Zach Dailey - Marathon Oil Corp. Lee M. Tillman - Marathon Oil Corp. Thomas Mitchell Little - Marathon Oil Corp. Dane E. Whitehead - Marathon Oil Corp..

Ryan Todd - Deutsche Bank Securities, Inc. Guy Baber - Simmons & Company Evan Calio - Morgan Stanley & Co. LLC Doug Leggate - Bank of America Merrill Lynch Paul Sankey - Wolfe Research LLC Brian Singer - Goldman Sachs & Co. LLC Pavel S. Molchanov - Raymond James & Associates, Inc. Scott Hanold - RBC Capital Markets LLC Roger D.

Read - Wells Fargo Securities LLC Jeffrey L. Campbell - Tuohy Brothers Investment Research, Inc..

Welcome to the Marathon Oil Corporation 2017 Third Quarter Earnings Conference Call. My name is Hilda, and I will be your operator for today. 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 will now like to turn the call over to Mr.

Zach Dailey. Mr. Dailey, you may begin..

Thanks, Hilda. Good morning and welcome to Marathon Oil's third quarter 2017 conference call. I'm Zach Dailey, Vice President of Investor Relations. Also joining me this morning are Lee Tillman, President and CEO; Mitch Little, Executive Vice President of Operations; and Dane Whitehead, Executive Vice President and CFO.

Last night, in connection with our earnings release, we also released prepared remarks and associated slides, which can be found on our website at marathonoil.com. Following some brief remarks from Lee, we'll open the call up for Q&A, where we'd request you ask no more than two questions and you can re-prompt as time permits.

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 the 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..

Thanks, Zach. Good morning and thanks for joining us today. First, congratulations to my hometown Astros in their victory in what can only be described as a historic World Series. Houston needed a win with all of its recent challenges, and the Astros delivered. Go 'Stros. Hopefully, there's no Dodgers fans on the call.

I'll share a few opening remarks, and then we'll spend the bulk of the time addressing your questions. All year, we've consistently executed across our portfolio, delivering outstanding new well productivity, strong base performance, cost reductions and improved efficiencies.

We continued this trend in the third quarter, delivering 14% sequential oil growth in the resource plays that drove us to exceed the top-end of our U.S. production guidance range, while achieving record low unit production costs in the U.S.

We now expect to end the year toward the high-end of our updated 2017 production guidance range, which is complemented by an increased exit rate guidance in the resource plays, all while living within our means at current strip pricing.

This highlights the strength of our transformed portfolio and sets the stage for 2018, as we integrate the same discipline into our ongoing budget efforts. At a basin level, our execution focus translated into outstanding third quarter results across the company. Eagle Ford production was up from Q2 despite the impacts from Hurricane Harvey.

Kudos to some great work by our team to swiftly, efficiently and safely respond to what was a devastating storm on so many levels.

Through three quarters of the year, Eagle Ford's 90-day cumulative well production is tracking 15% above last year's, while maintaining flat completed well cost and working to uplift the economic viability of our inventory outside of our core Karnes County position.

Bakken production grew 20% from Q2, and this year's program is performing even above the step-change improvement we saw in 2016. The five Hector wells we brought online during the quarter delivered 30-day rate averaging 2,400 boe per day, beginning to put their productivity on par with our Myrmidon area.

Our team set a Williston Basin record for the highest IP 30 oil rate with the Clarice Middle Bakken well in Hector at 2,785 barrels of oil per day. Consistent with our plan to extend this success, the next Hector pad is much farther to the East and 24-hour test rates from the first two wells were 5,900 and 2,650 boe per day.

Oklahoma grew 18% from Q2, and our STACK volatile oil wells continue to outperform expectations. We also completed an Osage well in Kingfisher County with encouraging early results.

Our Oklahoma program remains focused on leasehold, delineation and infill pilot testing, as we continue to integrate data, technology and optimize completion designs on a customized basis across the STACK and SCOOP with an objective of achieving the highest full-section returns.

In our newest basin, we continue to ramp up activity in the Northern Delaware with five wells to sales, including two very good Wolfcamp X-Y results in Eddy County. We have also transitioned to a dedicated frac crew and recently added a fourth rig. Production at Equatorial Guinea grew 5% sequentially and generated over $180 million of EBITDAX in Q3.

The cash flow generation capability from this world-class asset continues to support our overall strategy of delivering profitable growth within cash flows. As I mentioned at the outset, we now expect to be cash flow neutral in 2017 at current strip prices, including dividend and changes in working capital.

While it's too early to talk about 2018 budget specifics, our capital allocation philosophy remains the same.

We will continue to support targeted strategic objectives associated with lease protection, delineation and infill pilots, but expect to deliver a returns-focused program, while living within our means at a moderate oil price of around $50 WTI.

Along those lines, we have listened closely to investor feedback and have continuous dialogue on the metrics that matter with our Compensation Committee, and we fully expect to integrate both the returns-based metric and a per share metric into our compensation structure.

These changes are consistent with others we've made since I became CEO four years ago, and we'll continue our journey to enhance alignment between management incentives and long-term value creation. Production growth will be an outcome of our capital allocation to the highest risk-adjusted returns, and you should expect about 95% to flow to the U.S.

resource plays. This will drive margin expansion, as we further shift our production mix to align with our investment focus. With an abundance of high-return investment opportunities in each basin, these choices will be informed by the extensive 2017 performance data across our portfolio.

