Marathon Oil Corporation (NYSE:MRO) Q3 2021 Earnings Conference Call November 4, 2021 9:00 AM ET

Company Participants

Lee Tillman – Chairman, President, and CEO
Guy Baber – Vice President Investor Relations
Dane Whitehead – Executive VP and CFO
Pat Wagner – Executive VP of Corporate Development strategy
Mike Henderson – Executive VP of Operations

Conference Call Participants

Jeanine Way – Barclays
Arun Jayaram – JP Morgan
Scott Hanold – RBC Capital Market
Doug Leggate – Bank of America
Neal Dingmann – tours Securities
Scott Gruber – Citigroup

Operator

Welcome to the Marathon Oil Third Quarter Earnings Conference Call. My name is Cheryl 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. [Operator instructions] Please note that this conference call is being recorded. I will now turn the call over to Guy Baber, Vice President Investor Relations. You can begin, Sir.

Guy Baber

Thank you, Cheryl. And thank you as well to everyone for joining us this morning on the call. Yesterday after the close, we issued a press release, a slide presentation, and an investor package that address our Third Quarter 2021 results. These documents can be found on our website at Marathonoil.com. Joining me on today's call are Lee Tillman, our Chairman, President, and CEO, Dane Whitehead, Executive VP and CFO, Pat Wagner, Executive VP of Corporate Development strategy, and Mike Henderson, Executive VP of Operations. As always, today's call will 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. I refer everyone to the cautionary language included in the press release and presentation materials, as well as to the risk factors described in our SEC filings. With that, I will turn the call over to Lee, who will provide his opening remarks. We'll also hear from Mike, Dave, and Pat before we get to our question-and-answer session. Lee.

Lee Tillman

Thank you, Guy. And good morning to everyone, listening to our call today. I want to start on once again thanking our employees and contractors for their continued dedication of hard work, for their commitment to safety and environmental excellence, and for their contributions to another quarter of outstanding execution and financial delivery. While I get the privilege of talking about our Company's impressive results and outlet today, it is their hard work that makes all of this possible. Through our commitment to capital discipline and our differentiated execution, we are successfully delivering outsized financial outcomes for our shareholders, highlighted by more than $1.3 billion of free cash flow year-to-date For our $1 billion full-year 2021 capital budget at forward curve commodity pricing, we now expect to generate well over $2 billion of free cash flow this year.

And a reinvestment rate below 35% and a free cash flow breakeven below $35 per barrel [Indiscernible]. We are successfully delivering on all of our financial and operational objectives, and achieving bottom line results that we will put head-to-head against any other energy Company and against any other sector in the S&P 500. This strong financial performance has enabled us to pull forward our balance sheet targets. And this further improvement to our already investment-grade balance sheet has given us the confidence to dramatically accelerate the return of capital to equity holders. Under our unique return on capital framework, our shareholders get the first call on cash flow. A minimum of 40% of our total cash flow from operations in the current price environment.

Consistent with our commitment to shareholder returns and our objective to pay a competitive and sustainable base dividend, we have raised our base dividend by 20% this quarter. This is the third quarter in a row that we have increased our base dividend representing a cumulative 100% increase in the end of 2020, a sign of the increased confidence we have in our business. We are also targeting approximately $500 million of share repurchases during Fourth Quarter with $200 million already executed. At a free cash flow yield north of 20%, we believe our equity offers tremendous value. Additionally, there remains a dislocation between our equity and strengthening commodity prices coupled with a more mature business model that underwrites repurchases through the cycle. Further, buying back our stock for good value provides the added potential of significantly reducing our share count, meaningfully improving all of our per-share metrics even under a maintenance scenario, and increasing our longer-term capacity for continued per-share base dividend increases.

Looking ahead to fourth quarter, including our base dividend and planned share repurchases, we expect to return approximately 50% of our total cash flow from operations to equity holders. Fully consistent with our return of capital framework that prioritizes the shareholder first. Our financial flexibility and the power of our portfolio in the current commodity price environment provided the confidence for our Board to also increase our total share repurchase authorization to $2.5 billion to ensure we can continue executing on our return of capital plans as we progress through 2022. And perhaps most importantly, everything that we are doing is sustainable, backed by our 5-year benchmark maintenance scenario and our ongoing pursuit of ESG excellence through top quartile safety performance, significant reductions to our GHG intensity, and best-in-class corporate governance. With that brief overview, I will turn it over to Mike Henderson, our Executive VP of Operations, who will provide an update on our execution relative to our 2021 business plan.

