Marathon Oil's (MRO) CEO Lee M. Tillman on Q2 2016 Results - Earnings Call Transcript

| About: Marathon Oil (MRO)

Marathon Oil Corp. (NYSE:MRO)

Q2 2016 Earnings Call

August 04, 2016 9:00 AM ET

Executives

Zach Dailey – Director, Investor Relations

Lee M. Tillman – President, Chief Executive Officer

John R. Sult – EVP and Chief Financial Officer

Lance W. Robertson – VP, Resource Plays

Analysts

Ed Westlake - Credit Suisse Securities

Doug Leggate - Bank of America Merrill Lynch

Ryan Todd - Deutsche Bank Securities, Inc.

Guy Baber - Simmons

Evan Calio - Morgan Stanley & Co. LLC

Brian Singer - Goldman Sachs & Co.

Paul Sankey - Wolfe Research LLC

Pavel Molchanov - Raymond James & Associates, Inc.

Arun Jayaram - JPMorgan Securities LLC

Operator

Welcome to the Marathon Oil Corporation 2016 Second Quarter Earnings Conference Call. My name is Hilda, and I will be your 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. Zach Dailey. Mr. Dailey, you may begin.

Zach Dailey

Thanks, Hilda, and good morning to everyone. Welcome to Marathon Oil’s second quarter earnings call. Joining me this morning are Lee Tillman, President and CEO; J.R. Sult, Executive Vice President and CFO; Lance Robertson, Vice President, Resource Plays; and Mitch Little, Vice President, Conventional.

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 the call over to Lee

Lee M. Tillman

Thank you, Zach, and good morning to everyone. I’ll make a few brief comments and open the call for questions. Our second quarter headlines: strong well results, continued cost reductions, successful portfolio management. Our Oklahoma asset team delivered two outstanding STACK Meramec wells with oil cuts above 70% while continuing to balance leasehold demands with acreage delineation.

This same team also closed our PayRock acquisition on Monday, just six weeks after announcing the deal, and are rapidly integrating that asset into our Oklahoma business. The team actually had a countdown calendar in the office as they marched toward the accelerated close date. Needless to say, they are excited, and their focused efforts will ensure no loss of momentum.

We had an exceptional quarter in the Bakken, delivering a record well on our West Myrmidon acreage through a combination of great reservoir quality and enhanced completion designs. The Bakken asset team has truly embraced this time of lower activity to prepare for what’s next. They’ve dropped their production costs materially and upped their game on well returns to place West Myrmidon in the mix for 2017 capital allocation.

The Eagle Ford continued seeing uplift from tighter stage spacing while feeling the effects of a planned stepdown in activity and challenging base production declines. And despite their move to higher intensity completions, their completed well costs are down significantly year-over-year. Winning the production cost battle is hard work and typically measured in numerous but smaller victories.

Rest assured that cost management remains front and center with all of our asset teams. North America E&P production costs are down almost 30% from a year ago. And we’ve dropped their full year guidance by $1 per oil equivalent barrel. We’ve also reduced 2016 unit production expense guidance for International by $0.50 per oil equivalent barrel. Through a combination of capital discipline and efficiency gains across all of our businesses, we’ll deliver a 2016 capital program that’s $100 million below our original budget, all while funding the incremental 2016 activity associated with our STACK acquisition, including the additional rig we’ll add there this quarter. Oklahoma is getting busy. With the acquisition, we will be doubling our activity in the STACK to four rigs in total.

Not to be outdone by North America’s success, in our International business, we achieved first gas from the B3 compression project in EG in July, on schedule and within budget. The project is fulfilling its mission to extend the Alba field’s production plateau by two years and the asset’s life out beyond 2030. As our capital investment in the compression project falls away, EG will contribute significant free cash flow that we can reinvest in our deep inventory of high-return opportunities here in the U.S. resource plays.

On the portfolio management side, our non-core asset sales program has now achieved over $1 billion year-to-date. And though we exceeded our initial target, we aren’t done. Expect non-core asset sales to be ongoing as we continue optimizing our capital allocation to the lowest-cost, highest-margin opportunities. On the other side of portfolio management, the 61,000 net acres we acquired in the STACK Meramec oil window ticks all the boxes: quality, scale, value, and with further upside not assumed in the purchase price.