For example, the exceptional Bakken results, particularly in the Hector area, continued profitable extension of Eagle Ford into areas outside of core Karnes County, and the anticipated step-up in activity in Northern Delaware will all compete within our four-basin optimization.

All of this sends the clear signal that competition for our discretionary CapEx is broader, more diverse and more intense than it ever has been.

You should expect our capital allocation to remain a dynamic real-time effort as we continually optimize across our four basins, leverage learnings and respond to performance trends as well as the macro environment. Our drive for maximizing returns is neither static nor limited to an annual budget cycle.

Underpinning our strategy and outlook is a continued focus on a strong balance sheet. The actions we took in the third quarter, reducing gross debt by $765 million, lowering interest expense by about $65 million, managing our maturity profile are fully consistent with this priority.

With both cash on hand and anticipated strong operating cash flows, you should expect us to continue focusing on reducing gross debt, as well as looking to pursue low entry cost opportunities within our resource play exploration group, opportunistically acquire small acreage packages in our core basins, fund our high-return organic investment program and support our dividend.

And just as a reminder, we will receive the second OSM installment of $750 million in first quarter of 2018. All the work we've done the last couple of years around the balance sheet, cost reductions and portfolio transformation have all been done to position Marathon Oil to deliver profitable growth within cash flows at moderate oil pricing.

That is our investment case. And thanks to recent performance in cost efficiencies, we believe we can achieve that objective at a flat $50 WTI. We have moved from portfolio transformation to execution delivery at scale across our differentiated position in the four highest-margin, lowest-cost U.S resource plays.

We expect our margins to expand, as we continue to shift our production mix to a greater weighting of U.S. unconventionals, better aligning our volumes to our investment concentration.

The margin expansion story, coupled with outstanding financial flexibility, will drive cash flow growth per debt adjusted share and position us favorably to outperform the competition through the end of 2017 and beyond.

I want to conclude by thanking all of our dedicated employees and contractors who have made such a difference in 2017, driving execution excellence in every asset every quarter. Thank you. And with that, I'll hand it back to the operator to begin the Q&A..

Thank you. We will now begin the question-and-answer session. We have a question from Ryan Todd from Deutsche Bank..

Okay, thanks. Good morning and great quarter. Maybe if I could start with one on capital allocation into 2018. I know you can't provide specifics and you mentioned the overriding philosophy is spending within cash flow.

But is the target, as we think about capital next year, to target a budget that's effectively in line, including the dividend, with operating cash flow at around $50? And then, if oil price were to be higher than budgeted, how would you prioritize the use of excess cash and where in the – I guess in the potential uses would cash return to shareholders fit in the list of potential uses there over the medium term?.

Okay. Yeah. Good morning. Good morning, Ryan. This is Lee. You're right, our production growth is absolutely going to be an outcome of capital allocation to the best risk-adjusted returns, and we're going to do that while living within our means. And that means basically balancing our capital and our dividends with our operating cash flow.

And we're currently basing that on about a $50 flat WTI forward pricing.

In the event that we see more price support and see better and improved free cash flow above and beyond cash flow neutrality, then again, it's going to come back to those high-level priorities, starting with making sure that we protect and support an investment-grade balance sheet through continued gross debt reduction.

We want to make sure that we've got ample liquidity to protect our flexibility and certainly respond to any volatility in the market. We're going to fund our high-return organic investment. Certainly, from a cash return to shareholders, we're going to continue to support our dividend as well.

And then, we're also going to continue to look for opportunities for resource capture via our low entry cost opportunities within our resource exploration team, as well as some smaller bolt-on acquisitions, where we continue to want to build more of a contiguous position in some of our core basins.

So, that's really where we would stand, Ryan, if we see some more discretionary cash flow on hand next year..

Great. And I guess maybe as a follow-up to that, post the $750 million in proceeds from the second installment in OSM that you'll get in the first quarter of next year, it'll leave you with a pretty significant cash balance. Can you talk about how you think about managing that longer term? You mentioned gross debt pay-down.

Should we expect to see you continue to pay down debt in advance of the scheduled maturities or how would you think, I guess, about managing that cash balance longer term?.

Yeah. We're always scrutinizing our capital structure and ways to improve that. Directionally, our objective is to continue to reduce gross debt. That is an objective that we have. We're not prepared to get into the specifics around that today, what that might look like. But directionally, that's something that we're pursuing.

We hope to leverage again some of the elements of our existing capital structure to facilitate that, and I would just say stay tuned..

Is there a targeted range about where we should expect – where you'd like your leverage to be?.

I think as we look out toward next years, particularly on kind of the cash metrics, debt to EBITDA, Ryan, certainly, we would like to get below that kind of 2.0 mark and get comfortably below that. Obviously, we're very mindful as well of wanting to make sure that we protect our investment-grade rating. We're there with two of the three agencies.

One of the three, obviously, took a sector position that the sector is still a little bit in the penalty box on. But we think that investment-grade rating is important in terms of the flexibility and the cost of capital that it provides..

Great. Thanks, Lee..

Thank you, Ryan. Appreciate it..

We have a question from Guy Baber from Simmons & Company..

Good morning, everybody. Congrats on the quarter and congrats to the Astros as well..

