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Marathon Oil First Quarter 2019 Results

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   |    Thursday,May 07,2020

Marathon Oil Corp. reported its Q1 2020 results.

Marathon reported a first quarter 2020 net loss of $(46) million, or $(0.06) per diluted share, which includes the impact of certain items not typically represented in analysts' earnings estimates and that would otherwise affect comparability of results. The adjusted net loss was $(125) million, or $(0.16) per diluted share. Net operating cash flow was $701 million, or $550 million before changes in working capital.

Chairman & CEO Lee Tillman said: "I want to first extend my thanks to our resilient and dedicated employees and contractors, all of whom remain hard at work day in and day out, helping to supply our communities and our nation with the clean and affordable energy we need to power our way of life, as well as our eventual economic recovery. While the safety and health of our people remains my top priority, we continue to focus on the financial strength of our Company. In addition to the previously announced $1.1 billion reduction to our 2020 capital budget, we also expect to reduce our annualized cash costs by $350 million. We entered this unprecedented downturn on firm financial footing, and we believe we are taking the necessary steps to protect our hard-earned financial strength and flexibility."

Highlights

• Executing revised 2020 total capital expenditure budget of $1.3 billion or less, a reduction of at least $1.1 billion in comparison to initial 2020 guidance and a 50% reduction in comparison to actual 2019 capital spending
• Expect to capture annualized cash cost reductions of $350 million, or 20%, relative to initial 2020 budget
• Implementing broad-based cost saving measures, including base salary reductions for CEO and other corporate officers, reduction of Board of Director compensation, and U.S. employee and contractor workforce reductions
• Temporarily suspending quarterly dividend and share repurchase program
• Ended first quarter with $3.8 billion of liquidity, including $817 million of cash and cash equivalents and an undrawn revolving credit facility of $3.0 billion
• Investment grade credit rating at all three primary rating agencies, with recently completed reviews from Fitch and S&P
• Protected second quarter cash flow through 117,000 bopd of fixed price swaps and two-way collars at a weighted average floor price of $30.33/bbl

Tillman added: "In response to the challenges facing our industry, we are exercising the capital allocation flexibility inherent in our multi-basin portfolio. We're dramatically reducing our capital expenditures, including a pause in virtually all completion activity during second quarter, and we will continue to optimize our capital program in response to market conditions. We are also aggressively managing our cost structure. While returning capital to our shareholders remains a core Marathon Oil objective, we are temporarily suspending our dividend and share repurchase program, prioritizing our liquidity and balance sheet during this period of heightened uncertainty. We plan to resume building on our well-established track record of returning capital to our shareholders upon improved visibility into normalizing macro conditions and sustainable free cash flow generation. Collectively, we believe these proactive steps, along with the strength of our asset base, the resolve of our people, our execution excellence, and our investment grade balance sheet, position us well to navigate this challenging time for our industry."

United States (U.S.)

U.S. production averaged 340,000 net barrels of oil equivalent per day (boed) for first quarter 2020. Oil production averaged 207,000 net barrels of oil per day (bopd), in comparison to first quarter production guidance of 192,000 to 202,000 net bopd. U.S. unit production costs were $4.63 per boe, the lowest quarterly average since Marathon Oil became an independent exploration and production company. First quarter average completed well cost per lateral foot was down approximately 10% in comparison to the prior year average.

EAGLE FORD: Marathon Oil's Eagle Ford production averaged 114,000 net boed for first quarter 2020. Oil production averaged 72,000 net bopd. Marathon Oil operated four rigs and two frac crews on average during first quarter and brought 38 gross Company-operated wells to sales. The Company has suspended second quarter completion activity and plans to transition to a lower and more stable level of drilling and completion activity over the second half of the year.

BAKKEN: Marathon Oil's Bakken production averaged 110,000 net boed in the first quarter 2020. Oil production averaged 88,000 net bopd. Marathon Oil operated four rigs and 1 frac crew on average during first quarter and brought 25 gross Company-operated wells to sales. As in the Eagle Ford, the Company has suspended second quarter completion activity and plans to transition to a lower and more stable level of drilling and completion activity over the second half of the year.

OKLAHOMA: Marathon Oil's Oklahoma production averaged 74,000 net boed in the first quarter 2020. Oil production averaged 21,000 net bopd. The Company brought 13 gross Company-operated wells to sales during first quarter. Marathon Oil began the year operating three rigs and one frac crew in Oklahoma but suspended all drilling and completion operations before the end of first quarter. The Company currently does not expect to bring any additional wells to sales in Oklahoma this year.

NORTHERN DELAWARE: Marathon Oil's Northern Delaware production averaged 30,000 net boed in the first quarter 2020. Oil production averaged 17,000 net bopd. The Company brought 6 gross Company-operated wells to sales. Marathon Oil has suspended further drilling activity in the Northern Delaware, with only a limited number of wells to sales expected through the balance of the year.

