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Marathon Oil Corporation (NYSE:MRO)

Q3 2013 Earnings Conference Call

November 5, 2013 09:00 AM ET

Executives

Howard Thill - Vice President, Investor Relations and Public Affairs

Lee Tillman - President and CEO

J. R. Sult, - EVP and CFO

Analysts

Edward Westlake - Credit Suisse

Evan Calio - Morgan Stanley

Paul Sankey - Deutsche Bank

Blake Fernandez - Howard Weil

Doug Leggate - Bank of America

Jason Gammel - Macquarie Research Equities

Roger Reed - Wells Fargo

Pavel Molchanov - Raymond James

Operator

Welcome to the Marathon Oil Corporation Third Quarter 2013 Conference Call. My name is Christine and I will be the operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Mr. Howard Thill. You may begin.

Howard Thill

Thank you, Christine, and good morning, everyone. I too would like to welcome you to Marathon Oil Corporation’s third quarter 2013 earnings webcast and teleconference. On the call today with me are Lee Tillman, President and CEO and J. R. Sult, Executive Vice President and CFO.

As a reminder, today’s call is being recorded and the call will include forward-looking information. As the prepared remarks were issued last night, I refer you to the forward-looking statement in that slide deck, along with our SEC filings including our 10-K, 10-Q’s and other filings, which provide additional risk factors.

Before I’d turn the call over to Lee, I’d like to remind you that when he opens the calls for questions to constraint yourself to two questions and then requeue, as time permits so that we can get everyone’s questions answered.

With that I’ll turn the call over to Lee to summarize last night remarks.

Lee Tillman

Well good morning, thank you. Let me add my welcome to Marathon Oil Corporation third quarter earnings call. Before moving into your questions, I wanted to begin with a few very brief opening comments. I’ve just concluded my third month as President and CEO of Marathon Oil and during this period, I’ve had the opportunity to visit many of our sales locations, engage with a large cross section of our dedicated employee base and dialog directly with the investor and analyst community. I have also had strategic discussions with the Marathon Oil Board as we develop our near-term, medium, term and longer term business plans.

Our December 11th Analyst Day will give the Marathon Oil leadership team an opportunity to share with you in more depth our next steps as we strive to become premier independent E&P company and will feature the business imperatives that will drive performance in 2014 and beyond. As such it should not surprise participant on today’s call if our responses to select questions are deferred until that time. Our third quarter results underscore our commitment to long term shareholder value. Third quarter net income is up over 30% from second quarter and adjusted net income per share is up 30% quarter-on-quarter at $0.87 per share.

Our resource plays continue to deliver strong volumes performance with Eagle Ford third quarter production doubled that of the same quarter one year ago. And we have high confidence in an Eagle Ford December exit rate of 100,000 oil equivalent barrels per day net as supported by an end of October rate of approximately 92,000 oil equivalent barrels per day net. Our renewed exploration portfolio with a bias toward emerging oil firm plays that afford Marathon Oil the appropriate risk metrics as well as the optionality to operate or monetize is delivering on it’s promise with announced discoveries in both Kurdistan and Gabon. In Gabon we were also just awarded two perspective deepwater blocks subject to successful contract negotiations.

We successfully completed the first phase of our $1 billion share repurchase program and expect the second phase to commence in the fourth quarter. And as we look to our future we expect our 2013 reserve replacement to be in excess of 140% excluding acquisitions and divestitures. In summary we remain well placed to deliver on our commitment of 5% to 7% compound annual growth rate from 2012 to 2017. I would now like to open the lines for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) our first question comes from Edward Westlake from Credit Suisse. Please go ahead.

Edward Westlake - Credit Suisse

Good morning. I appreciate some of these questions you may want us -- expected at the Analyst Day. But just maybe from qualification reference, report from other companies of EUR, recovery rates improving up in the Bakken and also some areas of Eagle Ford. How do you see the EUR’s effect to bring the Eagle Ford? And then I have a follow up question on the Bakken trending against your expectations as you lay out in your presentation?

Lee Tillman

Yeah. Well, good morning, Ed. Thanks for the question. Certainly we will get into a lot more granularity on the 11th of December, but I think Ed, focusing on Eagle Ford, certainly what we see is our well completions are performing EUR wise at or above the tight curves that we have establish in both the Eagle Ford and as well as the Bakken. However as you know there is variability across all plays so there are various tight curves that we are comparing against. But overall our performance is very well aligned with the tight curves that we have assumed in our go forward volumes profile.