Thanks, Guy. Appreciate it. As you might imagine, there's a few tired folks in Houston today..

Right, I'm one of them. So, just to lead us off here, the production has outperformed this year obviously, while capital spending has been lower than expected. So, the capital efficiency just appears to be improving pretty meaningfully.

So, if we did a look back analysis here, if you compare kind of where you are now, where you see the capital efficiency and how that compared to internal expectations entering the year, can you just touch on maybe the specific areas where you're really coming out ahead of plan that you would call out? From our vantage point, it appears the performance is pretty broad-based, but I know you guys have done that work.

So, just trying to better understand if there are specific areas you would really highlight as big outperformers relative to internal plan..

Yeah. I think the way I would characterize it, Guy, is first of all, it's a combination of factors like on all these cases. First, we've seen very strong performance from the base production that we carried in from 2016. So, we've seen a strong support from those carry-in barrels from the capital program last year.

Secondly, our new well productivity has been higher than originally anticipated when we pulled together the plan.

Thirdly, I think the teams have done an outstanding job of finding ways to embed efficiencies that have allowed us to mitigate some of the inflationary pressures that we saw much earlier in the year when we kind of went through a little bit of hyperinflation during the initial rig ramp-up. So, I think it's a combination of all of those things.

And I think importantly, we saw some kind of, I'll call them, breakout performances in some areas that quite frankly when we built the plan, we couldn't fully anticipate. We had to kind of risk those. And specifically, I would cite, certainly, the Bakken, both Myrmidon and Hector, just the continued outperformance we've seen there.

The extension in the Eagle Ford outside of the core Karnes County area and the ability there obviously to keep completed well cost essentially flat over the period, despite inflationary pressures and even more intense completion designs.

The volatile oil performance not only in new wells, but the base that we carried in, in Oklahoma, all of those things collectively, I believe, have contributed to the shift in our capital efficiency, which we're very, very proud of, in the second half of the year..

That's very helpful. And then, Lee, you touched on this in the comments, but I was hoping you could elaborate a bit on the potential revision to the compensation metrics, really what you're trying to achieve there and what your organization and you all believe the best metrics are to judge real value creation.

And then, perhaps just remind us how those metrics maybe have already evolved over the course of your tenure at Marathon..

Yeah. You're right, it has been a bit of an evolution, Guy. We have been focused on the metrics that matter with our Compensation Committee really since day one. It's been something that we consider each and every cycle, and in fact, we've shown, I think, a great amount of willingness to actually make changes and make improvements to that.

So, when you think about our structure today, I would say we're very happy that we do have a very strong alignment and strong linkage to pay-for-performance. In other words, I'm not in any way saying that our current structure is broken.

But we do use a variety of metrics to run our business, and not surprisingly, we need to use a variety of metrics to also drive our compensation. We don't want to get overly reliant on any one metric. And so, we keep a lot of flexibility around our metrics, the weightings of those metrics.

We've even made changes in our proxy peer group to better reflect the changes that we've made in our company. And so, I think we have shown a history of continuing to search for ways to incentivize our leaders that encourage that long-term value creation mindset.

And I think this most recent dialogue around returns and per share metrics is a healthy one. It's one that we've had internally as well, and we will be featuring aspects of both of those as part of our forward compensation structure..

Sounds good. Thank you..

We have a question from Evan Calio from Morgan Stanley..

Hey. Good morning, guys..

Good morning, Evan..

Good morning, Evan..

Good morning..

Hey, Lee. It appears all your unconventional basins are competing for capital here, as are individual focus areas within the basins. I know you have strategic priorities in terms of holding and testing PayRock and Delaware acreage in 2018.

But could you walk us through the 2018 strategic priorities and then the broad rank of basins where incremental CapEx dollars could flow?.

Yeah. Well, first of all, what I would say, Evan, is that we're still in the process of fully integrating 2017 performance data into our capital allocation optimization. Much of the data of course that we're sharing in the third quarter, we're still building in to our forward-look.

And as we go through our, I'll call it, four-basin optimization, we want to make sure that we're using the absolute best, not only technical data and productivity data, but also cost data, so that our decisions are driven by a return focus, and that's really within that, I'll call it, discretionary bucket.

The strategic objectives really are pretty consistent with the ones that we talked about for 2017, and they really revolve around in those limited areas now, which are the STACK and Northern Delaware, where we have leasehold requirements. Those, of course, will be at the very top of that list.

The continued work on delineation in both the STACK as well as the Northern Delaware, and then finally, the infill pilot work that is ongoing really not only in the STACK, but even starting in the fourth quarter in Northern Delaware.

Those, in my opinion, are really that element of our program that's strategic in nature that we want to drive, because that's really setting the tone and the cadence for the business in the future.

Within the discretionary program, it's going to be all based on where we believe we can generate those highest risk-adjusted returns, and that's where the integration of a lot of this new data is going to be essential and vitally important, so that we make the correct calls on that development program, if you will.

And you're right, all four basins are competing very strongly. That's a great problem to have, to have that type and level of opportunities. And that work really is what we're doing currently. And more to be revealed clearly next year, where we'll get into basin-by-basin capital allocation..

Great. Maybe a follow-up there. In the Bakken, your Hector results have been excellent, you disclosed there last night. And while early, your well inventory appears much deeper than it was six months ago.

