馬拉松石油 (MRO) 2016 Q1 法說會逐字稿

Welcome to the Marathon Oil Corporation 2016 first-quarter earnings conference call. My name is Sylvia and I will be your operator for today's call.

(Operator Instructions)

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

Thank you, Sylvia. Good morning and welcome to Marathon Oil's first-quarter 2016 earnings call. I am Chris Phillips, Director of Investor Relations. Joining me on the call this morning are Lee Tillman, President and CEO; JR Sult, Executive Vice President and CFO; Mitch Little, Vice President Conventional; Lance Robertson, Vice President Resource Plays; Zach Dailey, Director of Investor Relations. Our earnings release, prepared remarks and associated slides are posted at marathonoil.com.

As a reminder, today's call may contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Please read our disclosures in our earnings release and in our SEC filings for a discussion of these items. Reconciliations of any non-GAAP financial measures we discuss can be found in the quarterly information package on our website.

With that, I'll turn call over to Lee.

Thanks, Chris. Let me add my good morning. I'd like to take a few moments here to just offer some opening comments before we start taking your questions.

Our first-quarter results highlight our continued focus on resetting our cost structure across all elements of our business, reducing our capital program consistent with our plan, and delivering production at the upper end of our guidance. Our capital program remains squarely focused on maximizing allocation to our lower-risk, higher-return US resource plays.

In the Eagle Ford we continue to see well performance uplift from tighter stage spacing in our high GOR oil wells, while driving completed well costs down by about $2 million from last year. In the Bakken we released our remaining rig, but base production outperformed our expectations, supported by 2015 enhanced well completions, all while decreasing production expense per oil equivalent barrel 35% year over year. And in Oklahoma we progressed our operated drilling program for leasehold protection and delineation.

Outside the US, the jacket and topsides for the EG compression project were successfully installed ahead of schedule, and we remain on track for first production mid year. At OSM, the asset continued to perform well on both the cost and reliability fronts.

On that subject, our thoughts go out to the Fort McMurray community today where wildfires continue to take their toll. Though not currently threatened, operations at the Muskeg River and Jackpine mines have been temporarily suspended to support emergency response efforts.

This year we've continued to strengthen the balance sheet, first through the equity offering, and, second, through the successful execution of our non-core asset sale program. In April we announced $950 million worth of non-core asset sales, bringing our total since last summer to $1.3 billion, far exceeding our target and delivering on this commitment early in the year. With this success we are on track to achieve our 2016 objectives to live within our means inclusive of non-core asset sales.

Looking ahead to the second quarter, total Company E&P production will be higher with EG and the UK Brae Field back online. We will bring on twice the number of wells to sales in Oklahoma, four in the STACK, three in the SCOOP, and all extended laterals. We will have additional results from completion enhancements in the Eagle Ford, though at a reduced pace. And in the Bakken we will have our Clark's Creek pad online in West Myrmidon.

Everything we've been doing for the last 18 months -- lowering costs, workforce reduction, strengthening the balance sheet, and executing non-core asset sales -- has been designed to provide us the flexibility to respond when we see constructive commodity prices and to derisk our business plan through 2017 in what remains an uncertain commodity price environment. While some positive trends are occurring, we are not yet confident that global supply and demand fundamentals are supportive of sustained higher oil prices. And we expect volatility to continue. As we see strengthening to $50 and above, we are well-positioned to consider increasing the activity levels. Having quality resource, execution capability and a strong balance sheet puts us in a favorable position to be on our front foot when the time comes.

Before I close, I'd like to recognize Chris Phillips who will retire at the end of the month. Chris joined Marathon Oil in 1984 to help build the North Brae platform in the UK, and has served in various roles within the Company since, including the last eight years in Investor Relations. My thanks to Chris for all of his contributions, and we wish him all the best in his retirement. And Chris is leaving our IR team in good hands, so please contact Zach Dailey going forward for all IR related matters.

With that, I'll hand it back to Chris to begin the Q&A.