Mike Henderson

Thanks Lee, third quarter operations were against all odds, demonstrating that we remain on track to achieve or outperform all of the key 2021 financial, operational, and ESG related objectives that we established at the beginning of the year. First and foremost, our consistent execution is translating to outside financial outcomes, highlighted by over $2 billion of expected free cash flow, with a material sequential increase expected in the fourth quarter. A full-year 2021 reinvestment rates below 35%, and a full-year corporate free cash flow comfortable breakeven below $35 per barrel WTI. Our gas capture during third quarter also exceeded 99% as we continue to reduce our GHG emissions intensity. There is no change to our $1 billion full year 2021 capital budget. Raising our spending levels this year has never been a consideration consistent with our commitment to capital discipline. There's also no change to the midpoint of our full year Total Company Oil or Total Company Oil Equivalent Production Guidance.

We're also raising our full year 2021 EG equity Method Income Guidance for the 2nd consecutive quarter to a new range of $235 million to $255 million due to stronger commodity prices. This is a 30% increase from the guidance we provided last quarter, and 120% increase relative to our initial guidance at the beginning of the year. Our full-year production and EG equity net of income guidance truly contemplate an unplanned outage we experienced in EG late in the third quarter. Looking ahead to fourth quarter, we expect to finish the year strong with our total Company all production increasing to between 176,000 and 180,000 180 thousand barrels of oil per day in comparison to 168 thousand barrels of oil per day during the third quarter. Our quarterly production volumes are always subject to some normal variability associated with barrel framing, but that small, significant sequential increase is due largely to deferred [Indiscernible] production associated with third party midstream outages, [Indiscernible] well performance, and solid base production management.

We also expect our fourth quarter total Company oil equivalent production to be similar to the third quarter at 345,000 barrels of oil equivalent per day. With a sequential increase in the U.S. offsetting a sequential decrease in Equatorial Guinea associated with previously referenced outage. I will now turn it over to Dane Whitehead, EVP and CFO, who will discuss how our strong operations are contributing to an improved Balance Sheet and an acceleration in return of capital to equity holders.

Dane Whitehead

Thank you, Mike. As I noted last quarter, our financial priorities are clear and unchanged, generate strong [Indiscernible] returns with significant sustainable free cash flow, [Indiscernible] already investment-grade Balance Sheet, and return significant capital to shareholders. Early in the Third Quarter, we retired $900 million in debt bringing total 2021 gross debt reduction to $1.4 billion and achieving our targeted $4 billion gross debt level. With this milestone, we no longer feel the need to accelerate additional debt reduction and going forward, we plan to simply retired debt as it matures. And please note that we have no significant maturities in 2022. This Balance Sheet repositioning was achieved well ahead of our original schedule, which opened the door to begin returning a significant amount of capital to equity holders. To be clear, these are returns beyond our base dividend, which we just increased for the third consecutive quarter.

Our base dividend is actually up a 100% over that time period. Now, at $0.06 a share per quarter in the $50 million of annual interest savings will realize due to -- or gross debt will help fund a significant portion of this base dividend increase. Our equity return framework calls for delivering a minimum of 40% of cash from operations to shareholders when WTI is at or above $60 a barrel. This is a pure leading return of capital commitment. It is also competitive with any sector in the S&P 500. Our Fourth Quarter is shaping up to be an exceptionally strong pre-cash flow quarter due to a combination of higher commodity prices and oil volumes quite a bit stronger than Third Quarter. At recent strip pricing, this could take our operating cash flow to approximately 1.1 billion or about a 25% sequential increase versus the Third Quarter. Add to that, an expected increase in dividend distributions from EG and lower CapEx relative in third quarter peak, in fourth-quarter free cash flow could almost doubled to north of $850 million.

So in Q4, we expect to have lots of flexibility to exceed our 40% of operating cash flow minimum thresholds for equity returns. In fact, through our base dividend and approximately $500 million of share repurchases. We expect to return approximately 50% of our operating cash flow to investors during the fourth quarter, while further improving our cash balance and net debt position. As we also mentioned, we believe that buying back our stock in a disciplined fashion makes tremendous sense. There aren't many opportunities in the market right now that provide a sustainable free cash flow yield north of 20%. Stepping back, the full-year 2021 financial delivery is exceptional; $140 million in base dividends, $1.4 billion in debt reduction, and $500 million of share repurchases, representing a total return to investors combined debt and equity of over $2 billion.

We're over 60% of our expected full-year operating cash flow [Indiscernible] commodity prices. Our actions in 2021 have successfully repositioned the Balance Sheet and kicked off a strong track record of equity returns. Going forward, we're going to stay laser-focused on our financial priorities and our return of capital framework taking into account our cash flow outlook when making return decisions. Because our framework is based on a minimum percentage of cash flow from operations and not free cash flow, the equity investor will have the first call on cash not the drill bit. I'll now turn the call over to Pat Wagner, EVP of Corporate Development Strategy for an update on that resource play exploration program.