And so, does that change the amount of capital you can deploy there or more generally transform it from a run it flat to a growth – or run it to a driver of significant growth region? So, i.e., run it flat for cash flow or a driver of significant growth in the future?.

Yeah. I think it changes everything. I think the ability to continue to migrate inventory towards our internal Tier 1 kind of criteria, it does. It changes our view of Bakken. And earlier this year, that was really yet to be proven.

I think with the continued success in both the Myrmidon, and now as we have marched across the Hector area, we continue to de-risk and prove up more of that top-tier inventory in the Bakken, which I do believe means it's going to compete more strongly for capital and certainly has the ability to grow as it's demonstrating this year.

And just this quarter, we had exceptional growth in the Bakken from these highly capital-efficient wells that we put down..

Great..

So, its role is going to change..

Great. Congratulation on the results and the Astros, guys..

Thanks. Appreciate it..

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

Thanks. Good morning, Lee. Good morning, everybody..

Good morning, Doug..

A follow-up to Evan's question, Lee. I think in the past, you've kind of walked us away from assuming that the Southern part of your Bakken acreage was being de-risked by these tremendous wells you've got in the Hector area.

Can you kind of give us an update as to what proportion of that acreage you now believe is de-risked? And maybe to get then through an addendum to that, when you look at your other options, it would seem to us with those oil rates that the returns here are probably some of the best in your portfolio.

Would that be a fair way of thinking about relative capital allocation for next year? I've got a follow-up, please..

Yeah. What I would say, Doug, is that although we're really encouraged with the Hector results, we still have a limited number of pads.

We did this – we shared some 24-hour IPs from this Far Eastern pad and that really stepped us across the play, but we still have some work to do in between kind of where we know we have good well control, which is where the initial pads were. Also, we still need to kind of test that further to the South as well, not just to the East.

So, there's still some work left to do, but we do believe that we're beginning to migrate a material amount of the Hector inventory toward Tier 1. So, I don't have an acreage percentage for you.

But as we move through and get a little bit more well control across that full 115,000-ish acres, I think we'll be in a much better position to share more quantitative metrics with you around what does that inventory truly look like going forward.

On your capital allocation question, because of the oil weighting, because of the capital efficiency of these wells, without a doubt, they have moved considerably in the priority order for capital allocation, particularly the Myrmidon very geologically advantaged area.

But the Hector results that we've seen, particularly in the pads that we've drilled, are even crowding the Myrmidon performance. So, we feel really good that those are going to be near the top of our capital allocation priorities..

Okay, I appreciate that. My follow-up is also a quick one, but it's another, I guess, relative capital allocation question as well unfortunately. But – so, you've done a tremendous job putting your mark on this portfolio.

It's now basically your portfolio with PayRock and with the acquisition in the Delaware, but it also means you've paid upfront for – in terms of capital employed.

So, when you think about these competitive metrics for management compensation, what pace do you need to run that to get enough earnings and revenue and cash flow from those two acquired assets in order to be competitive on a return on capital employed basis now? I'll leave it there. Thanks..

Yeah. First of all, I appreciate the recognition on the portfolio transformation, and that's really a recognition for the entire team here, not just for me.

It's been a great team effort to get us to this stage, where a lot of that heavy-lifting is behind us and we really have turned our full attention to executing against what I think is a truly differentiated organic portfolio.

In terms of the acquisition entry points, we felt that – first of all, that we entered both of those deals with very strong value propositions, meaning that we felt that the acreage price that we paid in both of those acquisitions puts us in a very competitive spot moving forward. There were obviously acquisition economics that assumed a given pace.

We're very mindful of that as a metric internally to ensure that we capture full value from that. But inevitably, as you get new data, you continue to modify those full-field development plans. And we've seen it in the STACK area, which was a case where we integrated an asset into our existing portfolio.

And we're seeing the same thing in Northern Delaware, which was more of a greenfield acreage acquisition for us. So, we're very mindful of those entry costs that we paid. If you reflect back, Doug, we talked about kind of the several things we look at when we think about an acquisition.

It starts with quality, can it compete; materiality, will it make a difference; and value, which means can we drive a full-cycle return; and finally, have we saved some upside for the shareholder. And both of those two cases of acquisitions, we feel that we ticked all of those boxes.

The other thing I would just mention is that we continue to support a program and resource play exploration that is much more focused on greenfield leasing and low entry cost opportunities. And that kind of runs in the background in a little bit of stealth mode.

So, we hope that it's not obviously always going to be by the wallet, that we're also going to have opportunities either near basins or outside of our existing basins, where we can generate more of those low entry cost type opportunities..

Appreciate the answers, Lee. Thank you..

Yeah..

We have a question from Paul Sankey from Wolfe Research..

Hi. Good morning, Lee, and....

Hey, Paul..

Congratulations on the Astros. Happy for you. It's been a miserable season up here in New York. So, Lee, if we can go to a high-level question, the entire returns over growth theme is clearly taking hold of the E&P industry.

And I was wondering, given some of the detail you've been through, if you could, at a high level, talk to us about the endgame for where you think Marathon Oil can get to. Some people are talking about double-digit returns on a sustained basis as being a target. Others – in fact, yesterday, we had a CEO talk about best-in-class ROIC by 2020.