Through this volatile and uncertain commodity price environment, we’ve been resolute in executing against our playbook, strengthening our balance sheet, resetting our cost structure, simplifying our portfolio, all with the goal of profitable growth within cash flows when sustainably higher prices give us the confidence to ramp activity. With that, I’ll hand it back to Zach to begin the Q&A.

Zach Dailey

Thanks. We’ll ask that you guys limit your questions to one question and one follow-up. Hilda?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We have a question from Ed Westlake from Credit Suisse.

Ed Westlake

Good morning, a lot of excitement on the STACK. You spoke in the prepared remarks about resuming sequential growth at low to mid $50’s so maybe just some opening remarks about that statement?.

Lee Tillman

Yeah, good morning, Ed. We’re still committed to that, Ed. As we look out at the macro today, though we’re sitting at $40 today, but 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. A lot of that will also hinge on our ability to ensure that we have operational momentum coming out of 2016 as well.

Ed Westlake

And so maybe some color on the rig activity that would be embedded in that. I mean, obviously, we can do our own forecast but just interested in your color on rig ramps and buying Eagle Ford STACK, Bakken...

Lee Tillman

Yeah, absolutely, Ed. We’ve talked about nominally a $1.4 billion program in 2017 that would get us back on that sequential growth track within the resource plays. And within that, the way I would ask you to think about it is, is embedded basically an almost the doubling of the rig count from where we are today to when we would exit in 2017. And that would support both that capital program as well as that volumes profile.

Ed Westlake

All right. Okay. If I could sneak one final one, debt repurchases, or blending and extending maturities, any thoughts there? Other companies are doing the same thing.

J. R. Sult

Hey, Ed. This is J.R. You know, as we’ve talked, I think on previous calls, even though we’re focused here on ultimately being able to get that capital program up to a level to where we can resume the growth path, the balance sheet is still going to be important. I think we’ve got some maturities coming up here in October of 2017 and again in March of 2018.

Sitting here today, it would appear to be the right allocation of capital might be just to wait to be able to pay off those maturities when they’re due. And that’s one reason why I think we’re maintaining the cash balance that we are today, to give us that option. But we’ll continue to look at other opportunities to be able to reduce overall gross debt. But right now, I think we’re leaning toward just repaying those maturities when they’re due.

Ed Westlake

Thank you.

Lee Tillman

Thanks, Ed.

Operator

We have a question from Doug Leggate from Bank of America Merrill Lynch.

Doug Leggate

Thanks. Good morning, everybody.

Lee Tillman

Good morning, Doug.

J. R. Sult

Hey, Doug.

Doug Leggate

So, guys, as things post your acquisition in the STACK, obviously, there’s a lot of tension going on there. Can you just give us some idea as to how you would prioritize incremental rig additions in the event that the commodity does continue to recover next year?

Lee Tillman

Yeah. Yeah, Doug. Good morning. Oklahoma STACK is going to be our absolute first priority, Doug. Once we’ve met our leasehold requirements and our strategic objectives in the STACK, then we’re going to look at optimizing across the remaining basins to maximize economic return. I think the good news there for us is that when we look at that multi-basin optimization, we’ve got a very competitive and diverse Tier 1 inventory that really now features everything from Eagle Ford oil and condensate to Bakken West Myrmidon to SCOOP.

So it’s a great portfolio, but that first incremental capital is absolutely going to Oklahoma STACK. In fact, as we stated in our released material last evening, we’ll be looking to add that second rig into the STACK acquisition acreage later in the third quarter, bringing us to a total of four rigs in Oklahoma.

Doug Leggate

As a follow-up, obviously, the STACK’s a fairly meaningful change in your inventory where you’ve got – how would you characterize your comfort level or your satisfaction, I guess is a better way of putting it, with your current acreage position up there because, obviously, relative to some of your other peers, you still have a relatively a small footprint. Do you see other additions in the future? Or what’s the overall characterization of availability of acreage? And I’ll leave it there. Thanks.

Lee Tillman

Yep. Well, thank you. Yeah, Doug, I certainly wouldn’t – I’m very happy with our footprint in the STACK as well as the SCOOP, as certainly with the bolt-on of the STACK acquisition, the PayRock acquisition, it enhanced our position materially in the STACK. But as I look across it from a overall resource standpoint and you think about the fact that we now have in excess of about $1 billion 2P resource in the STACK as well as another $1 billion or so in the SCOOP, that is a very, very material position going forward in Oklahoma. And at just over 200,000 net surface acres in the STACK, we feel very good about our position. We would never forego accretive small bolt-on positions or greenfield leasing, but we’re quite pleased with where we stand right now in Oklahoma.