Pat Wagner

Thanks, Dane. We recently completed our 2021 [Indiscernible] drilling program, which is focused on the continued delineation of our contiguous 50,000 net acre position in our Texas Delaware Oil Plant. As a reminder, this is a new play concept for both the Woodford and Bareback that was secured through grassroots leasing, a very low cost of entry and with 100% working interest. It is essentially an exploration bolt-on that is complementary to our already established position in the Northern Delaware. We brought online our first multi-well pads during the third quarter. And while it is still very early, initial production rates in both the Woodford and Merrimack are exceeding our pre -drill expectations. more specifically, one of the Woodford wells achieved an IP 30 of almost 2,100 barrels of oil per day at an oil cut of 66%. This appears to be the strongest Woodford oil well ever drilled in any base.

And while we don't yet have 30-day rates for the other two wells, early indicators, including IP 24s, are all very positive. Our primary objective of this 3-well pad was to execute our first spacing testable play. To date, we're seeing no evidence of interference between the Woodford and Merrimack consistent with our expectations due to over 700 feet of vertical separation between the two sales. As I stated, it's still early and we need more production history to draw stronger conclusions, but we're certainly encouraged by the initial results from this first spacing tests, including the record Woodford productivity. The second objective was to continue to progress our learning and cost improvements in completed well costs. We expect to ultimately deliver well costs comparable to those used in the scoop and are aggressively leveraging our substantial experience hopeful how much it's at end.

In total, we have now brought our line 9 wells since play entry to the successfully delineated our positions. 6 wells with longer dated production have collectively demonstrated strong long-term well productivity. Oil cuts greater than 60%, lower oil ratios below one, and shallower declines. Looking ahead to 2022, you should expect us to continue to integrate our learnings and progress our understanding of this promising play. However, we will do so in a disciplined manner and within our strict re-investment rate capital allocation framework. I will now turn the call over to Lee, who will wrap this up.

Lee Tillman

Thank you, Pat. I will close with a quick summary of how we have positioned our Company for success and a preview of what to expect from us in 2022. Spoiler alert, there will be no surprises in 2022 and no compromise with respect to our capital return framework. If we [Indiscernible] put some focus on the financial benchmarks that matter, we are delivering top-tier capital efficiency, free cash flow yield, and Balance Sheet stream. Our 2021 capital rate of sub 35% and capital intensity as measured by capex per barrel of production, are both the lowest in our independent E&P peer group. a strong validation of our leading capital and operating efficiency. We're also one of the few E&Ps expecting to deliver a 2021 reinvestment rate at or below the S&P 500 average. We're also delivering top quartile free cash flow yield this year among our peer group, and well above the S&P 500 average. And, we are doing all of this with an investment grade Balance Sheet at sub one-time net debt to EBITDA, a 2021 leverage profile also well below both our peer group and the S&P 500 average.

In short, we are successfully delivering outsized financial performance versus our peer group and the broader market with the commodity price support we are experiencing this year. Yet perhaps more importantly, we are well-positioned to deliver competitive free cash flow and financial performance versus the broader market at much lower prices than we see today; all the way down to the $40 per barrel WTI range. This is the power of our sustainable cost structure reductions, our capital and operating efficiency improvements, and our commitment to capital discipline, all contributing to a sub $35 per barrel breakeven. Looking ahead to 2022, our differentiated capital allocation framework that prioritizes the shareholder at the first call on cash flow generation will not change. Our commitment to capital discipline will not waver with maintenance oil production, a case to be as we finalize our 2022 budget.

We believe the right business model for a mature industry prioritizes sustainable free cash flow, a low reinvestment rate, and meaningful returns to equity investors, not broad capital. Recall what we entered is the unique five-year maintenance scenario earlier this year that featured $1 to $1.1 billion of annual spending, $1 billion of annual free cash flow at $50 WTI, and a 50% reinvestment rate. Given we're no longer living in a $50 per barrel environment and that prices are currently north of $80 per barrel, it is both prudent and reasonable to consider some level of limited inflation up to about 10% that would yield modest pressure on the maintenance scenario capital range. Yet importantly, this modest level of inflation pales in comparison to the uplift to our financial performance in the current environment.