RESOURCE PLAY EXPLORATION: In response to the dramatic fall in commodity prices, the Company has exercised the flexibility inherent in this program and has suspended further activity, beyond wells already in progress in the Texas Delaware oil play. The Company therefore expects to drive an approximate $100 million reduction to REx capital expenditures this year in comparison to initial guidance of $200 million. REx spending is fully contemplated within the Company's total capital spending budget of $1.3 billion or less.

International

Equatorial Guinea production averaged 82,000 net boed for first quarter 2020, including 14,000 net bopd of oil. Unit production costs averaged $2.35 per boe. The previously disclosed major turnaround at the AMPCO methanol facility was completed during first quarter.

Guidance

In light of the substantial change to global commodity prices and the macro environment, the Company has withdrawn previously provided guidance. At the revised capital spending budget of $1.3 billion or less, for full-year 2020, the Company now expects its underlying U.S. crude oil production to decline by approximately 8% on a divestiture-adjusted basis, with a similar percentage decline expected for boe production. Underlying International oil production is expected to decline by approximately 7% on a divestiture-adjusted basis, with a similar percentage decline expected for boe production. Underlying production guidance excludes the potential impact from production curtailments.

On this same underlying basis, full year 2020 U.S. unit production expense is expected to average $4.25/boe to $5.25/boe and full year International unit production expense is expected to average $2.25 to $2.75/boe. These unit production expense guidance ranges are consistent with previously provided guidance.

Marathon Oil currently expects that second quarter U.S. crude oil and boe production will be down sequentially due to curtailments along with natural decline from reduced activity. The Company will continue to assess the need for curtailments on an ongoing basis in response to market conditions.

Corporate

Consistent with a focus to continually reduce its cost structure, Marathon Oil expects to capture annualized cash cost reductions of approximately $350 million relative to its initial 2020 budget. Savings will be realized across numerous expense categories, including production expense, general and administrative expense, shipping and handling expense, and production taxes. Savings are expected to be fully realized on a run-rate basis by the end of this year, with approximately 40% of these savings attributable to the Company's fixed cost structure. For 2020, the Company expects to realize total cash cost savings of approximately $260 million, inclusive of severance and partial year timing impacts.

Cost saving measures include base salary reductions for certain corporate officers, a reduction of Board of Director compensation, and employee and contractor workforce reductions. More specifically, corporate officers, including the Company's President and Chief Executive Officer, the Company's Chief Financial Officer, and other corporate officers will experience temporary base salary reductions of 10% from May 4, 2020 through December 31, 2020. The Company's Board of Directors has also agreed to a temporary reduction of annual cash retainer fees for non-employee directors of 20% for the third and fourth quarter of 2020.

Additionally, broad workforce actions have taken place that reduce the Company's U.S. employee base by 16% and total contractor base by 70%. Such reductions reflect a realignment of Company resources with lower investment levels, while retaining a foundation of essential talent to support an efficient recovery in investment. The Company believes these actions, in addition to other measures, will drive a 17% annualized reduction to corporate general and administrative expense by the end of this year, in comparison to 2019.

Marathon Oil generated first quarter net operating cash flow of $701 million, or $550 million before changes in working capital. The Company made $40 million of dividend payments and executed $85 million of share repurchases during first quarter. In response to dramatic commodity price weakness and the significant uncertainty surrounding the near-term macroeconomic and global oil supply and demand outlook, the Company is temporarily suspending its quarterly dividend payment and its share repurchase program. While returning capital to shareholders remains a key objective for Marathon Oil, the Company is prioritizing financial strength and liquidity preservation in the current uncertain environment. The Company will revisit its return of capital policy in coming quarters, expecting to resume quarterly dividend payments pending improved visibility to normalizing macroeconomic conditions and global oil supply and demand balances.

Total liquidity as of March 31 was approximately $3.8 billion, which consisted of $0.8 billion in cash and cash equivalents and an undrawn revolving credit facility of $3.0 billion. Marathon Oil is investment grade rated at all three primary rating agencies, including recent reviews from Fitch and S&P, and has no significant debt maturities until November of 2022.

The adjustments to net income for first quarter 2020 totaled $(79) million before tax, primarily due to the income impact associated with unrealized gains on derivative instruments, partly offset by the full impairment of remaining goodwill.

Marathon Oil has added to its hedge positions with a primary focus on protecting near-term cash flow. As of May 4, 2020, the Company's second quarter open crude hedge positions include 117,000 bopd of fixed price swaps and two-way collars at a weighted average floor price of $30.33/bbl. Additional protection to second quarter cash flow has been added through fixed price sales agreements. The Company has also added hedges to protect near-term regional basis differentials and NYMEX trade roll exposure.