Doug Leggate

Appreciate the answers, Lee. Thank you.

Lee Tillman

Yeah. Thanks, Doug.

Operator

We have a question from Ryan Todd from Deutsche Bank.

Ryan Todd

Thanks. Good morning, gentlemen. Maybe with the PayRock deal closed, can you talk a little bit plans to integrate these assets? I mean, I guess you’ve talked about rig addition there, but generally how you characterize that acreage relative to your legacy acreage and potential improvements or any changes operationally that you might look to make on things like lateral length or completions or such versus what you’ve done on your acreage?

Lee Tillman

Yeah. Let me maybe kick that one off, and then I’ll turn it over to Lance to maybe provide a bit more color. But we just closed on the STACK acquisition on Monday and took over operations after lunch on Monday, so integration is still a work in progress, though the team is well advanced. As you mentioned, we’re going to be putting a second rig to work there. The two rigs are going to be initially focused on protecting that valuable leasehold, but also looking toward continuing strategic, I’ll say, delineation around the play as well.

But in terms of economics and where those wells fall in our set of opportunities, there’s no doubt that the STACK oil opportunities compete at the very top of our Tier 1 inventory. And that’s even been confirmed yet again with the three additional wells that have been brought to sales within the acquisition between, up to close. And so maybe I’ll just let Lance fill in a few more details on just how the integration is going?

Lance Robertson

Sure. Thanks, Lee. We took over the operations Monday. It’s been very seamless to date. Obviously, we look at the acquired acres. They’re on the oil bias side. We think it balances the portfolio across the breadth of the STACK basin very nicely for us. We’re going to have the ongoing obligations there to defend the lease position. And our heritage Marathon acreage in STACK as well is ongoing in the acquired acres. We do have a bit of excess capacity there.

I think one of the things that you had recognized in our activities to date, so for example, in the results we reported this quarter, we’ve been transitioning to XL wells in our over-pressured area to look at the value there. Those well results have been very compelling, and we’re very excited about those. We also purchased this acquisition on the oil bias side based on the fact that they had among the very best productivity on a lateral-adjusted foot basis with very low capital costs, which together create a great value opportunity for us.

And so we’re going to continue on that basis. But I think we also recognize the opportunity with about half the acres in the acquired package suitable for XL that we’re going to move to also test the XL in that area to see what the best long-term result for Marathon is.

Ryan Todd

How much of your acreage across the entire, not just the acquired acreage but across your entire STACK portfolio now is conducive to long laterals?

Lance Robertson

I think in general about half of that’s conducive to long laterals, perhaps a bit more as we continue to consolidate and unitize in there. But that’s where we’d stand today.

Ryan Todd

Great. Thanks. I’ll leave it there.

Lee Tillman

Thank you, Ryan.

Operator

We have a question from Guy Baber from Simmons.

Guy Baber

Thanks very much. Good morning, everybody.

Lee Tillman

Morning, Guy.

Guy Baber

I’m just trying to understand the financial and operational framework you’ve set out here for 2017. So I had a follow-up there. But I believe you mentioned the early view is that about $1.4 billion in spending or so next year would be sufficient to return the company to sequential growth, assuming oil in the mid to low $50s. I believe you also mentioned the desire to live within cash flow. So is $1.4 billion, plus your dividend, about the type of cash flow you expect to generate next year in a low to mid-$50 world? Or are you incorporating some asset sales proceeds into your forecast to support that as well?

Lee Tillman

Yeah. Guy, thanks for the follow-up question. First of all, I want to be very clear the $1.4 billion I’m talking about, Guy, is for the resource play element only. That would not include other capital requirements and the conventional elements of our business, although we would expect similar to what we did this year that the bulk of our capital investment in 2017 will, in fact, be allocated to the resource plays.

But in that low $50 to mid-$50 window we would absolutely expect to cover that capital demand within operating cash flows. Does not mean that we’re not still pursuing non-core asset divestitures, but we’re certainly not saying we’re going to be reliant upon those. They give us optionality but we don’t feel that we need to rely on those if we’re in that price band.