With a 2022 maintenance scenario free cash flow potentially on the order of $3 billion at recent strip pricing, or nominally 3 times the $50 benchmark outcome. And under such a maintenance scenario, we're positioned to lead the peers once again with a 2022 free cash flow yield above 20%, are in excess of the S&P 500 free cash flow yield of approximately 4%. Our minimum 40% of cash flow target translates to about $1.6 billion of equity holder returns next year. But that is a minimum, and we see significant headroom to drive that number higher. At the expected 4Q run rate of 50% of CFO, 2022 equity holder returns would increase to approximately $2 billion, while still improving our cash balance and net debt position. Even at a more conservative $60 per barrel oil price environment, our minimum 40% of cash flow target still translates to about $1.1 billion of equity holder returns in 2022.

Applying 2022 consensus estimates to the return framework disclosed by our peers only confirms our leading return of capital profile, with a double-digit cash distribution yield to our equity investors in 2022. The confidence in this outsized delivery is further supported by recent board action to increase our share repurchase authorization to $2.5 billion to ensure we have sufficient runway to continue delivering on our return of capital commitment next year. To close, our Company was among the first to recognize the need to move to a business model that prioritizes returns, sustainable free cash flow. flow, Balance Sheet improvement, and return of capital. We have also led the way and better aligning executive compensation to this new model and with investor expectations. We're successfully executing on our model today delivering both financial outcomes and ESG excellence. They're competitive not just with our direct [Indiscernible] peers, but also the broader market. With that, we can open up the line for Q&A.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. [Operator instructions]. Our first question comes from Jeanine Way, from Barclays. Your line is now open.

Jeanine Way

Hi. Good morning, everyone. Thanks for taking our questions.

Dane Whitehead

Morning.

Jeanine Way

Good morning. Our first question, maybe for Dane. Can you walk us through the mechanics of how you're determining the buyback tranches? It looks like it could be on a concurrent quarterly basis, but we just wanted to get some more detail on that. And how did you decide on the 50% level of returns for 4Q 21 other than it needs a criteria of more than 40%? And I guess, what would make you change that number quarter-to-quarter?

Dane Whitehead

Great questions. I think there's a couple of different aspects to it. One is a little more tactical about how we execute the share repurchases. So briefly on that, we execute under short, 30 to 60 day -- can be 5-1 programs, so we can set those in motion and execute them over a short period of time. And that -- because of that short duration, it allows us to really calibrate return percentages more on a real-time basis based on what we're seeing in the business, whether it's capital spend levels, commodity prices, other aspects of what's going on. It also gives you the advantage in the can be 5-1 of riding through blackout periods. We view that stepping back a little more context for the decision process about when do you exceed the minimum -- our decisions are always grounded in our financial priorities which we talk about on a regular basis; generate corporate returns, significant sustainable free cash flow, bullet proof Balance Sheet, and then return significant capital to shareholders.

We just talked about what we've done year-to-date, generated significant operating and free cash flow. Q4 looks like by far the best quarter yet from a financial perspective. The Balance Sheet is really strong and we retired $900 million debt in September a billion for year-to-date. So we're at $4 billion gross debt target ahead of schedule, and that only opens the door for much more substantial returns to equity holders if the conditions warrant. We also bumped the base dividend for the third time this year. It's up 100% over that period. And fuel's competitively positioned right now and also very sustainable through recycles at the current level. So we turned to the capital return framework that calls for returning a minimum of 40% of operating cash flow to shareholders when WTI is above $60.

We look at Q4, not only is WTI well above $60, all the commodity complex is high. Oil volumes should be quite a bit stronger than they were in Q3. We expect an uptick in dividend distributions from EG and lower capex versus Q3, which was the high point of our burn rate for the year on the capital side. So we expect that lots of flexibility to exceed 40%. We also have a desire to continue to add some level of cash to the Balance Sheet. As we go through the year ultimately our plans are to pay off debt -- future debt maturities as they mature. And they aren't significant in the future, but we'd sized have that level of flexibility, and in the process reduce our net debt. So all of this, I think it's a great example of our shareholder return framework and action.

It's -- it's based on a minimum percentage of operating cash follow, but we have the ability and latitude to make real-time decisions to exceed those minimums when conditions are right; they sure appear to be in Q4, so there's a little bit of judgment involved. Is it 50% or 55% or whatever that is, but we just need to make a call and over time, we'll have the ability to modulate that accordingly.

Jeanine Way

Okay, great. Thank you for the detailed answer. I appreciate it.

Dane Whitehead

Okay.

Jeanine Way

Maybe my second question, maybe for Mike. The well per foot, it decreased quarter-over-quarter in the Eagle Ford and the Bakken. Would you characterize those decreases as sustainable for '22? And any color just on current inflation on your outlook for '22 would be helpful. For example, one of your peers mentioned earlier this week that they would adjust '22 activity is inflation warranted it. And I believe Lee said just now in his prepared remarks that 10% cost inflation would put pressure on the maintenance scenario and I didn't catch whether that meant on the 1.1. capex or if that meant on activity. Thank you.