Thanks, Lee. Before we open the call for questions we would like to request that you ask no more than two questions with associated clarifications. And you can re-prompt as time permits. With that, Sylvia, we will open the lines for questions.

(Operator Instructions)

Doug Leggate, Bank of America Merrill Lynch.

Thanks. Good morning, everybody. And let me also add my congratulations to Chris. It's been a pleasure, Chris, and I know we will keep in touch going forward.

Lee, maybe I can just straight into the capital question. You've got a fair amount of non longer-dated capital in 2016. I'm guessing some of that's going to fall away with the completion of some projects. I wonder if you could speak to your capital flexibility beyond that $50 ceiling that you mentioned, or level, to go back to work, and how things might change as those spending commitments roll away.

Yes, absolutely, Doug, and good morning. On the longer-cycle investments that we have in 2016 that we will be wrapping up, first and foremost is the operated compression project in equatorial Guinea, which, as I mentioned, we are still on track for start up in mid year.

Secondly, of course, is our involvement in the non-operated Gunflint project in the Gulf of Mexico, which also will be starting up approximately mid year. And then, finally, our non-operated participation in the Atrush project in the Kurdistan region. Those three projects will essentially run their course from a capital program standpoint this year and would not be recurring in 2017.

So, as you state, that does give us some flexibility. If you think about our 2016 capital program, we have, of the $1.4 billion budget that we've talked about, about $1 billion of that, of course, is targeting the US resource plays, the short-cycle investments, and about $400 million is targeting the rest of the portfolio, of which those three long-cycle projects are a material component of that $400 million. We do still have some commitments in the conventional exploration space that will have potentially an offset to that, but, largely speaking, those projects will come out and provide us a good deal more flexibility in 2017.

So, basically, should we anticipate that the $50 number that you mentioned as a starting point to go back to work, does that assume that the overall spending level stays the same next year?

When we talk about the $50 number, Doug, for us that's really the constructive signal to start increasing our activity, considering reinvestment back into the short-cycle investments. And that would be on some type of ramp. I think the capital program for 2017 remains to be developed.

But you would expect that we would be directing more than that $1 billion that we had this year toward the short-cycle investments in that kind of constructive pricing case. We believe that if that $50 number, Doug, that we would not only have the opportunity to flatten the decline coming out of the resource plays but actually get back on a sequential quarter-on-quarter growth as we get toward the back end of 2017.

Thank you. My follow-up, hopefully a quick one, is just in terms of capital reallocation. Your SCOOP/STACK area appears to be gravitating to the top of the relative priority in terms of capital allocation. Is that a reasonable representation as to where new rigs would go first? And, if so, where are you in terms of your HBP commitments? And I will leave it there. Thanks.

I do think that as we do get a more constructive commodity price environment, start looking at that first new dollar of capital allocation, that the Oklahoma resource basins, the SCOOP and the STACK, are going to compete very strongly for that initial investment when it becomes available. Currently we are running a two-rig operated program. That, in essence, covers our HBP requirements.

We are largely held in the SCOOP currently, but most of our leasehold activity is directed at the STACK, and, of course, our Meramec drilling. In fact, two-thirds of the Oklahoma program this year is directed toward the STACK and the Meramec. And we would expect that by the time we get to year-end 2016 we should be around 70% HBP'd with the rig activity that we currently have in place.

Appreciate the answers, Lee. Thanks again. Congrats again, Chris.

Ed Westlake, Credit Suisse.

Let me also add my congratulations. It's amazing to think the Brae Field is still running from all that work you did many years ago. So, congrats.

Was that a compliment, Ed? (laughter)

Yes, that was definitely meant to be a compliment. A couple of quick operational ones. Obviously the STACK has emerged as a very competitive play. The over-pressured window is becoming more delineated by yourself and peers. You've got some good maps showing how much acreage you have there. How much in total net acres would you have in that over-pressured window, however you want to define it, roughly?