Edward Westlake - Credit Suisse

And then on the Bakken you dropped the light from past conference 60,000 barrels a day in 2018 or so. Can you just remind us what is the spacing savings in terms of wells per DSU for the Middle Bakken and how much Three Forks you assumed, any commentary and/or details about testing the Three Forks? Thank you

Lee Tillman

Yeah, absolutely. Primarily we continue to kind of be on the 320 acre spacing in the Bakken largely. However we continue to run from high density pilots where we look at combinations of both the Middle Bakken as well as the Eagle Ford, excuse me, as well as the level of the Three Forks. On the Three Forks what I would say Ed is that we have a quite a bit of production already in the Three Forks first bench as we look out in 2014 and again we'll talk more about this at the Analyst Day, we are starting to also look at, at the additional benches in the Three Forks, but we're having very good success in the first bench.

Edward Westlake - Credit Suisse

Okay. Thanks very much.

Lee Tillman

Thank you, Ed.

Operator

Thank you. Our next question comes from Evan Calio from Morgan Stanley. Please go ahead.

Evan Calio - Morgan Stanley

Hi, good morning guys. First question is on 4Q guidance. I'm just trying to understand U.S. volume guidance modestly up Q-on-Q, I think it's 152 to 162 versus 151. In October you were 92 and a way to 100 by year end in the Eagle Ford; in the Bakken, 3Q was flat due to temporary shut ins, due to adjacent well completions, which I presume would come back and try some kind of increase at Bakken and Eagle Ford looking better. Is there something in the (inaudible) or other American volumes in that guidance? I'm just trying to square the circle of your guidance looks conservative.

Lee Tillman

Well, I think again the guidance is meant to reflect kind of our risk view of volumes going forward, clearly it's reflecting our best estimates in the resource plays, recognizing that some of that will be offset by decline in the Gulf as well as some of our other based assets in North America so all that’s really rolled into that number. We still view that we're going to exit strongly. And in the Eagle Ford we've talked about the 100,000 barrel oil a day exit rate in December. We're looking to be probably just under the 40,000 barrels per day guidance that we've provided at the Bakken as well.

Evan Calio - Morgan Stanley

Okay. So that’s good then. Moving on to the exploration. Interestingly you guys picked up the additional blocks in Gabon; maybe two part question, where were they in relation to your other block? And on Diaman specifically, do you think you may have been drilling a gas cap on drilling operations seized and the operator established Gabon a hydrocarbon column in that well; what do we know and what don’t we know about the well?

Lee Tillman

Yeah. Let me maybe first start with the two blocks in Gabon and we participate of course as you know in the leach round in Gabon. One of the blocks is actually contiguous with the Diaba Block, the other block is a bit further south and a bit more in board it’s in slightly shallower water and about 1,100 meters of water. Both blocks in our view are highly perspective pretty solid plays in Gabon. Coming back to the actual Diaman-1B well, what I would say is that we're still in the data analysis phase, we're still getting back, if you go fluid samples and fluid property data for the well. We really need, this is a 2.3 million acre of block we're just in the early days of understanding what we have in the block. Our view is that we need to be out with an additional well, hopefully in the 2015 timeframe to continue to really identify the resource potential and hopefully also discover where we might have an oil column on the block.

Evan Calio - Morgan Stanley

Okay. Fair enough. I will leave it there. Thanks.

Lee Tillman

Thank you.

Operator

Thank you. Our next question comes from Paul Sankey from Deutsche Bank. Please go ahead.

Paul Sankey - Deutsche Bank

Hi good morning, Lee.

Lee Tillman

Good morning.

Paul Sankey - Deutsche Bank

You’ve just got quite a long list to the exploration success here, and I’d like to come back to that, but firstly could you just talk a bit more about the expenses, the exploration expenses being as high as they were? And maybe provide a little more detail on both the dry well costs and the impairments? Thank you.

Lee Tillman

Yeah. We’ll certainly on the exploration side, there are a couple of big contributors there. One was the Sverdrup dry hole in Norway which was of course expense in this quarter that was on the order of about $60 million in terms of dry hole expense. In addition to that, we also expense the Safen-1 well in Kurdistan. Those really are two largest contributors to dry hole expense, the Safen-1 well was on the order of about $10 million or so.

Paul Sankey - Deutsche Bank

Great. And then sold out would be firstly in Norway. Can you talk about your appetite to stay in that relatively mix your high-techs space? And also could you expand a little bit more on the specifics of commercialization of kind of I know that you’ve given some details here about the production facilities putting, could you just clarify where that oil is going to go and be sold? Thanks.