Mike Henderson

Yeah, Jeanine, I'll take that. I'll start with the expectation on the well costs for 2022. Well, it seems we're still working up on our bottoms-up planning and obviously as we noted the macro-environment's pretty dynamic at the moment. To highlight it's Third Quarter being the lowest quarter of the year, turned to CWC for foot costs in both Eagle Ford and Bakken. We're actually year-to-date down 12% from where we were in the 2020 on average. So what I'd see file that's probably going to be our starting point for '22 and similar to what you've seen in '21, we'll continue to progress opportunities to improve our cost structure. I think as we noted, we could improve -- should start to see some inflation in '22. On the inflation question, maybe a little bit more color there. Please start with '21, how it characterize dot inflation very much in check for '21. It's been largely confined into to steel and CTG. We have fully accounted for that and our capital, our $1 billion capital budget.

As noted, we're working through '22 at the moment. And it seems reasonable to some modest inflation. I think I wouldn't highlight that. we are looking to take some actions. So for example, we secured some of our Reg frac [Indiscernible] and [Indiscernible] requirements for next year. I think maybe the area where there's quite a bit of uncertainty is labor. But that's probably a broader issue economy-wide. So as we noted, we could see up to 10% inflation. I think that will depend on activity levels. But again, similar to '21, we're going to be working hard to mitigate and offset any of those cost pressures.

Jeanine Way

Okay. Thank you very much.

Lee Tillman

Yeah, Jeanine, maybe just around out to just for clarity. As I mentioned in my remarks, when you think about the benchmark case being predicated on really $50 WTI and that capital range that we provided that 1 to 1.1, I think applying that up to 10% to that range is what at least gets you in the correct zip-code

Guy Baber

under a maintenance scenario for 2022.

Jeanine Way

Perfect thank you.

Guy Baber

Thank you, Jeanine.

Operator

Thank you. Our next question comes from Arun Jayaram from JP Morgan. Your line is now open.

Arun Jayaram

Good morning. Mike and perhaps Lee, I wanted to get your thoughts on how you plan to lean on some of the basins outside of the Bakken and Eagle Ford. Obviously, in a lower commodity price environment that you guys have really focused on your core of the core inventory in both those plays. But how should we think about in a much better environment for oil gas and NGLs in capital allocation to place such as Oklahoma and the Permian?

Lee Tillman

Yeah, Rin. This is Lee, I think consistent with how we talked about in the past, we do expect to be increasing our Oklahoma and Permian allocation up to that 20% to 30% range under again, a maintenance scenario. For reference, those two basins accounted for more like 10% of our allocation in 2021 this year. Clearly, all of the commodity prices are moving in a very constructive direction which really has the net effect of really lifting all boats even in our black oil plays of the Bakken and the Eagle Ford. And I think where we're really seeing the benefit of having that strength across the commodity complex is the fact that we have this very balanced portfolio already with about a 50 Percent exposure to oil and a 50% exposure to natural gas and NGL.

So there's no -- our thinking hasn't changed. We believe there are extremely strong and competitive opportunities in both Permian and Oklahoma, the strengthening and NGL and gas has only served to elevate those further. But oil has also elevated the returns in our other basins as well. So we feel the strength of the balanced portfolio gives us that great exposure across the commodity complex.

Arun Jayaram

Great, great. And Lee, my follow-up is maybe just to get some -- a bigger picture question for you on just U.S. resource basins. 2 of your larger peers in the Bakken, Ryan and Harold, have announced large multi-billion dollar transactions in the Permian and I want to get your thoughts on what this says about the Bakken. They're 2 of the larger operators in the Bakken -- in that basin, pardon me. And just how you're thinking about portfolio renewal. Pat gave us an update on the Rex program, but you do have some other inventory expansion opportunities within your existing basin so, wanted to see how you're thinking about portfolio renewal and some of the moves of some of your key peers in the basin.

Lee Tillman

Yeah, Arun. First of all, I would just start off by saying any transaction, any M&A work whether it'd be large or small, we're always going to view that through the lens of our very compelling organic case, our peer-leading financial delivery, and really a strict criteria that's predicated on financial accretion. And so that's really the filter that we are going to view any type of opportunity. The same discipline that we apply to our organic opportunities, we certainly are going to apply in the inorganic space. We believe obviously that the Bakken continues to offer exceptional returns. If you look at some of the material within our earnings deck, you will see that certainly in some of the appendix slides, just how competitive Bakken is relative to the other place here in the U.S. But for us it really, anything that we would look at inorganically would have to offer significant value.