Where do you think you can take this thing? And it's interesting that you've got this improvement in performance operationally and a little bit of a higher base to start from in terms of your dividend. Thanks..

Yeah. No, thanks for the question, Paul. The endgame for us is a focus, and we always have been returns-focused. But we think that we can generate profitable growth and do that not only within cash flow, but when we look out towards our five-year kind of benchmark case, we also have clear line of sight on generating free cash flow yield as well.

So, we're not striving just to be cash flow neutral. I want to be very clear about that. Returns, cash returns is going to be a metric that we're very mindful of.

We want to make sure that our – particularly our D&C program every year is moving that enterprise metric in the right direction, that the things that we do, every new dollar that we spend is driving that metric in the correct direction.

The other metric that we're going to be watching very closely, of course, is our cash flow, debt- adjusted cash flow per share growth. And we feel there that we have a tremendous potential as we continue to expand margins to really outperform on what I think is one of the highest correlated metrics to performance in the E&P space.

So, I think the combination of ensuring that each incremental dollar of capital was moving your cash returns in the correct direction at an enterprise level, and then also coupling that with strong debt adjusted growth per share on the cash flow side, we think that's a powerful combination.

And those are metrics that we're going to be watching very, very closely as we come out of this transformation and kind of get shoulder in to this execution..

Yeah. I guess the question is that – there's a rate of change story obviously, which is positive, but where can you end up.

Can you commit to double-digit returns as an aim or some sort of leading metric that we can directly compare you on over some timeframe?.

Yeah. I think that as we start talking more about these financial metrics, we'll get better at how to be transparent with them. Obviously, as you know, Paul, there's going to be a high variability depending upon what your price outlook is and the capital spend that goes along with that.

So, there is some challenges there, I think, as you look out over time, making sure that you've wrapped the appropriate assumptions, so that the number is actually meaningful going forward. But we're going to be using these metrics to talk about our business. That's our commitment.

I think when you start looking at cash flow per debt-adjusted share and growth around that, coupled with more traditional things like production CAGR, I think we'll be able to tell a much more fulsome story about what that endgame actually looks like..

Understood. If I could just follow up on some more specific stuff. The rate of change is really impressive. And I think the way I'm hearing it, it sounds like the Bakken and Eagle Ford have kind of maybe surprising to the upside, and maybe there's a little bit of disappointment in the STACK. And I don't know, I guess neutral on the Permian.

Is that fair? And in that situation, would you potentially be in a disposal mode in order to focus down the asset base on where you are improving most rapidly? Thank you..

Yeah. No, thanks. Certainly, without a doubt, Bakken and Eagle Ford continue to surprise to the upside. You just have to look at the well results and the capital efficiency that's being generated within those two basins.

I think within the Oklahoma Basin that we still view the 340,000 net acres that we have in that basin as a tremendous high-return growth engine for the company going forward. I think we're still just very early days. And the development of the STACK, we're still in very much a leasehold and delineation and pilot mode there.

And so, we should expect some variability of results. But I wouldn't extrapolate the variability in results to mean that we don't remain very keen on the development of that and bringing it up to a similar standard of efficiency that we've observed in our more mature basins.

Northern Delaware is even further kind of upstream from a development standpoint. And there, we're really just getting started. I think we're starting though very fast there. When I already sit down – I was just out in the field a few weeks ago.

When I look at the efficiencies that are already being generated on the drilling and completion side, I'm very pleased that how rapidly we're coming up the learning curve there. And I think now, it's just a question of getting some more at-bats, continuing to generate the types of results that we're starting to see this quarter.

We're going to be very focused on continuing to try to further consolidate our significant position there. But we're very – very confident in the Northern Delaware as an area that's going to demand more capital certainly going forward into 2018.

Case in point, we picked up a dedicated frac crew at the beginning of this quarter and – as well as just added a fourth rig there..

Yeah. It's an interesting perspective that you've got assets at different points in the investment cycle. Thanks a lot, Lee..

Thank you, Paul. Appreciate it..

We have a question from Brian Singer from Goldman Sachs..

Thank you. Good morning..

Hey, Brian. Good morning..

As a lifetime Angels fan, I'm still celebrating their one World Series victory of 15 years ago. So, I can tell you this one will stay with you for a long time..

Yeah. Trust me, Brian. We're going to be talking about this one for probably 50 years is my guess..

Absolutely, absolutely. So, I wanted to pick up on your comments on the debt adjusted per share growth and wanted to explore a little bit how you guys see yourself differentiating, because there's really three aspects to that, the absolute growth, the potential for a share repurchase or falling share count, and then debt pay-down.

And I just wondered, as you think about being measured on that metric or focusing on that metric, where you see more of the niche for Marathon on a relative basis?.

Yeah. I think that when I kind of break that metric apart into its pieces, Brian, I think that we are going to have very strong and competitive production growth that will be accompanying that. The change and the, if you will, the mix of that production growth over time is going to be an important element of that.

You saw this year, about 60% of our barrels are really associated with the unconventional. That number is only going to drive higher. So, there's a natural, I would say, margin expansion that's going to occur even just based on the mix effect. That's not counting all of the efficiencies that we think we can generate within that mix effect.

And then finally, I think it's continuing to work diligently on the balance sheet and making sure that we really are protecting that kind of investment-grade view of our balance sheet. On the case of the shares side, that's absolutely always a tool in the whole toolkit.