Guy Baber

Great, that’s very helpful. And then my follow-up is, understanding 2017 is something of a transitional year for you during which you attempt to return the company back to sequential growth, but once you get a better commodity price environment, you’ve improved the well results, the operational performance I think significantly. You’ve also made meaningful improvements to the portfolio and your opportunity set. When the time comes, what type of growth rate do you think Marathon is poised to fundamentally deliver longer term? Just trying to understand that framework for longer term growth?

Lee Tillman

Yeah, no, absolutely. I think first and foremost, you said it well, we’ve got this great opportunity set that very much competes for capital and the price band. A lot of that I would say growth aspiration, though, will be highly dependent upon the pricing that we see. Being a very oil levered company, of course we have a very strong response in operating cash flows as we see improvement to the oil price. So to the extent that we need to modulate between growth as well as generating free cash flows, we’re prepared to do that. But the potential that we’ve got in the three resource plays definitely provides us an avenue for moving to a very competitive growth metric in the future. Without getting into specifics there, we have that potential.

Guy Baber

Thank you very much.

Lee Tillman

Thanks, Guy.

Operator

We have a question from Evan Calio from Morgan Stanley.

Evan Calio

Good morning, guys.

Lance Robertson

Hey, Evan.

Lee Tillman

Morning, Evan.

Evan Calio

My first question, your Meramec, your legacy wells are performing better than your type curve. How large of a well sample of production history do you need to raise your resource estimate? I guess the same question applies to Eagle Ford with the 200-stage spacing and Bakken wells with larger completion. I know the last time you lifted your resource estimate was September. How are you guys thinking about that?

Lance Robertson

Sure, Evan. This is Lance. So I’ll start kind of in the order you asked them, perhaps, but overall it’s clearly early in the STACK still. I mean we’re delineating the whole acreage, us and peers. Those well results we reported this quarter, the Irven John and the Olive June are excellent well results. They’re XL wells. They’re performing above that type curve. They’re also only about 40 days or 50 days into their total production. So I think we’re going to need to let those run a while. I think we’re excited that they’re above that curve, and so there’s certainly an opportunity for resource upgrade.

We’ll also have, as you might recall, a number of other XL wells in the third quarter and fourth quarter in that same Blaine County area from our heritage acreage we’ll get to talk about. So when we get the breadth of those, and they’ve matured a bit would be a bit more appropriate time for that.

Turning to the Bakken, I think the well results we reported there are really remarkable this quarter. All off of the same pad, among the three best wells put in the basin in the last three years. That really demonstrates what technology application, the right landings on the right combination is. And we have inventory like that. Similarly, we’d like to see those mature. But there are other wells in that area that also perform well, which is why we were aggressive in that area. So I think we need to let those mature. But I’d just echo your point. There’s clearly opportunity for a resource upgrade there, driven by that.

Lastly, Eagle Ford. We continue to be really pleased with the results of tighter stage spacing, particularly in the oil areas in the Upper and Lower Eagle Ford. Responding very well. We’ve got a breadth of wells there now, almost 75 wells in that group. So it’s maturing, which gives us more confidence. And I think we recognize there’ll be a need to do a resource update in the not too distant future.

Evan Calio

Okay. That’s helpful. If I could follow up in the Eagle Ford. I know you upspaced your Austin Chalk assumptions to 80 acre spacing. Could you walk us through what drove that change? And is that because you were getting well interference at the 40 acre spacing? I guess, are you planning on draining the Austin Chalk with your Upper Eagle Ford laterals?

Lance Robertson

Yes, Evan. So I think we went last year from unconstrained Austin Chalk very quickly to 40-acre spacing in the Austin Chalk to try to find the bounds of productivity of that reservoir. I think what we’ve discovered over the last few quarters is that at 40-acre spacing when we’ve had groups, really our first groups of Austin Chalk wells together that are constrained, that the reservoir quality is very high. It’s got a lot of natural fracturing, which we suspected but weren’t certain of. And those wells are communicating laterally a bit and that overall we’re going to get the best capital efficiency in the Austin Chalk at wider spacing.