Sure, Ed, great question, this is Lance. I think, in general, from our organic leasing as well as our historical efforts in there, we have a large footprint in that. Within what we view as the core of the Meramec we see about 90% of our core acreage is underneath or inside that window that's over pressured from that volatile oil window to down dip. So, a substantial portion of ours is over-pressured. Part of the reason we have been growing and developing the lease position in that area is to focus on that over-pressured, high reservoir energy acreage.

Okay, thank you. And then just switching to the Eagle Ford, obviously you mentioned in the first-quarter results that you were seeing some encouraging results, and you've given some data -- 20% above on offset wells from tighter stage spacing. Any update on EURs for those wells? The completed well costs of $4.3 million also seems quite low. So, maybe just talk a bit about how you manage to get down there.

Yes, Ed, starting in the EURs, I think the group of wells we released this quarter is really a follow on to a group from the previous quarter. So, we've seen consistently that tighter stage spacing, in some cases tighter cluster spacing, is also driving well productivity. Most of that activity has been focused in the oil areas as we've looked to try to upgrade or improve the returns of our best acreage, as well as lift some of our other acreage up to the highest tier of returns. So, we started on that, reflecting that, if you will recall, about 60% of our future inventory is in that high GOR oil window.

We've also had the opportunity now to move that stage spacing down into the condensate window. And although it is early, we are encouraged with the response from the wells so you will see us continue that. I think what we will find is, as those wells mature -- and I'm speaking now of the oil wells -- over the next months and this year, we expect the EURs to rise.

We haven't reflected that yet because the production history is just too immature. But on the consistent response for that, I think it is important to note that we effectively moved that stage spacing to the basis for all of our oil well completions, and continuing to attest even down to 150-foot stage spacing today.

On the capital, I think the capital reflects, really, the focus and the team. They are continuing to drill the wells faster and be efficient and focus on that. They're continuing to stimulate the wells faster.

We averaged more than 200 stages per month from our primary frac crew in the first quarter, which is the most efficient we've ever been with that equipment set. Those efficiencies come right to the bottom line and are helping to drive those costs down, even as we spend more, invest more on the completions. Certainly overall I would say that we're still getting a bit of commercial help. Most of these cost changes recently are driven, focused by the efficiency drive within the team.

Thanks very much. Very clear.

Evan Calio, Morgan Stanley.

Good morning, guys. I'd like to add my best wishes to Chris in retirement. My first question is on the asset monetizations. Your proceeds have already exceeded the high end of your guidance, and still in motion. Any new guidance range here or maybe some color on how you arrived at the original guidance, and what drove the excess, whether it be risking of the program, more assets sold, or better prices?

I think we have been, Evan, pretty consistent that non-core asset sales will just be part of what we do. It is part of our ongoing portfolio management strategy. As such, even though I think we have been successful in completing the sales against our published target, you should not deem that as us being finished or complete from a non-core asset standpoint. We are not putting out a new target but certainly the continued optimization of our portfolio is just part of what we want to be doing going forward.

When we began that process we had identified a population of non-core assets and we considered -- did they compete for capital allocation, could they potentially have higher value in someone else's portfolio? That population, even on a risk-adjusted basis, allowed us to have confidence in putting that first target out there at $500 million, and then ultimately increasing that target to the $750 million - $1 billion mark.

I think what we've seen is that for these quality assets -- and a great example would be Wyoming -- there is still a strong market out there that's willing to compete and pay very strong value for that type of asset. And, again, it comes down to matching up very specific assets to very specific buyer pools, and I think that's what's created our success this year.

That's great. Maybe just the same question a different way. The $1.3 billion sold, can you give me a percentage of what that was in your original guidance?

What I would say is that we identified well in excess of that original, of that completed $1.3 billion. There is still room for continued portfolio optimization. For us it will just be a focus on timing and how do we maximize value to the shareholder from those future transactions.