Lee Tillman

Yeah. Well, let me start with Norway, clearly the Sverdrup well provide us further input in terms of our go forward strategy in Norway. That’s part of the strategic internal discussions that we continue to have as we continue to look at our portfolio and ensure that we have the right portfolio mix, but I am not going to get into any more specifics on an asset-by-asset basis relative to that.

Norway as you’ve seen continues to perform strongly. We just completed a turnaround in Norway on schedule and on budget. We’re back up of course after that shutdown and running at a high reliability rate in Norway.

Relative to the Kurdistan and kind of the path to profitability, clearly we started in Kurdistan with four blocks; two operated, two non-operated. We now have discoveries on three blocks and essentially a field development plan filed and approved in one of those three. That’s the Atrush non-operated block. As you stated that field development plan essentially has us drilling three wells producing those back to 30 KBD facility and then moving those barrels ultimately to export or use internally.

I would say from a destination standpoint that’s still yet to be determined. We are still in the very early days. We’ve just got the approval of the field development plan. So we’ll continue to work there with the operator Tarka on how we will ultimately market the crude that we produce there.

Paul Sankey - Deutsche Bank

Thank you. See you in December. Thank you.

Lee Tillman

Yeah, absolutely. Thank you.

Operator

Thank you. Our next question comes from Blake Fernandez from Howard Weil. Please go ahead.

Blake Fernandez - Howard Weil

Thanks. Good morning. My first question is on the reserve adds. So I was thinking you could maybe give us some color around the regions or the areas where the bulk of those adds came? And I guess specifically what I am trying to dig around on this Eagle Ford. I wonder if that could be an impact of DD&A coming down into next year as you book more reserve there? Thanks?

Lee Tillman

Yeah. Well certainly, we’ll have a lot more color on reserve adds as we complete our year-end processes on reserve booking. But clearly the resource plays will have an element of those adds. And you’re right we state as we continue to migrate reserves in the Eagle Ford into the proved category, it will have a net effect of reducing our DD&A rate. So that certainly is an objective that we have.

Blake Fernandez - Howard Weil

Okay. The second question I had for you is on buyback. Have been, it looks like you’re going to commence the second tranche in fourth quarter. I am just trying to see how we should think about moving into ‘14. Is there any appetite to extent the program, I don’t even recall, would that fully exhaust your authorization?

Lee Tillman

Well, no it won’t fully exhaust our authorization we will still have authorization under the original Board authorization. It is our intent of course to complete the second half of the buyback as you are aware from our release. We completed the first half, the $14 million shares. The second half we’d certainly link to driving towards financial close on Angola Block 31 which we still anticipate to be towards the end of the year.

In terms of how we view repurchase moving forward, I view it as a capital allocation decision. It will, first and foremost, we look to invest organically in our business and that certainly what we’ll be talking about at the December 11th analyst meeting. Then we will consider things, we certainly work hard at our dividend wanting that to be predictable in the future, stock repurchase is certainly a lever that we have, but I view it is more of an opportunistic lever that we may use in the future. And then finally we also have the option of course to strengthen our balance sheet.

Blake Fernandez - Howard Weil

Okay. Thank you, Lee. I appreciate it.

Lee Tillman

You bet.

Operator

Thank you. Our next question comes from Doug Leggate from Bank of America. Please go ahead.

Doug Leggate - Bank of America

Thanks. Good morning, Lee. I’ve got a couple of if I may. So first of all in Norway [deploy] whole cost you mentioned, so my understanding is that exploration is kind of key to further how I express this et cetera, there is key to what the Norway remains, a long-term portfolio even though, obviously I’ve been there a few months, but can you just give us an [outlook] to feel as to how you feel about those core assets given the high decline that you’re facing there and I’ve got a follow-up?

Lee Tillman

Okay. Well certainly, exploration is an element of I would say our go forward plan in Norway, no question. The performance of all time asset is also a key element there. As you are well aware, Doug, we continue to invest profitably in the all time asset. We have in-fill development drilling, as well as a pretty significant subsea tieback that we’ll be moving into the installation phase in 2014 with expected first [hole] in 2015.

So we continue to work the asset very hard. And it's a very high income per barrel asset for us, very strong free cash flows. But all of that information is factoring into our continual look at, at our overall portfolio, Doug. And again I won't get into specifics on Norway, but sufficed to say that we continue to scrutinize all of our assets, there are no sacred assets in our portfolio. We're going to be driven by profitability and ensuring they are accretive to the overall return to shareholder.