It would have to come in and move our full-cycle returns in the right direction. And that quite frankly is a very high margin today. You could argue that the M&A market has become a little bit more of a seller's market today with the commodity prices that we're experiencing. And with over 10 years of extremely strong inventory, we simply don't see the need to do anything dramatic in the market. Certainly not do anything that would be dilutive to our exceptional financial delivery. But however, having said that, our portfolio renewal -- what we have talked about in the past is that, embedded in that capital budget that we talked about each and every year, we have kind of up to about 10% of that dedicated to what we consider to be organic enhancement opportunities that could be things like redevelopment opportunity than the Eagle Ford and the Bakken. It could be things like the Texas Delaware oil play that Pat addressed in the opening remarks.

And we want to make sure that we continue those programs on a consistent and sustainable basis. As we look out in those out years and make best attempts to continue to replace and replenish our inventory. I think the Texas Delaware oil play is a great example of some things that we were able to get into for very low entry cost. And now, certainly we see today a very clear path for that to compete for capital allocation. And we still have some work to do in terms of getting some longer dated production information from the spacing tests and we want to drive some learnings into the DMC program. But there's definitely a path there for that asset now to compete head-to-head with some of the best in our current portfolio. So hopefully, I addressed all of your questions, Arun. Did I miss anything?

Arun Jayaram

Well, just maybe a quick follow-up, Lee. In terms of the Texas Delaware just on this topic of portfolio renewal, are you aware of any of your peers which are testing the play at this point?

Pat Wagner

Hi Arun, this is Pat. There have been some other tests, specifically to the south of us. There have been some Woodford test, but that area's a little bit lower pressure and not as thick. And then on the eastern side of the platform, there's been some Merrimack tests as well, but some of them have been okay. But again, not as good a pressure as ours. We think we absolutely have the best sweetest spot of the play where we have both Woodford and Merrimack stacked with good separation between them and we've had good results to-date, obviously.

Arun Jayaram

Great. Thanks a lot.

Operator

Thank you. Our next question comes from Scott Hanold of RBC Capital Market. Your line is now open.

Scott Hanold

Thanks. Good morning all. I was wondering if you provided some good framework for 2022 and just to clarify a couple of things. One, obviously you're having a big uplift in oil production here in 4Q, should we think about the baseline maintenance cases, your average '21 oil production, or should we look more to the exit rate of where you might be this year and then on the capital spending concept, can you remind me within that circle, $1 to $1.1 billion dollars in capex, where does Rex capital fall within that? Is that included in that or would that be in addition?

Lee Tillman

Yes. First of all on your first question, Scott. Yes, you should think about our -- a maintenance scenario in 2022 being calibrated to our average 2021 oil production. All of us experienced some variability quarter-to-quarter in our production numbers. It's natural in the short-cycle investments that as you see that natural variability. But again, we'd be looking at a maintenance scenario to drive toward that notional 172,000 barrels of oil per day. Your second question, Scott, around our capital spending number, even in the benchmark case of one-to-one one, That number is all inclusive and includes all of our investments, including Rex as well as any other organic enhancement opportunity. Just as the $1 billion budget did this year. I mean, one of the reason that saw a little bit of peak CapEx in third quarter was the impact of bringing the 3-well pad online in the Texas Delaware Oil Plant. So that is should be looked at as an all in number. There's nothing carved out and put on the side.

Scott Hanold

Okay. That's great. Appreciate that. And pivoting back to shareholder returns. You guys obviously have a very robust buyback sitting in front of us. And it seems like that plus goosing up that fixed dividend over time, the plan. I know the answer is probably going to be, let's wait until we actually harvest some of this free cash flow. But as we look forward, even with the increased buyback authorization, it looks like you're going to eat to that pretty quickly next year if these commodity prices hold out. And as you continue to look forward, is the buybacks still going to be you're likely primary outlet for that or do you see any other opportunities going forward such as special or variable dividends in the mix as you look longer-term bigger picture?

Dane Whitehead

Yeah, Scott, this is Dane. Let me take a first kind of that at least. I think where we sit today, it's happening no - brainer. When you look at the valuation of our stock and the fact that it's yielding in excess of 20% free cash flow that that's the place to go with the excess distribution to shareholders because great value. And if that persists than that will still be the first call on incremental cash above the base dividend. But we haven't said that's the only thing we'll ever do, obviously, over time, than to keep your options open and to manage through this process that the $2.5 billion authorization, they're truly no magic to that number. It was clear to us as of yesterday when that authorization went in place, we had 1.1 billion of remaining authorized capacity. And we would chew through a chunk of that getting through this Fourth Quarter $500 million that we talked about going into the year pretty light so we just asked the board to top that up 2.5 billion as of today and that will give us good running room into next year and if we need to up that authorization over time, we can certainly do that.