Great, that's fair. Let me ask my second question on the Eagle Ford. You cite the ability to drill 97% within 20 feet. Maybe just some color where that was a year ago or where you think the industry average is, how that relates to both drilling speed and well performance. I'm just trying to dimension the impact of that and where you think that may be going.

Sure, Evan. I think you wouldn't be surprised if we articulated that that target window has evolved over time to be a specific interval from a wider interval, and that there would be positive tension on the size of that target versus how fast you can actually drill a well. The team has gotten very consistent and been able to be focused in that target and still deliver the well at a very high efficiency within that.

Part of that is repetition. They've had a lot of experience in the basin, a lot of practice, if you will, so they've gotten very effective at it. We've been consistently in the mid 90% in terms of landing in target over time.

When we look at it, is we made the target smaller over the last quarters and years, and they've still been able to stay within that, even as they increased the efficiency, which really speaks to the collaboration between the geosciences and the drilling engineering, that collaborative effort to work together to deliver those great results. We expect to continue to be able to deliver those results consistently even as the efficiency will still drive upwards.

Right. So, both elements are targeted to change, both the percentage that relates more to time, and the size, the tightness as it relates to the subsequent well performance?

Yes, to some degree. And also keep in mind, over the last two years we've really pioneered the concept of multi-horizon development in South Texas, the Austin Chalk, the Upper Eagle Ford and the Lower Eagle Ford. And we are doing all of those. And that percentage reflects landing three different horizons drilled from the same pad, in most cases, or more than one of those horizons from every pad in almost every case. So, the team's doing a really good job of targeting multi-horizons, very complex trajectory. I think it just demonstrates their efficacy overall.

Good stuff. Thanks, guys.

Scott Hanold, RBC Capital Markets.

Thanks. Good morning. And, Chris, again, congrats. You will probably hear that many times today. Could we go to STACK and SCOOP, and maybe specifically what is your focus for 2016? Obviously you've got some HBP work that needs to be done. But when you step back and look at your asset base, what is your focus for 2017 if prices improve and you put some more capital to work, you can be more toward development? Or maybe even that's too soon for that.

Scott, this is Lance. I think our focus this year, first and foremost, is that at lower activity, to manage our capital spend, we are going to protect our valuable leasehold in SCOOP and STACK. And second to that we're going to delineate the phase windows within those two basins. I think there's some key tertiary parameters we are also going to test that will be important for us this year.

This year we are going to go from six operated wells historically in all of the last two years in STACK to almost triple that, which will give us a much larger operated data set. Importantly, within that over half of those wells are XLs which gives us a chance to see long lateral performance as well as some of the shorter laterals we've had historically. And those wells are very much positioned in the core of the play, the highest value part of the STACK to drive results.

Similarly, in the SCOOP, although we are not entirely held by production we certainly have more flexibility this year. So, all of our wells will be longer laterals, a mile and a half plus laterals, and give us a chance to really test that value of that longer lateral. So, I think those are all key objectives that we can accomplish this year, even at lower activity.

Okay. And just to clarify, too, is the plan preparing yourselves for -- I don't know if early 2017 is the right time frame to think about more development once you've figured it out, or do we still have more time of delineating HBP?

I was speaking of our operated acreage. And we are certainly learning and preparing for full-scale development with those activities. But also we continue to leverage the OBO activity that's material for us in Oklahoma, both in SCOOP and STACK, and that gives us an opportunity this year to participate in some high density tests, some unique multi-horizon tests at scale. So, we are learning from those and integrating that data just as if we were operating it effectively. So, I think those things prepare us and help us get ready for that full-scale development and to grow the activity.

I think, broadly speaking, in Oklahoma and in the rest of our resource play assets, we've taken this opportunity to work and high-grade our staff over the last year, but also retain capacity to respond to what Lee described. So, as we see that constructive pricing and the opportunity to return to both first flattened and then sequential growth, we've got the core technical staff still in place to do that, doing special projects or other things in the interim so we are ready to respond to that need.

