little bit about exit rates and forward looking rates in all three of the resource plays.

Understood. Thanks.

Thanks, Guy.

Thank you. Our next question comes from John Herrlin from Societe Generale. Please go ahead.

Yes, hi, this is either for Lee or JR. Given a larger US focus, any change in view with respect to product hedging, commodity price hedging?

That sounds like a great question for JR.

Hey, John, how are you?

Pretty good, and you?

Good thanks. Now, we talked about it on a past couple of calls. We try and look at commodity price risk through the lens of our ability to meet what we believe is the core of the capital program necessary to achieve those growth and return metrics that we set out for ourselves internally, and that's the way we look at it.

Now, no doubt today we are and still remain substantially unhedged when you look out to 2015. It is something we will continue to consider. We will look at the risks not only of the downside but also to the risks of the lost opportunity to the up side. But the focus is more in terms of that core capital program in our ability and our assessment of the probability of being able to fund that with both operating flows, cash on hand, and the ability to instill the maintain a really strong balance sheet.

Okay. Thanks. Next one for me is you mentioned you'd be opportunistic in terms of portfolio management on the sell side; what about buying acreage or assets in the downturn?

Well, I think as JR mentioned, having that strength of balance sheet does give us the I will say the horsepower to be opportunistic in the market. Whether the prices are up or down, it does allow us flexibility to entertain opportunities.

I think a great example of the type of opportunities that we're able to pursue is the add this quarter in the SCOOP area, which is a very accretive add. 12,000 net acres to a 300,000-acre position.

So it's in our view, those adds will always be open to, if they make sense and they reflect the quality that can come in and compete in our inventory. I think we will always look to be opportunistic and consider those opportunities that present themselves, particularly here in the US unconventionals, because of the strength of our execution model and I think the credibility that we have generated.

I believe we have confidence in pursuing those opportunities, but, it will have to be something that can come in and compete with the quality of inventory that we have today. It really all starts and ends with quality. And having that running room looking forward to add significant growth opportunity in the future.

Yes, John, as we talked before, I think Lee's point is a good one. Whether we're in a hundred dollar price environment or $80 price environment or lower, the same litmus test applies.

No doubt this environment can create opportunities for those who can take advantage of those opportunities, but that natural tension in the capital allocation process still exists. It's still got to compete with those very high quality resource plays that we have today.

Thank you.

Thanks John.

Thank you. Our next question comes from David Heikkinen from Heikkinen Energy, please go ahead.

Good morning, and look forward to the 2015 outlook in December. But can you walk us through your fourth quarter expectations for wells drilled and online in the Eagle Ford, Bakken and Oklahoma?

Yes, well I think, again, we remain on track, on plan to deliver the guidance that we have provided, of course, as part of last year's capital budget. We still remain within those brackets. So there's really no change in the activity outlook in terms of wells we expect to drill and wells we expect to bring to sales. So we're not signaling anything different, David, than what we have communicated if the past.

Okay. No hard details as usual. Just trying.

It's worth a try, David.

And then the 12,000 acres that you added -- .

Maybe David, just to not dodge that completely, though, I think you have seen our delivery in the three resource plays over the last three quarters. You have seen the efficiencies that Lance has referenced. So, I think, based on the activity levels it's relatively straightforward, I think, to project that into the fourth quarter outlook.

On track.

Yes.

And then the 12,000 acres, can you give specificity or details on details on where you added the SCOOP.

Don't want to talk about the specifics on the acreage add, but just, I think, suffice to say that our view is that it's comprised of good core acreage that will compete going forward. The other element that we find very appealing in the acreage is that it also looks like it is prospectivity in the Springer formation, which we already have acres that are prospective in the Springer. But this would be in addition to that, and so we saw the Springer as a distinctive up side in this particular acreage position.

All right. Thank you.

Okay. Thanks David.

Thank you. Our next question comes from Roger Read from Wells Fargo. Please go ahead.

Good morning.

