Marathon Oil Corporation (NYSE:MRO) Q1 2020 Earnings Conference Call May 7, 2020 9:00 AM ET

Company Participants

Guy Baber - Vice President of Investor Relations
Lee Tillman - Chairman, President & Chief Executive Officer
Dane Whitehead - Executive Vice President & Chief Financial Officer
Pat Wagner - Executive Vice President of Corporate Development and Strategy
Mitch Little - Executive Vice President Adviser to CEO
Mike Henderson - Senior Vice President of Operations

Conference Call Participants

Arun Jayaram - JPMorgan Chase
Nitin Kumar - Wells Fargo
Brian Singer - Goldman Sachs
Neal Dingmann - SunTrust
Scott Hanold - RBC Capital Markets
Scott Gruber - Citigroup
Paul Cheng - Scotiabank
Josh Silverstein - Wolfe Research

Operator

Good morning, and welcome to the MRO First Quarter Earnings Conference. My name is Brandon and I'll 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. [Operator Instructions] Please note this conference is being recorded.

And I will now turn it over to Guy Baber, Vice President of Investor Relations. You may begin sir.

Guy Baber

Thanks, Brandon, and thank you to everyone for joining us this morning on the call. Yesterday, after the close we issued a press release, slide presentation and investor packet that address our first quarter results. Those 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 and Strategy; Mitch Little, who has recently transitioned to the role of Executive Vice President Adviser to the CEO after serving the last several years as our Executive VP of Operations; and Mike Henderson, Mitch's successor and our new Senior 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'll 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'll turn the call over to Lee, who will provide his opening remarks. We will then open the call to your questions and answers.

Lee Tillman

Thanks, Guy, and good morning to everyone on the call today. I want to start out by extending my thanks to our resilient and dedicated employees and contractors during these uncertain times and reiterate that their health and safety remains our number one priority. Throughout this crisis, our field staff has remained hard at work as essential critical infrastructure providers, expertly doing their job to keep the U.S. supplied with made-in-America Energy. Our industry has been a powerful engine of U.S. economic growth for the last decade and the clean affordable energy we provide will unquestionably be critical in powering our nation's eventual economic recovery.

I want to pause and extend my thanks to Mitch Little for his three decades of service and leadership at our company. Mitch has been an integral part of our transformation to a leading independent E&P, and has set the tone for the execution excellence that we consistently deliver in our operations. Mitch will assist with an orderly transition of operations leadership to Mike Henderson through the end of the year, while also supporting our EG business, as well as our response to the current macro environment.

Mike is no stranger to many of you on the line and has held multiple operations leadership positions since joining Marathon Oil in 2004, including most recently responsibility for both our Bakken and Oklahoma assets. Mike's promotion ensures continuity and he will carry on the strong commitment to safety, integrity and operations excellence established under Mitch. I wish Mitch all the best as he transitions toward retirement, and I look forward to working closely with Mike in his new role.

The current challenges, our industry is facing are immense. We are experiencing an extraordinary confluence of supply and demand shocks the likes of which we have never seen. The impact to global oil demand in particular is unprecedented with a global health crisis essentially shutting down U.S. and global economic activity. While market forces are currently at work and global oil supply is headed in the right direction, the only real answer to the current commodity crisis is for the world to get healthy and back to work again.

Demand for our product will recover although the timing and shape of this recovery remain unknown. And once demand does recover capital discipline especially from the U.S. will be necessary for any sustained price improvement. Rest assured Marathon will play its part, when it comes to exercising this discipline.

Supply and demand must come into balance as we gain more visibility on the new demand norm confidence in OPEC+ compliance set the stage for consistent storage withdrawals and ultimately return to more sustainable prices.

As I reflect on the current state of our industry, it's – that even before the global pandemic the E&P business model was evolving. With legitimate demands from investors with respect to profitability, free cash flow generation and shareholder return.