Okay, that's good clarity. And if I could follow-up with, the balance sheet looks pretty strong right now with a lot of the work that you all have done. Can you speak to, again, if I were to stick on this STACK and the SCOOP, do you all think you've got the acreage position appropriate in size relative to Marathon that you need to make this a really core growth engine? Or should we expect you could look at larger bolt-on opportunities? And if you could give some color on what the market is looking for M&A in there right now.

This is Lee. I think absolutely we feel that Oklahoma is at a scale now where it can be a key growth engine for the future. We've talked about in terms of 100,000 oil equivalent barrels per day producer for us in the future.

Having said that, we continue to look for accretive opportunities to grow our core position there. A case in point, Scott, last year we added something around 12,000 acres in Blaine County. We are going to continue to look for that type of opportunity to expand and more consolidate our position, particularly in the STACK area.

We see it as, you look at not only our results as well as the industry results, what you can really say is that the vector is definitely up in the STACK in terms of the well performance, the cost reductions that are being achieved there. So, all of that for us is really just validating our very early perspective on just the potential that the SCOOP and the STACK have.

Great, thanks for that.

Brian Singer, Goldman Sachs.

Thank you, good morning. From a big picture perspective you talked in your last call about leverage versus liquidity. And, as has been mentioned, you've done a few things here that have improved that leverage. But I wonder if you could just speak to, maybe that thought has come about moving towards ramp up mode at some point -- $50 might be the number -- what we should expect and how you would expect to target both leverage and spending within cash flow, or outspending, and how that may change depending on the commodity environment, or if it just doesn't change. Can you just talk about how we should see your strategy in potentially a higher oil price environment than the one we are in right now?

Absolutely. First, just to reprise a bit, when we took the decision on the equity raise, that was a risk management decision that allowed us to derisk our business plans out through 2017. But probably more importantly, beyond strengthening our balance sheet, it also provided us the optionality and the flexibility to be a bit more on the offense when we do see that constructive price signal.

We've talked about the $50 or above number as being that signal. And it has to be a signal that's also equally supported by the fundamentals of supply and demand. It needs to be something that we have confidence in. We know that we're going to be living with some near-term volatility, but we want to have confidence as we start deploying that first amount of incremental investment.

We are prepared. Everything we've been doing early this year and actually toward the back end of last year has been geared toward that ramp up in activity that we can see a case for potentially in 2017. To the extent that we do see that pricing signal, we are well-prepared -- and I think Lance said it well -- that we've retained the internal competencies and capabilities that would allow us to get on a good strong ramp up in 2017 from an activity standpoint that would get us back very quickly into sequential growth mode.

And the willingness to outspend cash flow to do that is there, in part because of the proceeds that have come in?

I think it is an independent decision really on just how strongly we would want to go. I think right now our 2016 objective is definitely living within cash flows inclusive of non-core asset sales. I think as we look at 2017 the reason we've talked about that $50 number is we believe that growth can be achieved there while still living within our means. And that's been a controllable factor. Again, we have a desire to continue to maintain and strengthen our balance sheet over time. So 2017, again we have very little appetite for outspending in that year, and we don't see that as a limiting factor.

Thanks. And my follow-up is with regards to the Eagle Ford and the well performance that you have seen in the high-GOR area, the 20% outperformance. Can you talk to whether the production mix is the same as your expectations, and how, when you layer in the combination of the high-GOR area and condensate drilling, what we should expect for oiliness in the Eagle Ford going forward?

Sure, Brian. I think if you look back over the last several quarters our overall crude and condensate has drifted down a little bit. And I think that's been our focus for the last several quarters. We've been focused on value, and I think rightfully so in a challenged commodity market. And in many cases that's been the very high pressure, high deliverability condensate wells.

I think as we've lifted the returns and the performance of our oil well set, which is the majority of our future inventory, we have an opportunity to shift that mix back toward the crude oil side a bit. I don't expect it to move very much either way in the future because we have such a large base. First quarter has been more biased to the oil. We have some subsequent bias to that later in the year in general. We will see it level out or perhaps trend a bit upward on the oil versus condensate side.

