Ask The Austin Chalk Or Three-Forks, Marathon Oil's Shale Growth Story Is Only Just Beginning

| About: Marathon Oil (MRO)


Marathon is focused on three high growth shale plays, the Eagle Ford, the Bakken/Three-Forks, and the Oklahoma Resources Basin.

Three wells came online this quarter targeting the Austin Chalk, with very strong production results.

The Austin Chalk could be the next big thing in the Eagle Ford as Marathon delineates part of its acreage.

Targeting the second bench of the Three-Forks and then the third could push Marathon's reserve base in the Bakken up to 1 billion BOE and beyond.

Better drilling techniques will make the Bakken/Three-Forks produce even higher returns.

Many North American E&P players have been divesting foreign or non-core assets to focus on America's roaring shale basins, and Marathon Oil Corporation (NYSE:MRO) has been no different. Marathon Oil recently sold off its Norwegian operations for $2.7 billion, after selling off $4.8 billion worth of assets since 2010. By selling off its assets, it was able to buyback shares, boost its dividend (which was recently raised by 11%), and develop its shale positions at a faster rate.

Now Marathon is able to direct more cash towards its three core shale plays in the US; the Bakken, the Eagle Ford, and the Oklahoma Resource Basins (which includes the Granite Wash, the Woodford, and the Southern Mississippi plays). Last quarter, Marathon added 30,000 net acres to its Oklahoma position, boosting its overall acreage in the play to 300,000 net acres.

Production growth from these areas was very strong, up 29% year-over-year to 170,000 BOE/d, with liquids growth surpassing 30%. Marathon is guiding to grow output from these plays by 30% this year, which was reinforced management last quarter.

Expanding a prolific play
Production from Marathon's Eagle Ford position rose 26% year-over-year to 102,000 BOE/d, with a production mix that was 66% crude and 16% natural gas liquids. Production results from its enhanced completion has been boosting the production curve of its new wells by 25% versus the previous technique, allowing Marathon to make every new well increase its output by much more.

Marathon Oil was also able to successfully delineate the Upper Eagle Ford, dubbed the Austin Chalk formation, on 15,500 net acres of its position in the area last quarter. Three of its wells tapped into the Austin Chalk in the second quarter, and the results point towards a new growth horizon being opened up for investors.

Two of the wells tapped into the condensate portion of the Austin Chalk, with one posting a 30-day IP of 1,673 BOE/d (73% liquids) and the other positing a 30-day IP of 1,600 BOE/d (76% liquids). In the black oil part of the interval, Marathon brought online a well with a much lower 30-day IP rate of 600 BOE/d, but its production mix was 90% liquids. Marathon has room to improve its drilling program in the black oil portion of the Austin Chalk, but in the condensate position Marathon is on point. Nine additional wells targeting the Austin Chalk are currently in the drilling process, which will provide an even better picture of the interval.

While these three wells don't create a definitive ruling, by being able to book 15,500 net acres as capable of tapping into two high return shale plays, Marathon is proving its ability to drag more drilling locations out of the woodwork. When the other nine wells are completed investors will have a much better idea of what the Austin Chalk has in store, especially since Marathon will probably be able to delineate the formation on more of its Eagle Ford acreage.

A perfect example of the kind of results a new interval can produce, investors should take a look up north to what Marathon and several other oil and gas companies have been able to do in North Dakota.

Bakken and its partner the Three-Forks
Back at the end of 2011, Marathon had 345 million BOE 2P reserves in the Bakken and Three-Forks formation, with the Three-Forks generating just 3% of its production in the area. By targeting the first bench of the Three-Forks formation, that has grown substantially. Now Marathon sees 630 million BOE 2P reserves in the area, which comes as Marathon produces roughly a quarter of its Bakken/Three-Forks output from the Three-Forks. Last quarter, Marathon's Bakken/Three-Forks production increased by 28% year-over-year to 50,000 BOE/d.

By teaming up with Continental Resources Inc (NYSE:CLR), Marathon is participating in several pilot projects testing out the second and third benches of the Three-Forks. Marathon is currently producing similar returns from the first bench of the Three-Forks as it is from the Middle Bakken, which could lead to the lower benches also yielding strong returns.

With a 6.6% working interest in the Rollefstad project, which is operated by Continental Resources, Marathon Oil is participating in a 14-well pilot project targeting the second and third bench of the Three-Forks formation. The results couldn't have been more promising. The average IP rates of wells targeting the Middle Bakken and TF 1 came out to 2,960 BOE/d, with the TF 2 and TF 3 not far behind at 2,650 BOE/d. To make things even better, the older wells that targeted the Middle Bakken and TF 1 produced IP rates of just 1,330 BOE/d.

Marathon is going to drill six wells targeting the second bench of the Three-Forks this year and next. Based on Continental's success, Marathon will probably be able to book substantially more reserves, pushing its 2P reserve base closer towards 1 billion BOE.

Not only did the Rollefstad project prove that the second and third benches of the Three-Forks were economical, but also it is a testament to how better drilling techniques can substantially boost production rates. This comes as Marathon is testing out different completion techniques to boost its own results. On half of the wells it's going to complete through the rest of the year, Marathon will implement an improved completion design, larger volumes of proppant, more frac stages, cemented liners, slickwater fracs, and hybrid fracs.

Final thoughts
Marathon is expanding the horizon in two of the best shale plays in the world, which will reward shareholders immensely. As Marathon adds new layers of hydrocarbon producing intervals to its inventory, it also is boosting the production of the new wells it brings online through better completion desgins, optimized fracking techniques, and cemeterd liners. While Marathon may have grown production from its shale assets substantially since the beginning of 2012, when output was less than 50,000 BOE/d from these plays, the growth story is just getting started. Add in dividend increases, share buybacks, upside from its Oklahoma Resources Basin, success in its exploration efforts, and Marathon Oil Corporation is a good buy.

Disclosure: The author is long MRO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.