Doug Leggate - Bank of America

Great. Thank you. Yeah. Thanks for that. My follow-up is if you look at your exploration program generally, you’ve inherited the program which is assumingly disproportionately levered to the frontier areas or Kurdistan. Can you help us with what confidence you have that support Kurdistan can actually get monetize in terms of confidence in exports confidence in the political backdrop there should be confidence in getting paid and I'll leave it with that? Thanks.

Lee Tillman

Yeah. Well maybe starting first at a bit of a high level, Doug. Our exploration program is now I believe very well focused in four basins that have some very common attributes. One, they’re either emerging or demonstrated play. They’re extremely oil prone. And in the exploration space I would say they have a risk profile that we can tolerate. And those four areas are of course Kurdistan, East Africa Rift, Gabon and the Gulf of Mexico. Each of those have their unique grip both above ground, as well as below ground that will ultimately factor into our decision on the best approach to monetize, do we develop and operate or do we look for other avenues to monetize.

I would say in Kurdistan we're still in the very early days. We just have the first field development plan approved. So the process is working there. We've had discoveries. It’s certainly a high quality hydrocarbon province. And we have a ministry that we've had a very strong and good working relationship with. So I would just say stay tuned, it’s a work in progress and it’s still very early days.

Doug Leggate - Bank of America

All right. Thanks Lee.

Lee Tillman

Thanks, Doug.

Operator

Thank you. Our next question comes from Jason Gammel from Macquarie. Please go ahead.

Jason Gammel - Macquarie Research Equities

Yes. Thank you. For my first question I'll stick with exploration and I just wanted to ask about Madagascar. Have you discussed any churns you might have received on the farm out or you've been carrying for any portion of the well et cetera. And if the well is successful, can you talk about the running room that you have in the Northwood?

Lee Tillman

Yeah. Well certainly, we’re very excited about the Madagascar well, it is the North footwell which is a little bit different than a lot of the Paleo [mine] player that you see in the Gulf of Mexico. It’s still very challenging area, very deepwater, greater than 8,000 feet, 25,000 foot well depth. So still challenging conditions, but very prospective.

In terms of the farm out, without getting into any of the confidential details I will say that there is a carry involved in that interest. Not only do I think we have a running room in Madagascar, but certainly with success there I think you will see us very quickly move toward a play on that area. And with success we’ll also be looking to expand the position potentially in the Northwood based on acreage that maybe available.

So it’s an exciting prospect. We still anticipate even though we of course have a little bit of a hiccup with the tropical storm moving through, but we’d still anticipate tubing the Madagascar well before the end of the year.

Jason Gammel - Macquarie Research Equities

Okay, great. We’ll keep an eye on for that one. And then just one more if I could please and this is maybe something that just means to be referred, but you’re still what you haven’t enough of this representative sample in Eagle Ford wells now that the product mix that you had in the third quarter between oil, NGL and gas is going to be representative of your production profile moving forward?

Lee Tillman

Well certainly, that's a moving target. As the mix of wells change as we move from the contemplated window to the high-GOR oil window, those precautions can change, but the zipcode that we’re in which is something on the order of 70% or greater of liquid, that's our current target. And we would like to continue to stay in the liquids prone area of the play just because those in fact are our best and highest return wells.

Jason Gammel - Macquarie Research Equities

And any comment on the NGL relative to crude oils?

Lee Tillman

Well, we are still running I believe around 60% or so on crude. And again I think that’s the statistics that we see carrying forward in 2014. We’ll still see some shift in 2014 in inventory as we look at the mix. And what we’ll try to do is for December 11th meeting is to give you a little bit better feel to what those 2014 profiles will look like.

Jason Gammel - Macquarie Research Equities

Okay, terrific. I’ll leave it with that.

Lee Tillman

Okay. Thank you, Jason.

Operator

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

Roger Reed - Wells Fargo

Good morning.

Lee Tillman

Good morning, Roger.

Roger Reed - Wells Fargo

I guess in the risk of asking something that will be addressed early next month, I am going to just ask about some of the operating cost reductions you’ve achieved in the Eagle Ford and the Bakken. What has been the, I understand year-over-year down about 20% each, but what has been the recent trend? Are we seeing that flatten as a result of maybe some of the changes in the completion jobs, you are getting a better --, but not necessarily lower cost on an aggregate or on absolute basis, but you are on a per unit basis. Can you help us out a little bit with that?

Lee Tillman

Absolutely. And just for clarity you said operating cost, but I think you are talking about capital cost here?

Roger Reed - Wells Fargo

Capital cost, yes.