Thank you.

Paul Sankey, Wolfe Research.

Hi, good morning, everyone. Just a short-term question -- and apologies if you've dealt with this as much as you want to. But could you talk a little bit more about the situation in Canada for us. Chris, congrats, and I'll be thinking of you when the big soccer tournament happens this summer and we have England versus Wales. But, more importantly, thank you for your help over the years. Sorry -- back to Canada, Lee. Thank you.

Absolutely. Obviously, it is a very serious and dynamic situation right now, Paul. As we've gotten feedback, of course, from the operator, Shell, the current situation is that operations are suspended at both mines. And that's largely being done to allow folks to focus on rendering aid to the community and emergency response, so very well justified.

The mines themselves are not under any direct or immediate threat from the fires themselves, but precautions, again, are being taken and it is being watched very closely. The upgrader is still operating on existing inventory. And we have a finite amount of inventory there that we can leverage during this outage. And, really, we're just going to have to wait and see how the situation develops. But rightly so all the focus right now is on the safety and well-being of the folks in the Fort McMurray community.

Yes, totally understood. So, the industry obviously is just turning its attention to the human crisis. Got it.

Absolutely.

If I could ask you a strategic question, Lee -- to totally change the subject -- you talked about, and a lot of companies have talked about, the flex in short cycle. You mentioned short cycle several times. Is there is a scenario for long cycle here? And if there is, what would it be for you? Would it be more Gulf of Mexico, deepwater? Would it be something else? Would be more Canadian heavy oil? Thanks.

For us, Paul, it really starts with what are the risk-adjusted returns that we can generate. And we want our capital allocation, whether it be short cycle or long cycle, directed to those projects and opportunities that offer the highest risk-adjusted returns. We have been very clear, for instance, that we are transitioning out of the conventional exploration space, and that's being driven strictly by capital allocation. We simply did not see those opportunities competing in a relative sense within the very opportunity -rich portfolio that we have here in the US resource plays.

Now, we still have accretive opportunities that are more mid cycle and the long cycle -- for instance, the compression project that's wrapping up in Equatorial Guinea. But I think as we continue to transition our portfolio you should expect to see more and more of our capital allocation going toward our very deep and very economic US resource play inventory.

Yes, that's the impression I had. What do you think the risk is of that, if there is one? It seems, frankly, simply to be the right thing to do.

I think, again going back to the risk-adjusted return question for me really sets it. When we look within our current portfolio and we see the deep inventory, the $3.6 billion of 2P resources that we have access to, we feel very good about that. And to bring other opportunities in that portfolio, they have to compete within that space in a relative sense. We feel very strongly that we're headed in the right direction. It has been a true transformational shift in our Company since becoming an independent back in 2011. And we are very encouraged and excited by the progress that we've made.

If I could just round out -- I guess the risk is that everyone tries to grow at the same time. What can you do to mitigate costs? I know I've asked six questions so I'll leave it there. Thank you.

That's okay, we'll give you an out today, Paul. It is a question. When I think about the capacity and execution capacity question I think of it really in two buckets, Paul. One is the internal capacity and competencies. And I think Lance and I have both addressed, that we've been very thoughtful in our approach there to ensure that we preserve the internal capabilities and capacities needed to get back into growth mode when we do get that constructive pricing. We've done that through redeployment, everything from special projects to field leadership roles, to displacement of contractors, so that we do retain those essential skill sets that will be required when we get back into a growth mode.

Externally it is a little bit more complicated in that the service sector has been a bit decimated, at least on the labor side, from this correction. I do think what we will modulate some of that is just many companies will still be in either balance sheet repair or will just simply not have the cash flows or the wherewithal to get back on a very fast ramp. So, I do think that the ramp will be self moderated in some ways once we get on it. But I think maintaining those strong relationships with our key service providers, which we have been able to do during the downturn, that's very important. We are going to leverage those relationships when the bell rings again to get back into growth mode.