Lee Tillman

I do think Scott clearly, when you look at the potential financial delivery in 2022, we have a unique opportunity just as we did in fourth quarter to not only deliver against the minimum of 40% back to equity holders but to actually exceed that. But again, that's going to be calibrated to real-time cash flow from operations and that will be something that we'll watch closely. I think Dane did a great job of laying out the mechanics, but I also wanted to stress one thing we've been really clear on. We developed our framework to really give the investor confidence in the quantum. The quantum of cash we were going to get back to shareholders. And we knew that that would be a competitive and sustainable base dividend plus something else. That something else clearly today, is share repurchases. But we didn't. We purposefully and intentionally didn't limit ourselves to a potential delivery mechanism. We wanted to keep that flexibility going forward. But as Dane said, in the current environment, the impact of a steadying rateable share repurchase program going forward makes the absolute most sense today.

Scott Hanold

Okay, I agree. Thanks for that color.

Operator

Thank you. Our next question comes from Doug Leggate from Bank of America. Your line is now open.

Doug Leggate

Good morning, guys. Thanks for getting me on the call this morning. Fellows, I want to ask you about how the inventory view has changed given the backdrop in the commodity. What I'm thinking is given gas in particular, Mid-Continent, does that compete better, does it change the view of capital allocation? And what I'm really trying to get to is going back to your comments, we at the beginning of the year, I think was Mike actually that talked about in the maintenance scenario, you would drill half your high quality inventory in five-years because at the end of the day that's ultimately what's going to dictate how the market perceives your free cash flow yield.

Lee Tillman

Yeah. I think stepping back from the inventory, we've talked about, the greater than a decade of capital efficient high return inventory that it's really been based on nominally our $50 WTI men's cycle view. As actual prices move around that planning basis, clearly that has an impact on maturing of those opportunities and may in fact even bring additional opportunities into the economic window. So it is a very dynamic thing, but we set that planning basis on conservatively so we could give a very conservative and strong view of just how our inventory can deliver in a more modest pricing environment. To your question around how the -- the commodity's strengthening particularly the secondary products of gas and NGL alter our investment decisions. Look, we're a return driven Company, as we look at individual opportunities, we're going to be driven by -- by economics.

I won't say we're completely agnostic to the product mix but at the end of the day, it's not about barrels it's about dollars and we're going to be driven by selecting the most economic opportunities across all of our core play and then putting those into our business plan and executing efficiently against them. So, it's strictly an economic decision. And although I'm thrilled that the gas and NGL has recovered, I'm equally as thrilled that oil is sitting at above the $80 mark as well because that tends to uplift really all of our portfolio, because although we have an oil weighted portfolio, it is a very balanced portfolio. And so we are in essence taking advantage of those secondary product pricings at a portfolio level, but our individual capital allocation decisions are going to be driven by economics.

Doug Leggate

I appreciate that. Maybe this is a quick footnote to that, Lee for Guy perhaps. I think at dynamic inventory, some visibility [Indiscernible] would be really helpful because it would get a lot of [Indiscernible] away from the idea of that there's an inventory challenge [Indiscernible] with the commodity deck, just [Indiscernible] maybe a footnote. But my follow-up real quick is on Slide 7 and I -- you have been early on very clear about your views on the business model. And again, I congratulate you on leading market on that [Indiscernible] complete appears. But nevertheless, on Slide 7 you still talk about in a greater than $60 WTI environment our production grew with cap that underscores the commitment to discipline. The issue is the 5% growth is not part of your rhetoric today. So when do you decide is the right time to go back to growing production?

Lee Tillman

Yeah, I think that that was simply as you stated, a way for us to set up a bright line on the framework that there is a very, very high hurdle for growth. We will always be informed by the macro, but at the end of the day, it's all about delivering outsized financial metrics when we're above $60. To the extent that we see that some moderate growth would fit into that financial framework, it would become a consideration, but it still remains more of an output of our financial model as opposed to an input. And I think given the past history of the sector, it's very important for us to demonstrate clearly that in a very constructive oil price environment that we can deliver out-sized financial outcomes relative to alternative investments.

Because the reality is that we know there will be future volatility and we have to be able to, within that volatility offer competitive returns when prices are lower. So it's really just step there to really put it in the framework, acknowledge it. I think today we would say the need to drive to a number, even in that 5% range, we just don't see that today and it's hard to see it even in the near future.