But we just feel that we've got higher and better uses today to drive our business and drive that metric more effectively through other mechanisms as opposed to that..

Great. Thank you for the color. And then, my follow-up goes to some of the productivity gains that you've been talking about both in the Bakken Hector area and others.

Can you just talk to where, in your four key plays, you think recovery rates of oil in place are and what you see as the scope for further productivity gains over the next couple of years?.

Yeah. Sure, Brian. This is Mitch. I'll take that at least at a high level. I think what is compelling about the resource plays, and to some extent, the four-basin nature of our portfolio is we're able to quickly leverage things we learn in one asset to another.

And the Eagle Ford has been kind of our high-activity basin for the past several years and it's where we often pilot and trial new technologies or operational efficiency gains such as larger drill pipe, offline cementing, on the operational side, extending to the central control room, where we're not only able to operate more efficiently by operating through guided routes versus just going to every well every day, but also able to maximize the base production, the production and the barrels that we've already developed.

We're able to use machine-learning techniques to optimize that and drive higher uptime through upset periods or through artificial lift optimization. We're now transferring that to other basins. So, we should not be surprised to see continued efficiency gains going forward.

The rate of change in the Bakken has certainly been the most dramatic, and in terms of extending this integrated workflow that we trialed and tested in Myrmidon in 2016, pushing that down into Hector now with the same workflows and very impressive results. Northern Delaware has been a very high rate of change as well.

We've seen that as one of the catalysts for us getting in at the time we did, and we're now able to employ our completion designs combined with our facility and engineered flow-back structures. And that is becoming evident in the types of wells that we released there in Eddy County, the two Wolfcamp X-Y wells.

So, from a recovery standpoint, we're dealing with a lot of different reservoirs across these basins and still in the optimization mode. So, it's difficult for me to quantify for you a single number or a single rate of change.

But certainly, from a returns focus and a value focus, which is really where we're driving our teams and our business, this is all moving towards the positive..

Great. Thank you..

We have a question from Pavel Molchanov from Raymond James..

Thanks for taking the question, guys. Kind of a macro perspective that I would ask from you, because you are one of the most geographically diversified U.S. producers now in the four plays.

We've seen, particularly in the last three, four months, a great deal of volatility in basis differentials along the Gulf Coast and elsewhere, and some of that's hurricane related, some of it perhaps is not.

What's your take on what's been happening with the spreads, the dips, and is any of that changing perhaps how you think about the economics in the different areas?.

Well, obviously, we spend a lot of time thinking about the broader topic of just commodity risk – risk management, and I think that's evident in our hedging program. We're very much a defensive hedger in the sense that we want to underwrite a certain element of our capital program, while making sure that we protect some upside for our shareholders.

And I think you've seen us use that as an important tool in our tool kit not only around our commodity risk management, but as part of our delivery around living within our means. That's a key element of it. And we have explored, looking at basis differentials as well and if there are specific risk management actions that we want to take there.

I think one advantage that we do have in the four-basin model is that we do have a bit of an intrinsic hedge in the sense that we have multiple markets, multiple different product mixes.

And so, we have – almost just because of the diversity of our portfolio, we do have a bit of an intrinsic commodity risk management element that's embedded in our portfolio.

I think one of the more positive observations that we've had has been the differentials that we've seen, for instance in the Bakken, which have been part of the story around the strong economics there, basically trading more or less right around WTI.

I think in the Eagle Ford, the support there that we've seen with the linkage primarily to LLS and Brent, it's also been quite supportive. So, we've been able to very much selectively take advantage of those opportunities from a commodity risk standpoint..

Okay, helpful. And then, since no one's asked about Libya, let me ask you about that one. It's become a thoroughly meaningful part of your production mix again.

And I guess, is there a point at which you would actually begin to guide Libyan volumes? Are there certain milestones you want to see?.

Yeah. I think just for absolute clarity, Libya, yeah, it's gained in production, but I think you need to kind of separate production from the fact that we're still sitting on a 94% statutory tax rate there. Very little free cash flow or cash flow is being generated from Libya relative to the rest of the portfolio.

I think – and I don't have the exact number in front of me. But I think if you look at our $0.59 cash flow per share for the quarter, you're talking about $0.01 of it was associated with Libya. So, I just want to make sure that we put Libya in the correct perspective, lot of barrels, low margin, somewhat limited impact on our operating cash flows.

Having said that, there still remains a good deal of uncertainty in Libya, the political, the security situation there. And as long as we're dealing with that uncertainty, we feel it's best to hold that asset below the line. We've only really been out – we came out of two years of force majeure late in 2016.

So, I'm hopeful, but even this year does not necessarily a trend make, and we just need to be very mindful that this is still a relatively charged and higher risk environment, and we're going to continue to approach it that way.

But from a materiality standpoint, on cash flows, I don't think that there's any push there for us to drive that into the bottom line, because it's just not a big impact to us..

Okay, helpful. Thank you, guys..

We have a question from Scott Hanold from RBC Capital Markets..

Yeah. Thanks. Hey, a couple of questions. You made a point a couple of times that with some of the potential free cash flow, you'd look at bolt-on opportunities across your resource plays.

I maybe reading this – into this a little bit differently, but just help me out is – are you guys actively looking at several things? So, should we be surprised as we go through 2018 if you all have made a few nice chunky add-ons to your core positions?.

