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Marathon Oil Embraces New Strategy

Summary

Marathon Oil Corporation's management team is taking the firm in a new direction, prompted by the downturn and the fundamental change in the oil sector.

By not focusing on lofty and unsustainable dividend payments, Marathon Oil will instead reward investors by being a better firm to bet on.

At ~$55 WTI, Marathon Oil should be cash flow neutral and still able to cover its opex with the potential for production growth.

Instead of throwing cash away, Marathon Oil is going to keep it to bulk up its balance sheet and develop its extensive unconventional position.

Marathon Oil considers the STACK region (specifically the Meramec play) as being more economical than the Eagle Ford. Expect to hear additional bullish updates in the future.

In the wake of plummeting crude prices, Marathon Oil Corporation (NYSE:MRO) pulled the only levers it could to navigate the downturn. By sharply cutting down its drilling activity, slashing its capex in the process, and doing what other oil and gas firms have had plenty of trouble with (by not doing so), reducing its dividend, Marathon Oil Corporation gave itself a fighting chance. Those maneuvers combined with a big psychological shift in the industry overall changed the value proposition Marathon Oil seeks to offer investors.

On its Q2 conference call, Marathon Oil's management team commented that the firm doesn't see large payouts as a key way to reward investors. That is due to a few factors. One, the transition from long life conventional assets to short cycle unconventional operations means Marathon Oil's cash flow streams are going to be far more volatile in the years ahead. Volatility doesn't bode well for consistent dividend payments, especially payouts that cost an arm and a leg.

Two, Marathon Oil's unconventional asset base is very worthwhile to develop as long as crude prices aren't in the dumps. Yes, that sounds obvious but you have to factor in the colossal difference $45 WTI and $55 WTI has on unconventional economics, which is far bigger than the impact rising crude prices has on many conventional operations (which is still very significant).

In a ~$55 WTI environment, Marathon Oil is capable of fully covering its opex, the rate to keep its production base flat, according to commentary on its conference call:

"As we look out to 2017 and see that more constructive pricing, we feel very confident in our ability to begin that growth sequentially again, and do it within cash flows in that low to mid-$50s kind of price range."

Being able to live within its means at $55 WTI is aided by Marathon Oil turning the Alba compression project online in Equatorial Guinea and having the non-operated Gunflint development in the Gulf of Mexico reach first oil. When crude pricing benchmarks reach the mid-$50s, what Marathon Oil plans to do is start growing again by increasing its unconventional drilling activity while also making sure to repair its balance sheet. To read about Marathon Oil's pretty significant asset base in Equatorial Guinea, its balance sheet, and its cash flow situation, take a look at this article.

This is the strategy Marathon is pursuing instead plowing its newfound FCF generation into larger dividend payments that aren't sustainable in the new, volatile pricing and operational landscape upstream firms are coping with. By repairing the balance sheet, it means building its cash pile up so it can easily retire debt when it matures, which is management's preferred way of bringing Marathon's liabilities down. Debt buybacks are also an option but aren't being seriously considered on a material scale, at least not publicly so.

From Marathon Oil Corporation's Q2 2016 conference...


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