Doug Leggate

Thanks so much, Lee

Lee Tillman

Thank you, Doug.

Operator

Thank you. Our next question comes from Neal Dingmann from tours Securities. Your line is now open.

Neal Dingmann

Morning all. My question has been asked. I want to ask about just on the plan for next year. Does that basically assume is part of this total activity about the same percentage of Eagle Ford and Bakken activity. I know you run those 2 consistent except for the last few quarters and I'm wondering if that's still the plans for next year?

Lee Tillman

Yes. Neal, obviously, we have not released our budget for next year. We're still speaking in hypothetical terms around maintenance budget. But when you consider the fact that we will have incremental capital flowing to Oklahoma and Permian, we would expect obviously, that some of that capital would be coming out of Eagle Ford and the Bakken to make room for that. But I would just say stay tuned, we'll get into a lot more detail at an asset level of allocation when we get out to the budget release in February.

Neal Dingmann

Okay. No, [Indiscernible] assume that and then just a follow-up really encouraged like the comments on that Slide 14 about the resource play. I'm just wondering maybe could you comment for you on the guidance as far as how much further do you think you could push this in terms of pad size completion, some other things obviously the results -- early results here are very encouraging especially as you all pointed out when you compare into some of the Delaware, I'm just wondering so where we go from here?

Pat Wagner

Hi, Neal. This is Pat. Our primary objective is this pad has the spacing. And so right now we drilled this at a spacing of more wells per zone. We drilled 2 in the Woodford and 1 at the Bareback. So far we're seeing no interference at all between those. There is the 700 foot thickness between the 2. So we're going to give some more longer-term production on this pad and see how these wells perform. And if so, then we'll 4 by 4 [Indiscernible] development scenario. However, I think we have some opportunities to test that even further. We've obviously drilled 9 wells now, so we've had a lot of learnings on the drilling and [Indiscernible] inside. Hard to give any details on that, but we continue to refine our approach to that. I think we'll continue to drive our costs down as I mentioned in our prepared remarks. So as we go into '22, we'll continue to progress our learning there and see what else we need to do to take this thing ultimately [Indiscernible] call.

Scott Hanold

Very good. Thanks, Pat. Thanks Lee.

Pat Wagner

Thanks for your remarks.

Operator

Thank you. Our final question comes from Scott Gruber from Citigroup. Your line is now open.

Scott Gruber

Yes. Good morning. The key equity income was raised was great to see, expected, but still good to see. Cash dividends from EG was $47 million, but I believe those lagged the booking of income. Can you speak how we should think about cash flow back to Marathon from your equity interest in EG and in the quarters ahead in terms of the pace and magnitude?

Dane Whitehead

Hi, Scott, this is Dane. Yes, so for our EG investments that are accounted for on the equity method, excuse me. I think over time it's fair to expect that cash dividends match equity income. Quarter-to-quarter, they don't always match. The timing can vary, especially in periods where you have significant changes, like a bid run-up in prices that we saw in Q3. And so in this case, dividends lagged earnings fairly significantly in Q3. We expect that to catch up in the reasonable near future. So I think when you're modeling, it's probably just -- there going to be equal -- pretty much equal over time. But you can expect to see some variability quarter-to-quarter.

Scott Gruber

I got you. A little bit to your point where cash dividends, at least in the near-term exceed equity income or is it just on a lagged basis? Is there a catch-up here --

Dane Whitehead

Yeah. We're we certainly can see a catch-up where the dividends exceed equity earnings in the next period.

Scott Gruber

And then just thinking about cash taxes, you guys have a large NOL. But can you remind us, do you have U.S. cash taxes ramping up within your five-year outlook, Given better earnings out at the front end, there's the five-year outlook for cash taxes [Indiscernible].

Dane Whitehead

Good question on by the asset. And so we do have significant tax attributes in the form of NOL has the big one $8.2 billion and then foreign tax credits as well. Both of which of course will be used to offset future taxes. Our outlook, even at forward pricing doesn't have us paying federal income taxes until the latter part of the decade. And that really hasn't changed. The outlook is durable. We tested against commodity prices, a higher corporate tax rates, changes to the IDC tax treatments really don't have a meaningful impact on accelerating cash tax ability. So I think that answer hasn't changed over the past few quarters.

Scott Gruber

Got it. Appreciate the color.

Dane Whitehead

Okay.

Operator

Thank you. That concludes our question-and-answer session. I will now turn the call back to Lee Tillman for final comments.

Lee Tillman

Thank you for your interest in Marathon Oil and I'd like to close by again, thanking all of our dedicated employees and contractors for their commitment to safely and responsibly deliver the energy the world need each and every day. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.