Yeah. I think, Scott, we're always going to be watching the market, particularly in our core areas. And to the extent that we can find smaller fit-for-purpose bolt-ons that provide synergy to our existing core position, then we're absolutely going to look at those.

In particular, Northern Delaware is an area that still remains of high interest to continue. We like our scale, but we would certainly like to strengthen our operated positions there just from a consolidation standpoint.

So, you should expect us to continue to do everything from greenfield leasing to small bolt-ons there in Northern Delaware, as those opportunities present themselves. And those things will afford us an opportunity to drive our working interest up to convert some maybe non-operated pieces to operated.

And at the end of the day, we want to make sure that we're adding those incremental net well opportunities at a cost that's accretive to the overall kind of position there in Northern Delaware..

Okay. That's good color. And specifically, my angle was – and maybe I should have been upfront with this – is that it seems like the Bakken is getting a lot of attention today and the returns have been pretty good. And if you step back and look, a lot of industry has moved frankly from the Eagle Ford into the Bakken to the Permian.

And are there opportunities in those basins where industry has sort of left that you all see as strategic in your portfolio?.

All of our core basins, I would say, we're always mindful of opportunities, but they have to kind of pass through the filter of – first of all, we're not looking to buy someone else's decline curve. We want to make sure that it's bringing opportunities and inventory that will come in and compete with our existing portfolio.

We're not looking to acquire things that aren't going to be developed for another decade. And so, there is a relatively high bar just because of the quality and the success that we've generated in places like the Eagle Ford and Bakken. We certainly aren't looking to dilute our high-quality position in either of those locations..

Okay..

Having said that, if the right opportunity does come up, Scott, we would certainly take a hard look at it. We're driving an incredible amount of capital efficiency at scale in both of those assets. So, if there are, again, smaller opportunities that kind of fit our pistol, then we're going to be on it..

Great, great, great.

And if I could slip one more in, in the STACK play and just Oklahoma in general, can you remind us, when you look at in the next 12 to 18 months, how much in maybe in rig counts or just general framework, how much work do you all need to do on delineating and piloting versus starting to look at developments in that area? So, I think if I'm not mistaken, you're around 10 to 12 rigs there right now..

Yeah. We're probably more on the order of about eight rigs in Oklahoma today, just for clarity.

And maybe the way I might calibrate that a little bit for you, Scott, would be to say, as we look ahead, for instance at the fourth quarter, we still have about, I think – and Mitch will correct me if I got the number wrong here – about 40% of leasehold drilling still in the fourth quarter.

And as you might recall, we talked about leasehold requirements really extending throughout most of 2018 and a little bit into 2019 in the STACK. So, that's still going to feature as a large element and component of our capital program. Along with that, we're also going to still be doing delineation as well as pilot testing.

Another great example is if you look at – again, I'm kind of focusing on the fourth quarter program, because we've described the demographics of that a little more carefully. I said 40% of that is leasehold, but there's also a large element of it when you consider both the Eve and the Tan infill pilots that is pilot directed as well.

So, probably about half the program, when you look at those wells, is really geared toward continuing to move the ball forward on our pilot testing as well. So, that's the kind of mix that we're going to continue to see as we look to delineate as well as protect leasehold in STACK..

Appreciate that. Thank you..

We have a question from Roger Read from Wells Fargo..

Yeah. Thank you. Good morning..

Hey, Roger..

Hey, Roger. Good morning..

Hey. Just a follow-up on the debt-adjusted per share growth. So, obviously, a lot of components to that. You can lower debt, you can raise your growth, you can reduce number of shares. I know the question has been asked a little bit here about share repos.

But as you step back and look at the debt you can pay back, is that something to watch the next 18 months? After that, free cash flow is a combination of allocation to growth, which, let's face it, I don't know you need to grow any faster.

So, should we think about that overall calculation as ultimately that's another way to improve the metric?.

Yeah. I think I'll maybe offer a few comments, and then perhaps Dane wants to jump in a little bit more on capital structure. But you're right, there are a lot of moving pieces within the – kind of the debt adjusted cash flow per growth – or cash flow per share metric.

Directionally, we've been very clear that investment-grade rating is important to us. We think that an element of getting that back to all three agencies and protecting where we are with the two that currently have us at IG is a continuous focus on what can we do to drive our capital structure in a direction that will support that IG rating.

The nice thing about that, and we saw this demonstrated when we did the debt reduction this year, is that when you take those actions, they also have some other very strong benefits. And in the case of our latest action, we were able to pull some $65 million of corporate cost right out.

There's not many places where you can drive that magnitude of reduction in your corporate cost structure. So, we're going to be looking to find that combination of things that will allow us to continue to delever, but also afford us the opportunity to impact our corporate cost structure as well.

I don't know, Dane, if you have anything you'd like to add..

I would just add, I think we're in very strong liquidity position right now. We've got $1.8 billion at the end of quarter in cash, and we've got another $750 million coming in on the second installment for the OSM divestiture in Q1. And so, as we look at the capital structure, I think we have the flexibility to act when it makes sense for us to act.

There are elements in the debt structure that are actually callable at par today. So, we'll keep trying to drive to the benefits that Lee described and really focus on that capital structure..

