speechEVP, Operations Mitch Little Addresses
DUG Midcontinent’s Annual Meeting

September 20, 2017 – Oklahoma City, Oklahoma

 

I’m pleased to be here this morning to share a few thoughts on Marathon Oil and the bright future we see in the Oklahoma Resource Basins.

I wanted to start my comments today, though, by acknowledging the truly devastating effects that Hurricane Harvey caused in my home state of Texas last month and equally the destruction that Hurricane Irma caused across Florida. I know all of you saw the images during the storms, can recognize the significant struggles that many are still incurring, and can appreciate the long recovery process ahead.

Many in the Marathon Oil family were impacted -- either evacuated from their homes or have significant damage. But the good news is, all of our employees are safe and accounted for. As a company, we continue to vigorously support relief efforts through our own corporate contributions to the American Red Cross and other organizations. Our employees are out there volunteering and helping one another. And I know many of you here in the great state of Oklahoma have contributed. OKOGA organized a drive to collect and deliver supplies to the Texas Gulf Coast, which was incredible. Thank you.

There will be a massive humanitarian effort put forth to rebuild in Houston and these other communities in both Texas and Florida, but it’s going to take time. I encourage you to continue supporting the relief efforts if you are able. There are many great charitable organizations doing fantastic work.

Our employees are strong, they're committed and they're going to rebound from Harvey. And they got back to work just as soon as it was safe to do so. I could not be more proud or humbled to be part of such a great team.

I have been with the company for over 30 years now, including five great years here in OKC. While we have certainly seen change over our 130+ year history, I truly can’t think of a more dynamic or more transformative period, or time when we have made such a clear commitment to a strategic shift.

“Our employees are strong, they're committed and they're going to rebound from Harvey. And they got back to work just as soon as it was safe to do so. I could not be more proud or humbled to be part of such a great team.”

Mitch Little, Marathon Oil EVP, Operations

Marathon Oil has certainly undergone a remarkable transformation since becoming an independent E&P in 2011.

When we separated from our downstream assets, and became an Independent Upstream E&P 2 it also came with a new strategic direction – a focus on U.S. unconventional resource plays. And we’ve made considerable progress over the last five years to shift toward these lower-cost, higher-margin opportunities.

  • In 2013, only about two-thirds of our capital was allocated to the U.S. resources plays, with a large portion still directed to international, conventional exploration and oil sands mining.
  • Since then, we’ve divested assets that simply didn’t fit with our U.S. Resource Play focused strategy. In fact, in the last year alone, we’ve divested nearly $4 billion of non-strategic assets.   
  • Last year we sold our conventional assets in Wyoming, and in March of this year, we announced the divestiture of our Canadian oil sands mining business. 
  • We balanced these divestitures by also playing offense and strategically enhancing our STACK position and, most recently, completing two Permian Basin acquisitions for 91,000 net surface acres, primarily in the Northern Delaware.
  • Sticking with the Oklahoma focus – during this same time period, and inclusive of the STACK acquisition in 2016, we have grown our Oklahoma position to be the largest resource play position in our portfolio – having doubled our acreage position to about 340,000 acres, nearly tripled our unrisked resource in the Andarko Basin to over 3.0 Billion BOE, and grown our unconventional production by 7 fold from 7,000 BOED in mid 2012, to 49,000 BOED last quarter.
  • One of the most attractive aspects of the Oklahoma Resource Basins, is their multi-prospect / multi target nature -  we see more than 10 reservoirs across our acreage position – and in many cases – multiple targets are vertically stacked, providing multi-horizon development opportunities from a small surface footprint.

With our most recent transactions, we are now the only major U.S. E&P company to enjoy a strong position in the four best oil-rich U.S. resource basins: Oklahoma, Eagle Ford, Bakken and the Northern Delaware.

The transformation progress is also evident in our production mix which continues to become more concentrated towards higher margin barrels, with roughly 60% of this year's production coming from our unconventional assets in Oklahoma, Texas, North Dakota and New Mexico. For perspective, that 60% is more than double the contribution from 2013. And we expect this figure to keep trending higher in the years ahead, enhancing our margins while driving returns and cash flow higher.

With our most recent transactions, we are now the only major U.S. E&P company to enjoy a strong position in the four best oil-rich U.S. resource basins: Oklahoma, Eagle Ford, Bakken and the Northern Delaware.

 

We believe that over the long term, the Oklahoma Resource Basins will be one of the key
growth engines in our portfolio with capability of delivering well over 100,000 boe per day.

Read About Our Oklahoma Operation

In the longer term, we’re well positioned to deliver profitable and compelling oil and BOE growth rates, with an objective to live within our cash flows.

We have the quality and depth of inventory across all 4 basins to generate profitable returns, and exciting growth of 18-22% in our Resource Plays from 2017-2021, within cashflow, at a WTI price in the low $50s.

It’s amazing to think… 100 years ago, Marathon Oil drilled its first Oklahoma exploration well in the Cushing field in Creek County. For most of the next century, our focus here was on conventional drilling. 

Our state operations were headquartered in Tulsa for much of that time. Then, in 1990 we moved to our current office off of the Northwest Expressway in Oklahoma City.

Our operations scaled up, and then back down again, in response to market conditions and what drilling technology allowed us to do.

 

About 10 years ago, the game changed dramatically. Unconventional drilling revitalized the oil and gas industry in the United States, including here in Oklahoma.

In 2008, we drilled our first Oklahoma Resource Basins horizontal well in the Cana Woodford, which would become one of the Company’s core areas. Three years later, we drilled another horizontal well in the Woodford, Knox field, which later became the SCOOP.

And that was just the beginning.  