Lee Tillman

Yeah. No, I understand, I completely understand the question. Yeah. On the capital efficiency side we continue to drive our drilling time sound as noted in the press release. The Eagle Ford now we have down to, spud to TD of about 12 days. We are continuing also to work completion optimization not just from a cost standpoint, but also from a value standpoint and ensuring that we deliver the highest productivity completions to generate the best economics. We also are seeing commercial leverage as well in the Eagle Ford. As we look forward to 2014, we begin looking commercially at our frac crews etcetera. We still see room there to drive some of that commercial element down a bit lower as well. I believe I mentioned that (Bark Lee) know that some of our best wells in the third quarter, we were drilling for around $7.3 million total [BMC]. On average we are drilling them at about $7.8 million in the Eagle Ford.

As we move out in 2014, we would like to see again those kind of analog best wells be down around $7 million as we are able to continue to exercise some of this optimization on the [BMC] technical side, but also take advantage of some of the commercial leverage that we think exist in the play today.

Roger Reed - Wells Fargo

And then the unrelated follow-up. The OSM turned in a pretty good quarter, we all know it’s been a erratic times. Can you give us maybe some idea of, were there good things that occurred in the third quarter, recognized the guidance for the fourth is fir fairly flat, but I mean we turned some sort of a corner here or as you look to ‘14, it’s going to be erratic, it’s going to be seasonal and we just have to live with that?

Lee Tillman

Yeah, well certainly you are correct, and that we have been up and down in oil sands mining. The third quarter really reflected good performance by the operator from a reliability standpoint, but then we got quite a bit of help on the realization side as well. Those two factors volumes and realizations really drove the outstanding performance from oil stands mining.

As we talked in previous teleconferences, we continue to work with the operator at OSM to try to drive the reliability higher, drive the reliability to be more predictable, but I will tell you that remains a work-in-progress. As we look out in fourth quarter, we recognize that we will likely have some pretty significant plan downtime looking out ahead, which create a impact us but we provided some guidance around our fourth quarter view and that's certainly reflected in that guidance. But it's a challenging asset. Reliability continues to be our number one challenge as we look at oil sands mining.

Roger Reed - Wells Fargo

Thank you.

Operator

(Operator Instructions). We have a question from Pavel Molchanov from Raymond James. Please go ahead.

Pavel Molchanov - Raymond James

So Libya has to one surprise been a complete block box lately ahead and as bode I’d ask if you are thinking about keeping that asset has been evolving at all, and if so, what might get you over the hump to put it for sale?

Lee Tillman

Well, Libya again is an asset in our portfolio, just like the remainder of our assets that gets scrutinized for the value delivers within the portfolio. Libya right now unfortunately, we are experiencing the above ground risk, the labor strikes there and that are impacting our terminal. We haven't really done any liftings there in the last two months of the quarter. So, clearly it's been a downward pull on our volumes. We recognize the above ground risk there, but you also have to recognize that Libya has an extremely strong sub-surface asset. It’s a world-class asset that’s have growth potential going forward, clearly some challenging fiscal terms there, but a world-class resource.

In terms of looking at next steps in Libya, from our perspective we are hopeful that the sovereign authority will be able to rectify the current impacts on the labor strikes and get this back online and that’s our number one objective today.

Pavel Molchanov - Raymond James

And then just a quick follow-up on Kurdistan. So obviously you guys have a plenty of development now for one of those blocks, following the Mirawa discovery, how closer you to getting up point of development for that block?

Lee Tillman

Well, as you know on that particular block Mirawa was a strong discovery for us, but we feel compelled now to move over and drill an analog structure which is the (inaudible) 1 well that will give us a much broader data set to come up with a realistic field development plan potentially in the future, but I would say today we're still in the discovery in appraisal mode for that particular block.

Pavel Molchanov - Raymond James

Okay. So 2014 realistic to get a plan or too early?

Lee Tillman

No, I was just say we're going to, we’ll base that timeline on the data that we get from the wells. Depending on what we see (inaudible) will likely drive us one direction or another so we really need to wait and see the results combined that with the Mirawa-1 results and then that will start helping us set the timeline.

Pavel Molchanov - Raymond James

Okay. Appreciated guys.

Operator

Thank you. I would now like to turn the call back to Howard Thill, please conclude.

Howard Thill

Thank you, Christina. And as Lee said, the December 11th meeting is coming up quickly upon us. If you did not sign up for that, please send to either [Paul or myself or Chris] a note. So when we get you signed up for that, the Analyst Meeting. Other than that, this concludes our call. We appreciate your interest in Marathon Oil. Have a great day.

Operator

Thank you. And thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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