In that same timeframe, we’ve also been testing the Upper Eagle Ford, really doubled the amount of our delineated acreage over that time in the Upper Eagle Ford and recognized that we could backfill some of those Austin Chalk locations with Upper Eagle Ford, but both at wider spacing. They just interact better. Ultimately, we’re looking for the highest recovery of hydrocarbon out of that unit at the lowest capital input. So we’re trying to optimize the returns at the drilling unit level.

Evan Calio

Is there a reasonable oil price in which you’d go back to the 40-acre downspacing? Or how does that interplay work?

Lance Robertson

Sure. I think you have to take a view on price, any of this, and I would reflect that we started this density testing at north of $90 a barrel. Probably looks different at $40. So the higher commodity price, I think the more you’d want to look at that ultimate density because that just drives the returns from that unit. We think where we are today, evolving, making these adjustments is appropriate for today’s commodity market.

Evan Calio

Great. Good stuff. Thanks, guys.

Operator

We have a question from Brian Singer from Goldman Sachs.

Brian Singer

Great. Thank you. Good morning.

Lee Tillman

Hey, Brian. Good morning.

Brian Singer

I wanted to follow up on the CapEx, $1.4 billion. I think you clarified on the earlier question that this is for the key resource areas, and just wanted to kind of put that into context to make sure the base is right. Is this essentially off of about a $375 million spent for those resource plays in the first half of the year? And then can you talk about the trajectory for how you’re thinking about the rest of the company? I think if we look at least on a cash flow statement type perspective, you spent about $800 million overall for the company in the first half.

Lee Tillman

Yeah. Certainly, in the first half of the year, Brian, there was a bit of a bias because we had a couple of long-cycle projects that were running their course that are now, of course, both started up, which are the EG compression project as well as the non-operated Gunflint project. So there was probably a bit more bias to the conventional portfolio in the first half of the year. As we look forward to the second half of the year, that’s going to largely be paced by the resource plays themselves, and that will really set the, I’ll say, kind of that exit velocity that we achieve from a capital program standpoint as we move out of the year.

We do anticipate, based on the activity we’ve described, including the additional rig in Oklahoma, as well as some additional completion work in the Eagle Ford, that we will exit the fourth quarter with some pretty strong momentum going into 2017. To your point, I guess, on the rest of the portfolio, the looking forward to 2017, you should expect us to continue to minimize the capital allocation to the conventional program, very similar to what we endeavoured to do this cycle in 2016.

Brian Singer

Great. Thanks. And then, as a little bit of a follow-up, from more of a strategic perspective, which is given your, I think, interest in the return that you’re seeing from the resource play portfolio, how strategically are you thinking about the assets elsewhere? Do you anticipate additional asset sales or, as you perhaps just described, minimal levels of capital investment, try to use these assets for the free cash flow to offset potential outspending going on at the resource plays?

Lee Tillman

Yeah, Brian, our conventional business is absolutely geared toward generating free cash flow that can then be redeployed. That’s the model, that’s what Mitch drives the team toward. I will look at some selective investments there. Great example is the EG compression project, albeit a long cycle project it’s very accretive, it’s delivering very strong economics and performance in the portfolio and it’s simply going to add to the ability of Equatorial Guinea to add to our cash flows.

I think a separate question, though, is more of the non-core asset question. We continue to scrutinize our portfolio and ensure that it is fully optimized. As I said in my opening remarks, we’ve achieved $1 billion year-to-date of non-core asset divestitures but we believe there is more work to be done there. We don’t think they’ll be to the scale of, say, a Wyoming, but we still believe there’s some good solid portfolio work, particularly here in North America, that we continue to drive. And again, it’s all focused on that simplification and concentration of the portfolio toward the highest risk-adjusted returns.

Brian Singer

Thank you.

Operator

We have a question from Paul Sankey from Wolfe Research.

Paul Sankey

Hi, guys.

Lee Tillman

Hey, Paul, good morning.

Paul Sankey

Good morning. A high level question, if I could. I assume that you’re basically planning the company at about a $50 outlook. How would things change if we were to start assuming $40 or $60, in your mind? And I know you’ve been a little bit reluctant, probably quite rightly, to commit to levels of prices at which you’d start to think about faster growth and stuff, but I’m trying to pin you down on it. Thanks.