Hey, Roger, good morning.

Just wanted to follow up a little bit and maybe the details aren't available yet, but your Bakken recompletions, particularly the Hector and the Ajax 16 wells, can you give us a little more idea of what exactly you're doing there, what you're hoping to accomplish, maybe if there's any way you can give us any expectations for volumes and changes relative to where the wells were before or what they did originally?

Yes, maybe a few opening comments and I will turn it over to Lance. We've got quite a large inventory of wells that were competed with earlier technology in the Bakken, essentially single stage, open hole frac designs. And we saw that inventory, and we felt that there was a real potential there to go in and do recompletions to modern multi-stage technology and generate not only up lift and IPs, but also EURs.

We started, not surprisingly, in the best area of the field, which was the Myrmidon area. We have now moved into Hector and Ajax. The majority of what you have seen this quarter is really Hector wells, and that's where the majority of acreage lies. But I will let Lance comment a little bit on what we're doing in the wells and how the team is driving not only capital efficiency but economics in those wells.

Roger, what you would find in terms of operational basis, as we go into recomplete wells, we're going into a drilling unit most of the time that has one or two wells in it on a 1280-acre unit, and we're going into move to higher density, full field development. Sometimes those wells are not using -- those original wells weren't used the best available technology that we understand today.

And they're three, four, maybe five years on production. So we're restimulating those wells to that modern best available technology as we drill and complete the rest of the wells on that pad for efficiency all at the same time and to see those results. We're having good success with that. We're having it in the Myrmidon. We're having equal success in Hector. We do not have inventory outside of Hector effectively today for those recompletions. They compete for capital nicely, and otherwise those wells on pads would have to be shut in for some period as we do the offset stimulations.

So rather than having expense workover, this is an opportunity for us to restimulate those wells on a capital basis and bring the EURs up. So far the wells performed very well, and we're going to continue that program through the end of this year, and pending our capital evaluation into next year, and we have about 70 more wells that are viable candidates.

And just to add that, we have a dedicated recompletion rig running in the field, and that rig will essentially be liquidating that inventory over the next couple of years on a go forward basis.

I would say too that we're now far enough into it that even as we move to Hector and the reservoir quality may not be quite equal to Myrmidon, our efficiency at doing the recompletions, we have gotten faster as well as lower cost over the year which has helped balance our return on those.

Great, thanks and another way of asking the capital allocation question, and maybe ways to lower spending commitments for next year, Key Largo, I guess the wells maybe more of an impact on 2014 CapEx. But at 60% working interest, any efforts to cut that back, sell down a little bit, or any of the other exploration wells for next year?

Well certainly Roger, we look at the risk profile on all of these wells and make a determination on, do we want to try to bring in additional partners to mitigate the go forward risk, particularly on high dollar wells on the Gulf of Mexico. So we're going to continue to be interested in looking at that risk profile on all of these deep Paleogene type wells to ensure that we balance materiality versus risk in the well.

You will continue see us pursuing farm downs when it makes sense to reduce our exposure on these wells. These are very high dollar wells, as you know.

Absolutely. Thank you.

Thanks Roger.

Thank you, our next question comes from Pavel Mochanov from Raymond James.

Thanks for taking the question. You operate in, obviously, a diverse range of areas. Can I get some comments from you on what's been happening with service costs if your various geographies, in the last, let's say, 90 days? In other words if there is a response on the cost side to the moves in the commodity market.

Yes. Well, maybe I will chime in, and then certainly, I think, Lance has already indicated that in the beginning of the year, we were quite successful in negotiating some very favorable commercial terms for our key service providers. And when you look at our business particularly here if the US, it's dominated really by the supply change.

It's dominated by our pumping services. Our rig contracts, et cetera, that's really what's driving our business here in the US. I think we were starting to see certainly some tightening in the availability of high speck rigs, as we move through the second half of the year, but had not really seen a quote unquote price response per se in the rig market.