Okay. Yeah, that's helpful. And then, looking at your Permian acreage, I know early days here and still on a leasehold focus.

But with the cash that you do have, the liquidity you have, and to take a look at sort of the geographic spread of the acres, you definitely are going to want to get a little more contiguous acreage, I would think, to ultimately pursue 10,000-foot laterals. Where are you in that process? I guess I'm trying to think about it.

Is it a daily process to make that happen or is there a single transaction we need to be focused on that brings that contiguous nature to the Northern Delaware?.

Yeah. Great question. No, it is a daily process that's really integrated in not only with our asset team, but also our resource play exploration team. We have a small kind of purpose-built team that sits in Midland that has their A No.

1 priority each and every day looking at swaps, trades, greenfield leasing that continue to move the needle on, just as you described it, Roger, getting more access to XL potential, higher working interest, conversion of some of our leases over from non-op to op. All of those things are going on. It's kind of a singles and doubles kind of game.

It's some hard-lifting from a land perspective to get those done. Particularly swaps and trades are always complex. No one wants to say that they've got the ugly baby in a trade. But – so, you've got to work through some of that. But we're making good progress.

And I think you'll see a mix of those kinds of swaps, trades, leasing as well as some continued smaller acquisitions that again drive that synergy and help us continue to move toward a more consolidated position.

So, it's a bit of an all-of-the-above strategy, but it is going to be an everyday proposition and it's going to look more like, again, singles and doubles along the way..

Okay. That's great. Thank you..

We have a question from Jeffrey Campbell from Tuohy Brothers..

Good morning, Lee, and your team. Could you speak about the Osage test in the Oklahoma Resource? And this is kind of a little multi-parter here. You can answer whatever you like.

Did it meet or exceed your expectation going in? Will we get more Osage tests in the area? Can the cost be competitive with the other zones and do you have any multi-zone development potential in this area of the Osage exposure?.

Yeah..

Yeah. Absolutely, Jeff. This is Mitch. I'll try to remember all of those questions, but....

I can repeat them..

That's right. Yeah, if I missed one, I'm sure you'll remind me. But starting off with the White well, we're certainly quite encouraged by the early performance on that well.

We've, I think, talked in the past, a few quarters back, on a few other Osage tests that we've done, and we have seen some variability in there, as industry has, which is the nature of the Osage play. It's quite extensive.

Certainly, it covers the vast majority underlying our Meramec oil window and even extends further to the North, where some others are doing some testing there and certainly to the East. So, we do see it as prospective and extensive.

We're quite encouraged by the White, but we also recognize that it's a play with some variability, and we're still in the process of defining the true prospectivity and high-grading of that across our position.

I think it's important to note that – and we talked about this as well following the PayRock announcement that while we recognized its potential, it wasn't contributing to the value that we paid for in the acquisition.

So, this is upside that we're looking to exploit and kind of selectively integrate into our program as part of the delineation effort. We will have an upcoming pad, where we'll be looking at co-development of the Meramec and Osage and likely a Woodford test in the same trial, but certainly the Meramec and Osage.

So, stay tuned, there will be more to come on this, but we definitely like it. From a well cost standpoint, we'd also think it's quite competitive. A little different completion style required here, which actually drives cost a little bit below kind of our average Meramec D&C costs..

Okay. Well, that was great color, and you certainly have a good memory, so thank you. And I just want to ask a last question on portfolio management. I'm just wondering....

Sure..

At this stage of the game, would you consider revisiting or selling any of your International assets? I know there's some interesting dynamics here, because we know that some of them are free cash flow generators, but you also mentioned the margin uplift from increased unconventional production.

And we saw a pretty favorable peer sale in the Equatorial Guinea not too long ago..

Yeah. The way I would ask you to think about our portfolio today, Jeff, is the – it's the four core U.S. basins plus EG.

And to the extent that we have other assets that lie outside of that grouping, you should think about those as being non-core and areas that, if we can generate value for the shareholder, we would certainly be looking to do so, because those assets simply don't compete for capital allocation and would likely have more value within someone else's portfolio.

So, portfolio management, a lot of the heavy-lifting is behind us on some of the big pieces. But it's just – again, similar to what we were talking about earlier, this is just part of what we do day-in and day-out, is scrutinizing every aspect of our portfolio and asking the question how can we maximize value.

We kind of crossed the, I would say, the hurdle a little bit on getting our capital allocation concentrated where we want it, that 95% kind of capital allocation. But the volumes are still playing a little bit of catch-up. We do think that things – assets like Equatorial Guinea are still very key to our overall business model delivery.

But to the extent that assets, again, beyond our resource basins and EG, we need to look at those very carefully and make sure that they are playing a unique and additive role within today's portfolio. And if they're not, we need to start looking at other options.

Then, as you saw from some of our commentary in the release, we did, in fact, have some transactional activity on the International front in some of our less material non-core assets. So, our expectation is that portfolio clean-up continues over time..

That was a very clear answer. I appreciate it. Thank you..

Thank you, Jeff. Appreciate it..

We have no further questions. I will now turn the call over to Mr. Lee Tillman for final remarks..

Well, I very much appreciate your questions today. I appreciate your interest in Marathon Oil. Thank you very much and have a great day. That ends our call..

Ladies and gentlemen, thank you for participating. This concludes your conference call. You may now disconnect..