Oklahoma is a big part of our strategy and plans for growth. As I mentioned earlier, Marathon holds more than 340,000 net surface acres between STACK and SCOOP, with more than 200,000 of those acres in the STACK.

We believe that over the long term, the Oklahoma Resource Basins will be one of the key growth engines in our portfolio with capability of delivering well over 100,000 boe per day. In fact, our Oklahoma production posted double-digit growth in the second quarter, up 11% sequentially to 49,000 BOE per day. 

Across various portions of our Oklahoma leasehold, we see multiple vertically stacked unconventional targets. Our primary STACK and SCOOP target intervals are the Meramec, Woodford and Springer formations, with Meramec receiving the most attention. Other 
secondary zones have potential as well. It’s still very early in the acreage development and we see a lot of room for improvement … and more room for delineation of the boundaries.

Within our core footprint, we cover a gross area of approximately 120 miles by 50 miles. Across that span the geology changes.

  • We see total vertical depth ranging from about 6,000 feet to more than 15,000 feet.
  • Low permeability shale to naturally fractured calcareous sandstone.
  • And including normally pressured black oil as well as higher pressured, deeper volatile 
    oil.

 

We’re working to gather as much data as we can, and leverage technology. Our team is tackling this problem solving with gusto!

While the play is young, well performance is impressive across a very wide area, and across all phase windows. Our team continues to optimize landing targets, the number of wells per section and completion design for the primary Meramec reservoir – all with the goal of maximizing returns. Reservoir quality, phase window and completion style all play a role – and unique solutions will need to be developed and applied.

This year we’ve been focused on lease retention, Stack infill spacing pilots to prepare for full-field development, and achieving the highest risk-adjusted returns.

In the second quarter, we brought 20 gross operated wells to sales, including the Chapman well, which was an extended lateral, Meramec volatile oil well, that achieved an average 30-day IP of nearly 3,200 BOE per day, with about 52% of that oil.

Our Meramec volatile oil extended lateral wells in the second quarter are all exceeding our 1.5 million BOE type curve. The Calf Rope and Strack wells came online at the beginning of Q2 and continue to perform above type curve after more than 90 days online.

We also brought our second Meramec infill spacing pilot online in Q2, the Hansens, which was just the third industry full section spacing pilot in the black oil window. The Hansen’s are located in the shallower, normally pressured area of the Black Oil  Window – which has a material cost advantage.  Completed well costs for the 6 Hansens infill wells averaged $4.3 million, about half the cost to test the higher pressured volatile oil in Western Kingfisher or Eastern Blaine. The infill was designed as a multidimensional pilot to maximize trials from spacing and completion techniques. The 5 infill wells in the western part of the section effectively tested an 8-well per section density across the Upper and Lower Meramec. Pump rates, fluid rates, fluid volumes and use of diversion were altered across the pad.

We collected a cadre of technical data, including the use of electromagnetic proppant, microseismic and other fracture characterization methods that we're integrating with well performance data to allow us to continue optimizing completion techniques. And we will continue to test multiple completion approaches in our upcoming trials to ensure that we have an optimized combination of spacing, proppant loading, pump rate and entry points to deliver maximum value.   We'll continue to monitor extended production and integrate the technical data to further optimize future trials. For the balance of the year, about half of our wells to sales will be for leasehold protection, while progressing select infill pilots and delineating parts of the play.

As we look forward, our capital allocation priorities remain the same, and Oklahoma sits among the top of the list. Our 2018 program in Oklahoma should be focused heavily toward STACK development and continued leasehold, delineation and infill pilots. Across all four of our unconventional basins, we look to allocate to the highest risk-adjusted returns.

As we look forward, our capital allocation priorities remain the same, and Oklahoma sits among the top of the list. Our 2018 program in Oklahoma should be focused heavily toward STACK development and continued leasehold, delineation and infill pilots. Across all four of our unconventional basins, we look to allocate to the highest risk-adjusted returns.

We don't pretend to predict pricing,  but rather, we want to prepare our business to be successful across a broad range and a more moderate range of pricing.

In this market, our game plan has been to prioritize those aspects of our business within our control -- making every dollar count by focusing on the lowest-cost, highest-margin opportunities. We’ve reset our cost structure, and continue to put downward pressure on production costs, G&A costs, and capital costs across all parts of our business. 

We’re looking for the best ways to continue managing costs while preparing for future growth while living within our means. We’re doing that by operating more efficiently and effectively AND working with our partners to create savings—thereby lowering our enterprise break-even price and delivering growth within cash flows at moderately higher pricing.

And that growth from across our industry generates meaningful revenue for the state of Oklahoma. When drilling rigs are running, the oil and natural gas industry is generating additional direct tax revenue for the state through sales tax and income taxes. One long-lateral horizontal rig running at full capacity for one year generates an industry average of $4.2 million in state and local taxes, according to OKOGA.

That leads me to an important point that many of our companies have cautioned legislators about. By changing the gross production tax rate in an attempt to generate more tax revenue, the state will be increasing volatility in its budget. No amount of tax increases on the oil and natural gas industry will dig the state out of a budget deficit. It’s flawed logic. In fact, an increase in the gross production tax rate could negatively impact investment across Oklahoma.

Oklahoma is business-friendly with common sense regulation and a history of collaboration around important issues. Let’s keep it that way.

Despite these challenging and uncertain times, we’re planning for our next century in this great state. 

There’s no doubt, we are optimistic, bullish, about this great state and the potential for growth.

Every year, every decade, there have been milestone achievements and progress—we will continue to innovate and drive value for the State and our shareholders.

I know I speak for all of our employees and contractors when I say: We can’t wait to see what the next century brings.

 

 

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