Marathon Oil Corporation (NYSE:MRO): A Compelling Upstream Play Delivering Sustainable Free Cash Flow and Shareholder Returns

Published on September 24, 2024 | Ticker: MRO

Marathon Oil Corporation (NYSE:MRO) is an independent exploration and production company focused on high-quality U.S. resource plays, including the Eagle Ford in Texas, Bakken in North Dakota, Permian in New Mexico and Texas, and STACK and SCOOP in Oklahoma. The company's U.S. assets are complemented by its international operations in Equatorial Guinea (E.G.).

Marathon Oil has delivered impressive financial and operational results, showcasing its ability to generate sustainable free cash flow and provide meaningful shareholder returns across commodity price cycles. In 2023, the company reported annual net income of $1,554 million, annual revenue of $6,407 million, annual operating cash flow of $4,087 million, and annual free cash flow of $2,054 million.

For the first quarter of 2024, Marathon Oil reported net income of $297 million, a decline from $417 million in the same period last year. This decrease was primarily driven by lower natural gas and NGL prices, as well as slightly lower sales volumes in the U.S. segment. However, the company's International segment saw a significant increase in revenue, with $51 million generated from the initial shipments of LNG under new global pricing contracts.

Marathon Oil's capital allocation framework remains focused on prioritizing shareholder returns. In the first three months of 2024, the company returned $350 million, or 41% of its cash flow from operations, to shareholders through dividends and share repurchases. Over the trailing 10 quarters, Marathon Oil has returned $5.8 billion to equity holders, including $5.2 billion in share repurchases, reducing its outstanding share count by 29%.

The company's balance sheet remains strong, with $49 million in cash and $2.2 billion in total liquidity as of March 31, 2024. Marathon Oil has an investment-grade credit rating and has been actively managing its debt, including the recent repayment of its $1.2 billion term loan facility using proceeds from a $1.2 billion senior notes offering.

Business Overview

Marathon Oil's operations are organized into two reportable segments: United States and International.

United States Segment

The U.S. segment explores for, produces, and markets crude oil and condensate, NGLs, and natural gas in the United States. Key assets include the Eagle Ford in Texas, Bakken in North Dakota, Permian in New Mexico and Texas, and STACK and SCOOP in Oklahoma.

In the first quarter of 2024, the U.S. segment generated revenues of $1,422 million, a decrease from $1,503 million in the same period last year. This decline was primarily due to lower natural gas and NGL prices, as well as slightly lower sales volumes. The segment's net income was $334 million, compared to $425 million in the first quarter of 2023.

International Segment

The International segment explores for, produces, and markets crude oil and condensate, NGLs, and natural gas outside the United States, as well as produces and markets products manufactured from natural gas, such as LNG and methanol, in Equatorial Guinea.

In the first quarter of 2024, the International segment generated revenues of $116 million, a significant increase from $64 million in the same period last year. This was driven by the company's initial shipments of LNG under new global pricing contracts, which realized an average price of $7.21 per mcf. The segment's net income was $82 million, compared to $89 million in the first quarter of 2023.

Operational Highlights

Marathon Oil's operational performance in the first quarter of 2024 was strong, with the company executing its plan and building on its multi-year track record of sustainable free cash flow generation, capital efficiency, and shareholder returns.

In the U.S., the company's oil production of 181,000 barrels per day was slightly above its guidance. Marathon Oil continued to enhance its capital efficiency through the use of extended lateral drilling, with approximately 25% of its first quarter wells to sales being 3-mile laterals. The company also disclosed approximately 600 high-quality refrac and redevelopment opportunities across the Bakken and Eagle Ford, which are complementary and additive to its primary drilling inventory.

In the International segment, the first quarter marked the transition to fully realizing global LNG pricing for Marathon Oil's Alba gas. Under the new contractual agreements, Marathon Oil began marketing its share of Alba LNG directly into the global LNG market, driving a significant increase in the segment's revenue. The company also sanctioned a high-confidence, low-execution-risk Alba infill program that offers risk-adjusted full-cycle returns competitive with its U.S. onshore portfolio.

Outlook

For 2024, Marathon Oil expects to generate $2.2 billion in free cash flow, equivalent to a mid-teens free cash flow yield. The company remains committed to returning at least 40% of its cash flow from operations to shareholders through a combination of its base dividend and material share repurchases.

The company's capital expenditure guidance for 2024 remains unchanged, with a midpoint of $2.0 billion. Marathon Oil expects its capital program to be heavily weighted towards the first half of the year, similar to its historical profile, with a significant sequential increase in oil production expected in the second quarter.

In Equatorial Guinea, the company expects total EBITDAX of $550 million to $600 million in 2024, assuming a $10 per MMBtu TTF price, a significant increase from the $309 million generated in 2023. This improved financial performance is expected to be sustainable, driven by the company's shift to global LNG pricing, ongoing methanol volume optimization, the sanctioned Alba infill program, and further monetization of third-party gas through the ethane gas cap.

Financials

As of March 31, 2024, Marathon Oil had a current ratio of 0.55 and a quick ratio of 0.48, indicating a weak liquidity position. The company's debt-to-capital ratio was 0.33, and its interest coverage ratio was 19.98, demonstrating a strong balance sheet and the ability to service its debt obligations.

Marathon Oil's cash and cash equivalents stood at $49 million, and the company had $2.2 billion in total liquidity as of the end of the first quarter of 2024. The company's investment-grade credit rating and conservative financial policies provide it with the flexibility to fund its operations, capital expenditures, and shareholder returns while maintaining a resilient balance sheet.

Risks and Challenges

Marathon Oil's business is subject to various risks and uncertainties, including volatility in commodity prices, regulatory changes, operational challenges, and geopolitical factors. The company's operations in Equatorial Guinea also expose it to country-specific risks, such as political and economic instability.

The company's ability to maintain its strong operational and financial performance is dependent on its continued execution and the successful implementation of its strategic initiatives, including the development of the Equatorial Guinea Regional Gas Mega Hub and the integration of its refrac and redevelopment programs.

Conclusion

Marathon Oil is a compelling upstream play that has demonstrated its ability to generate sustainable free cash flow and provide meaningful shareholder returns across commodity price cycles. The company's diversified asset base, capital allocation framework, and focus on operational excellence position it well to navigate the challenges of the industry.

With its strong balance sheet, investment-grade credit rating, and robust liquidity, Marathon Oil is poised to continue delivering value to its shareholders through disciplined capital deployment, strategic initiatives, and a commitment to shareholder returns. The company's guidance and outlook suggest continued financial and operational strength, making it an attractive investment opportunity in the E&P sector.

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