Thank you.

Guy Baber, Simmons.

Good morning, everybody. And congrats, Chris. Lee, you mentioned the objective to flatten declines to $50 and then eventually grow at that price. Can you give us some indications of the latest view with the productivity improvements you are realizing, the cost reductions you are seeing, how many rigs it would take or how much capital relative to current activity levels and CapEx, to stabilize that unconventional production portfolio?

Yes, sure, Guy. Let me maybe address it this way. When we talk about getting to the maintenance capital and getting back on a growth mode, you really have to talk about it from a common starting point -- where are you starting that discussion. So if I fast forward to the end of this year based on our current plan, and I look at where my resource plays will be exiting at the end of this year, and I think about what type of capital program will not only flatten but will actually start growing sequentially in 2017, based on what we know today -- and, again, this is not a budget outlook -- we would probably place that capital program in the resource plays in the $1.3 billion to $1.4 billion.

And, again, that's not just getting us back to flat, that's actually starting sequential growth again in 2017. That's a ballpark number. It is one that I think will continue to improve. Lance did a great job describing some of the secular efficiencies that we're already creating in the business. The Eagle Ford is a great example of that because we're still operating at scale there. And as we take those efficiencies forward we expect that that number will even have some downward and constructive pressure on it.

That's great detail. And then I wanted to discuss, we have not talked about the Bakken much today, but I wanted to discuss the resilience of your production there. I'm struck by the fact that production is effectively flat year over year and quarter over quarter despite the meaningful activity reductions. Can you update us on the strength you are seeing in your production rates there, what you are learning in terms of decline rates, and really just update us on the outlook and what's driven some of that unforeseen strength, at least on our part?

Sure, Guy, this is Lance. I'm happy to address that. I'm pleased that you noticed that, actually. The Bakken team has done a really effective job of managing that production base over the last year at lower and lower activity. One of the key things is we had lower activity and they've been very focused on the base business, the production efficiency, or up time is really rising. And that's been a focus of theirs not just the last year but the last couple of years, and they've really improved there.

I think probably more important than that in driving that flattening decline profile you see is that we've made a material shift in our completion practices over the last year and a half. And the wells from 2015 are among the best we've ever developed and put online. The declines from those continue to flatten, so that group is a big part of driving that flatter profile. Those completion practices with more fluid volume, higher density profit loading, more stages, have all been beneficial, and we continue that.

We certainly sit today at lower activity, we have less opportunity to demonstrate that. But we look forward to the future. There's enormous commodity price leverage in the Bakken. When we get back to activity there we expect to be able to deliver even better wells in the future than we have in the past, just building on that. I think we even look forward to saying in the second quarter earnings being able to talk about the results from the Clark's Creek pad in West Myrmidon where we will have pumped what we view is our most sophisticated, most aggressive stimulations to date in the Bakken, and we expect those results to be compelling.

Great stuff. Thank you, guys.

Pavel, Raymond James.

Thanks for taking the question. Just one from me. It goes back to the labor issue that was discussed a little bit earlier. Given the headcount reductions that you've had internally, and of course your contractors, as well, is there a rig count number or analogously a CapEx number that you can say is the peak that you guys could achieve before running into labor availability issues?

The way I would address that is going back to my earlier comments around what 2017 might look like in a more constructive environment as we get back on a flat and even a sequential increase or growth in the US resource play. We are setting today at right around seven rigs across all the resource plays. We've got five rigs running in the Eagle Ford, two rigs running in Oklahoma.

As we think about that notional budget out in 2017 in the resource plays, that $1.3 billion to $1.4 billion we talked about, that type of spend in 2017 would likely see us ramping into rig activity that would probably be close to double where we are today. So, we absolutely have the capacity internally, and we feel that the vendor and service community could support it, as well, if that scenario did in fact play out -- and, again, this is not a 2017 budget discussion -- but if that scenario did play out we would comfortably be able to ramp into that level of activity.