Lee Tillman

Paul, I appreciate your transparency. I’ll maybe take those two bookends that you just talked about, the $40 and the $60. Obviously I think at $40, similar to what we’ve experienced this year, we’d be looking to protect our balance sheet, to ensure that though we continue to drive those leasehold and strategic objectives in the portfolio, and then look with great discipline at some of those discretionary economic opportunities within the portfolio. We’d still be bearing down on cost, we’d still be bearing down on non-core asset sales. So those would be the behaviors and the objectives if we saw an environment moving into 2017 that is more in the [ph] 4- handle range.

I think, conversely, if we see more constructive pricing moving into 2017 at that $60, as we’ve talked about, a $10 move in pricing for us is a big impact on our operating cash flows. And we’d be looking to redeploy those pretty strongly back here into the U.S. resource place to not only get back on sequential growth, but to get on that growth quite strongly if we saw that level of price support. We’ve protected the organization in such a way that we have the capacity to move to much higher activity levels. And if we saw that $60, we’d move toward that as quickly as we could.

Paul Sankey

That’s interesting. So on the dividend, is that still something that you aspire to return to be relatively a high dividend payer Or do you see yourself shifting as to a more of a unconventional growth story?

Lee Tillman

I think as you look at our portfolio, Paul, you look at our business model, we have made the shift. We made the shift in the dividend last year. Of course it was helpful from an operating cash flow standpoint, but it was also much more consistent with where we were headed in this very short-cycle investment, resource-play-intensive business that we’re in. And we think from a competitive standpoint, given our opportunity outlook for growth and reinvestment, that’s the right place for us to place our shareholder money.

Paul Sankey

Great. Thanks. And if I could just try one to Lance. Lance, we’ve seen something very interesting here, which is that obviously there’s been a significant improvement in cost performance, really across the industry, at lower prices. But what’s also interesting is I guess the technical improvements are still being achieved even though activity is so much lower. If we did go back to higher prices, do you think technical improvements would accelerate, or would they actually deteriorate because we’d be going into presumably into less high quality acreage?

Lance Robertson

Yeah, Paul, I think that’s an insightful question. I think what we would focus on at today’s activity, which we are, or at higher activity in the future would be in our Tier 1 inventory. As we’ve taken those technical advances, and we’ve lifted up the returns of some of our portfolio, we have such a breadth of it now that we’re going to focus within that Tier 1 first. We’ll take a portion of our activity to try to test some Tier 2 and lift it up to meet that thing. We need to stay disciplined in any price environment to make sure we’re bringing our best opportunities forward, but also taking the view that we’re going to bet on technology, we’re going to bet on the innovation and the creativity of our people to keep bringing our portfolio up accretively over that time.

Paul Sankey

Yeah. Could I just ask a follow-up? You said that you’ve retained – is it that you haven’t restructured people? Or how have you retained your ability that both of you mentioned?

Lance Robertson

Yeah. Sure. As we spun down our activity, we recognized that we have a cadre of early career talented people. And we don’t necessarily have the direct activity to put them into. So we’ve taken them out to special projects across the company. They’re out doing site supervision work on rigs and frac crews, production supervisors. So we’re retaining them in very valuable functions, maturing their leadership and their technical skills and their business acumen. And then as we grow activity, we can recall them into other petro-technical-focused roles. And they’re going to be even better prepared to take those on. So that early activity ramp, those people are here for us.

Paul Sankey

Thank you.

Operator

We have a question from Pavel Molchanov from Raymond James.

Pavel Molchanov

Yeah. Hey, guys. Maybe I can ask you to force rank your Bakken and Eagle Ford opportunities. So you’ve been very clear, SCOOP and STACK will be the first call on capital. Which one goes second?

Lee Tillman

Yeah. This is Lee. Just for clarity. At the top of our batting order is going to be STACK oil. That clearly has the superior returns, whether we look at a $40 environment, or even a $50 environment. I think then the lead table gets pretty interesting. Because of all the good work the asset teams have been doing, we actually have more diversity within our tier one inventory that will compete for capital. But the ones that we would see really rising to the top are, we’re going to continue to see Eagle Ford high GOR oil. We’re going to continue to see Bakken, West Myrmidon specifically, come in to the mix. And then also the SCOOP condensate area is going to be a strong performer which will also maybe amplified in the event that we see stronger gas support as well. So that’s really the lead table as we see it today.