So I think now going forward in this somewhat different commodity price environment, our expectation is that there will be opportunity for those operators at scale. And we very much have a scale in our favor that we will be able to expand margins by getting in and driving much more favorable commercial terms, just given the significant attitude of our book of business.

Okay. That's helpful.

Small house keeping item in relation to Atrush, given the delay that of course you have had because of the fighting in the region, I understand that construction there was postponed for a period of time. You're still guiding to start up in 2015. In any sense during the year when that might be?

Yes, I will maybe just make a couple comments and turn over to Mitch. We were certainly impacted by the security situation in Iraq. We were impacted to varying degrees across all of the blocks that we have interest, including our own operated block where we temporarily suspended operations on the Jisik-1 well. But there were also other operations on our non-operated blocks that were also impacted.

Maybe I will let Mitch comment specifically on Atrush. By I do think it's important to note that Atrush from a net volume standpoint is still a very small component of our go-forward portfolio.

First phase.

Yes, first phase.

Thanks Lee. Clearly with the security developments in the region, several activities by various operators were put on hold or suspended. In the case of Atrush, and the development of the phase one, a majority of that work is currently being done outside of the country. So that was able to progress.

We had been expecting first production around mid year. The team is working on developing recovery options, and we're still in the midst of that process. So we can expect some impact from the security situation there, but don't have a definitive time frame nailed down until we work through the recovery plan.

But you're still firm on the 2015 generally.

That's correct, yes.

All right. Appreciate it.

Thank you.

Thank you, our next question comes from Scott Hanold from RBC Capital Markets. Please go ahead.

Yes. Thanks, good morning.

Good morning, Scott.

Hey, maybe this a question for JR. Obviously you all have gotten the proceeds from the Norway sales, and did indicate some intent to spend on some of the US unconventional plays. But JR, could you talk about the looking at the balance sheet in a lower commodity price environment, you've got that senior note coming due at the end of 2015? Is there a certain amount of comfort level you're going to create by warehousing some of those proceeds for that for that coming due?

Well, Scott as we have said a number of times now, I sleep very well at night with the strength of our balance sheet and the flexibility that gives us, especially in this lower commodity price environment. I wouldn't necessarily view where I'm warehousing the proceeds for debt repayment.

In fact if anything, I would like to put as much of those proceeds from this environment from a return perspective to work in our organic portfolio. I would have every expectation I will be refinancing that debt, later in the year when it comes to October of 2015.

Okay. You answered my question, I appreciate it. Thanks.

Thanks Scott.

Thanks Scott.

Thank you.

Our next question comes from Jeffrey Campbell from Tuohy Brothers. Please go ahead.

Good morning.

Jeffrey.

I apologize as a preamble if I'm being repetitive. I got knocked off Q&A for a little bit and got back on.

Your announced Austin chalk results were identified as being within the previously announced delineated area. What's the status of magnifying that area beyond the approximately 15.5 thousand acres presently derisked as you move into 2015?

Well, I think thus far we have delineated about 18,000 net acres in the Austin Chalk, and I would say that we are on plan not only to continue the development, co-development of the Austin Chalk, but also to continue to delineate to the east and the west. And maybe Lance you could just add a little bit about the forward Austin Chalk program?

Yes, absolutely. Jeff, we have four wells in the fourth quarter that will test new areas outside of the currently delineated area, and combinations will be east and west of that area, and they will test about 8000 more acres that we view as prospective for the Austin Chalk. In addition to that in the Eagle Ford area, we also have two pilots that we have previously described as stack and frac that will test a combination of Austin Chalk, upper Eagle Ford and lower Eagle Ford, up to four wells vertically stacked.

Those pilots are drilling today. Results will be roughly Q1 by the time they are drilled and completed.

We have stand alone, upper Eagle Ford tests that are also drilling today where we haven't developed before, and with those results, likely first quarter, as well. We have a substantial amount of activity testing other vertical horizons, as well as combinations of horizon and then those four wells that should test about 8000 acres if the Austin Chalk. And again, I would say that Austin Chalk results, will, most of these are on pace to all be drilled and start completions at the end of Q4 and first sales in early Q1.