Okay. Just to clarify, twice your current rig count is what can be realistically achieved without labor pressures?

I think what we are saying is that as we look at a reasonable plan under a constructive pricing scenario, that's a type of ramp-up that we think would be supportable with all the other constraints that we may have around cash flows, et cetera. So, we would be very comfortable. I wouldn't want to portray that as a peak that we think we could get to, we just think that's a realistic scenario to think about.

All right, appreciate it, guys.

Paul Sankey, Wolfe Research.

Hi, guys. Just an update on hedging, if you could. Thank you.

Hey, Paul, this is JR. You've probably seen from the materials that we put out last night that we have increased our hedge book. I think we've done that really for the purpose of protecting at least some level of our cash flows that in turn supports the balance sheet. When I look at the second half of 2016 we've got now positions in the aggregate of about a little bit less than 60,000 barrels a day of crude production.

Those are done through either straight two-way collars or through three-ways. When I look at an average floor price, it is around, call it, $49 to $50 average floor price, with a sold put on the bottom of that of right around $40. So, it does put, again, I think, a floor underneath at least a portion of our production, just to give us assurance with regard from a cash flow standpoint. Really nothing at this point in time beyond the 2016 timeframe, Paul.

Has the strategy changed? Just remind us what the strategy is. How much do you want to be hedged and where are we in that?

We don't have anything hard and fast, Paul, but I would tell you anything north of say, half of our crude production we would likely not do, at least at this point in time. Again, what we're trying to do is at least put some level of support under the cash flows but still allow our shareholders an opportunity to participate in as much of that upside as possible against the use of the collars and the three-ways.

Understood, thank you.

Guy Baber, Simmons.

Sorry to reprompt here, guys, but, JR, I wanted to get a comment on the cash flow during the quarter. It was a little light versus what we had modeled. Granted, the environment obviously exceptionally challenging. But was there anything non-ratable that you might highlight as we think about the outlook for cash flow generation this year?

Yes, Guy, I'm actually glad you asked. I've seen the brief write-ups earlier this morning and, needless to say Chris and Zach have been responding to a lot of questions from folks. And to be honest, first and foremost -- I think you were somewhat alluding to it -- it is really predominately driven by the macro conditions in the first quarter, being a substantial reduction in realized prices on a CNC basis, about 25%. And of course the volumetric implications, as well.

But when I then just look at more the micro granular level, there is an item, to use the vernacular of some of the reports this morning, the amount of the deferred taxes in the first quarter, the deferred tax benefit in the first quarter, might have been lower as compared to what many people were assuming it to be. And, unfortunately, it is really just the methodology we are using for inter-period tax allocation. So, how we allocate taxes, we anticipate for the full year how we allocate them on a quarterly basis. Honestly, that coupled with a couple other nonrecurring items likely accounts for close to $0.07 or $0.08 per share on a cash flow basis.

So, I think, unfortunately, when you are always looking at working cash flow before working capital you're going to get some anomalies there. We always try, of course we're managing total cash flow, and look at it on an after working capital basis. And when I do that, we did have an additional anomaly in there. We had some nonqualified pension payments that we paid in the first quarter that relates to our late 2015 workforce reduction. And as every company has in the first quarter, we also had the prior-year's incentive compensation payment. So all of those items actually add together to get us back another, as I said, $0.07 to $0.08 in the aggregate to cash flow per share.

Great. That's very helpful, JR. Thank you.

We have no further questions is at this time. I will turn the call back to Chris Phillips.

Thank you, Sylvia. Thank you for the kind words at the end of your opening remarks, Lee. I have very much enjoyed interacting with the Street analysts and investors over the last eight years, and of course all of my work colleagues over the last 30-plus years at Marathon Oil. I look forward to following the progress of the Company as an investor in my retirement.

With that said, I'd like to thank everyone again for their participation this morning. This final statement I will particularly enjoy -- please contact Zach Dailey if you have any follow-up questions. Sylvia, thank you. This concludes today's conference call. You may now disconnect.