Pavel Molchanov

Okay. That’s helpful. Then just a point of clarification on the small drop in your full-year production guidance, is that purely the net effect of taking out Wyoming and putting in the new STACK acreage?

Lee Tillman

That’s an element of it. But there is also an element, of course, of just base decline and other elements for our business, specifically Eagle Ford, which we’ve already talked about.

Pavel Molchanov

Okay. So it’s all in. All right. Thanks, guys.

Lee Tillman

Thank you.

Operator

[Operator Instructions] The next question comes from Arun Jayaram from JPMorgan.

Arun Jayaram

Yeah. Good morning. I was wondering if you could give us your outlook or expectations for how the U.S. resource play production could trend in the back half of the year? And secondly, is there going to be some more knock-on effect from the Eagle Ford completions, the high density completions you highlighted in 2015 in the update?

Lee Tillman

Yeah. I’ll take maybe the question around the back half of the year on resource plays. And then maybe pitch it over to Lance to take on if there’s any knock-on effect of the completion discussion. I think you’ve seen the releases that have come out over the last few days. There’s clearly more optimism in the market, particularly I think as you stretch into 2017. I think the sector in general is struggling with striking the correct balance between wanting to be prepared if they get a strong and sustainable price signal versus getting too far ahead of their headlights and losing, I think, the discipline that has been required during this downturn.

So speaking from a Marathon Oil perspective, we do expect to build some momentum going in to the fourth quarter which we thing would position us quite favorably in the event we do see more constructive pricing. And I would say that there’s probably many others within our space that are looking to do the same. There, of course, will always be an element that may have to be more in a balance sheet repair mode as opposed to being on their front foot and looking to drive toward incremental activity. But I don’t see a dramatic adjustment, just because the declines have been pretty challenging this year. And it’s going to be hard, of course, to offset that completely with late-year activity. And maybe, Lance, if you want to chime in on just the question around the knock-on and the completion effects?

Lance Robertson

Sure. So specifically focusing on the Eagle Ford, I think as Lee referenced, our guidance takes into account our view on all that. So it’s there in it. We have made some adjustments to the development plan. You’ll see those reflected in the Eagle Ford second half of the year. Shift to focus [ph] on more, two-thirds of that activity is in the high GOR oil areas which are our highest value type curves at current pricing. And we have widened out that Austin Chalk from 40-acre to 80-acre spacing to mitigate those influences. And the three and four zone high density pads are really, we’re foregoing those for the rest of this year. And so that will help mitigate those concerns. Otherwise we’ve put into our guidance what we think the base decline from 2015’s going to look like.

Arun Jayaram

Great. And my follow-up. Just, Lee, in terms of your comments of, earlier in the call about doubling maybe the rig count between now and year-end 2017 in order to get to that, let’s call it, flattish with some growth in the U.S. resource plays. Would you anticipate a stair-step kind of linear kind of move in activity over that time period?

Lee Tillman

Yeah. There will certainly be a ramp associated with that. I mean, I mean that would not be a step change, if you will. There would be a ramp across the year. So I was trying to just kind of project out kind of where we thought we might exit out of 2017 based on that nominal $1.4 billion type investment. But there will absolutely be a ramp.

And I think, too, you have to bear in mind, that the rigs today are doing a lot more than the rigs did a year ago. And so, we absolutely are taking advantage of that efficiency. In fact, in the Eagle Ford we’ve actually gone down a rig since second quarter, from five to four rigs, recognizing just the sheer efficiency of our drilling operations and the ability of our teams to continue to set a very strong pace on the drilling side of the business.

Arun Jayaram

Okay. Thanks a lot.

Lee Tillman

Thank you.

Operator

We have no further questions at this time. I would like to turn the call over to Mr. Lee Tillman for closing remarks.

Lee M. Tillman

Yeah. Well, I would just like to thank everyone on the call for their questions and certainly their interest in Marathon Oil. It’s been a busy and productive quarter for the company. I think the headlines speak for themselves. I won’t go back through those. But we are preparing for that sustainable price environment where we can profitably grow our business within cash flows. In 2017, we can get our business back to sequential growth and live within our means with WTI in the low to mid-$50s. And as I’ve stated during the call, we have the potential for even higher growth at higher pricing with an industry-leading leverage to oil.

So thank you again for the time on the call. I appreciate it and have a great day.

Operator

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

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