Okay. That was great color. If I could just clarify one thing that you just said. The stack and frac pilots, would you qualify those as being within presently derisked agreage or are they a part of derisking the additional 8,000 acres you talked about?

Those will be some of both, actually. We will have some outside the area, and the majority inside the area.

And if I could ask one follow up, a little bit higher level, it seems like condensate export momentum is slow as the government struggles with methodology to accurately categorize condensate. What is your view on how the condensate export market is progressing, and what do you anticipate in 2015?

I don't know that I would necessarily characterize it as slowing down. I think definitely there's been, if you're referring of course to the BIS process within the commerce department, I think that has slowed a bit as we move through the elections et cetera. So I still view this as a very important issue for the industry.

I think for Marathon specifically, the one advantage that we have is that our Eagle Ford production is relatively heavy compared to other operators, with the bulk of our barrels being heavier than 50-degree API. And so we tend to see it as an issue going forward as those higher API condensate levels move up. But today it's not a hot pipe issue for us right now.

Certainly we want to get hide behind not only the lifting of the condensate export ban, but also move toward lifting really the crude export ban fully and completely. We think that is really the long-term correct answer for the industry, but certainly if we see a progressive lifting of condensate restrictions, we want to make absolutely sure that we're positioned to take full advantage of that. And the Eagle Ford team is definitely, has definitely taken those steps.

That's helpful, and just to be clear, and to your point, really what I was thinking of is the EIA has been empowered to try to arrive at some industry agreeable definition on condensate based on API. That moves into your wheel house, I think.

Certainly it would be helpful to the extent that there is a clear and definitive definition of condensate. I think that would be helpful for the industry.

Thanks very much.

Thank you Jeffrey.

Thank you.

Our last question comes from Mike Kelly from Global Hunter Securities, please go ahead.

Hello. Good morning.

Good morning, Mike.

I know it's early days in the delineation of the Springer, but I was hoping to get your initial thoughts on how much of your 300,000 acres in Oklahoma could be prospective for the formation and also really get your sense on how the Springer could fare on a rate of return basis versus the SCOOP and the STACK, thanks.

Yes, I will maybe just let Lance jump in on the Springer.

Absolutely.

So to date we have participated in about 11 operated by other wells that are Springer, and we see very high liquids rates in those, tends to be a lower gravity. And so I think what working on now is to see is it really a oil in situ reservoir, or is it a retro grade condensate reservoir.

We're very encouraged by the high liquids content today. It's a little bit shallower than the existing Woodford, this is an opportunity to continue to work on capital efficiencies there. But that liquids content being very high and high value products, suggests that it should be able to compete favorably for capital on a go forward basis.

We will have our own wells starting in the spring on an operated basis late in the first quarter next year as we evaluate that, and by virtue of having a very core valuable SCOOP position, we also have a large part of that position is prospective for the Springer. And I don't think we're quite ready to declare how many of those acres are prospective.

We're encouraged by where we are, and what we see, we have been working on the Springer for some time now, almost a year in looking at it. I think it's going to be a great opportunity for us to test in the future and feel very comfortable it's going to have a chance to compete for capital.

Great color Lance, thanks.

Thank you very much, Mike.

Thank you, I will now turn the call over to Chris Phillips for closing comments.

Yes, before turning back to Chris, maybe just a closing thought here. I very much believe that as a Company, Marathon is very well positioned to invest intelligently through the commodity cycle.

And certainly we're going to be using the optionality that we have across our opportunity inventory to not only maximize returns in growth, but also retain flexibility as the market tries to find some equilibrium, and we look forward to sharing more details on that later in December. With that, I will turn back to Chris to close out the call.

Thank you Christine, and to everyone, we appreciate the questions and interest in Marathon.

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