Our company however was consistently delivering against the new investor mandate for energy companies; corporate returns improvement, sustainable free cash flow generation over multiple years meaningful return of capital to shareholders, consistent delivery on our promises. And we had done so for eight consecutive quarters with over 20% of our cash flow from operations returned to our shareholders over that period all fully funded from free cash flow.

First quarter represented a continuation of this exceptional delivery. We reported strong financials again supported by differentiated execution across our multi-basin portfolio. More specifically, we returned $125 million to our shareholders via our dividend and share repurchase program and still ended the quarter with over $800 million of cash on the balance sheet.

U.S. oil production of 207,000 barrels per day was 5,000 barrels of oil per day above the high end of guidance. U.S. unit production costs were down 10% from 2019 to the lowest quarterly average since we became an independent E&P. Average completed well cost per lateral foot was down 10% from the 2019 average.

The Eagle Ford team delivered the most capital-efficient quarter in the history of the asset nine years in as evidenced by IP 30s and well cost, a tremendous accomplishment. The Bakken team continued to reduce costs and improve capital efficiency, delivering eight wells during the quarter with a completed well cost at $4.5 million or below, and also setting a new quarterly record for completion stages per day.

Our execution was firing on all cylinders and we expect this to remain the case, whether we are operating 15 rigs or if we are operating only three. This continued improvement in expense reduction and capital efficiency is even more imperative in the current environment. And while we are rightfully proud of our track record and of these accomplishments, we also recognize this is all in the past. Everything has changed and our focus has rapidly shifted to our future and adapting to a new reality.

While our principles our playbook for success, have not changed the current crisis demands that we respond with a sense of urgency and purpose to prioritize our balance sheet and financial flexibility. We are truly in uncharted waters, but we are determined and confident that we will emerge from this correction a healthier company with an improved cost structure and ample financial flexibility.

We have taken immediate and decisive action in response to the macro challenges. Our response has been prudent but strong, reducing our 2020 capital expenditure program, lowering our cost structure and protecting our balance sheet and liquidity. Our returns first mindset dictates that in the near term new investment in an already oversupplied market simply does not make sense.

First a few words on our revised 2020 capital budget. Approximately one month ago we announced a revised capital program of $1.3 billion or less a $1.1 billion reduction relative to our initial 2020 budget and a 50% reduction in comparison to our actual 2019 capital spending.

Given the strong execution from our team, our ability to drive efficiencies and reduce costs, there is a solid chance, our team delivers the program we have outlined while spending less than the $1.3 billion we have guided. With our revised budget, we are exercising discipline, protecting our returns and preserving value through the cycle. And importantly, we are delivering an enterprise breakeven WTI oil price in the low 30s for the second half of 2020.

This is highlighted by essentially a pause in completion activity and minimal drilling during the second quarter, the period in which we expect the maximum pain for global oil supply demand fundamentals. This pause immediately resets our forward capital run rate that will extend across third quarter and fourth quarter.

At commodity prices largely in line with the current forward strip, we expect to resume investment activity in 3Q with a transition to three rigs and two frac crews concentrated in the Eagle Ford and Bakken, accounting for 95% of our capital allocation in the second half of this year. We are high-grading our CapEx to our most capital efficient cash flow generative opportunities that offer some of the strongest returns across the entire Lower 48 landscape.

Given how dynamic the current macro environment is, we will continue to exercise our flexibility to further reduce or increase activity as the macro conditions warrant. With our lower investment levels, we are expecting our 2020 full year U.S. oil production to decline by approximately 8% on an underlying basis exclusive of any potential curtailment effects.

With the 2Q pause, 3Q will be the trough for our 2020 production profile. However, our U.S. volumes will be on an improving trend by the fourth quarter led by the Eagle Ford and Bakken. We will exit 2020 with increasing momentum from a core of capital efficient, high-margin production in the Eagle Ford and Bakken that will provide us with a strong foundation for success as we enter 2021.

And while we are hitting the pause button on capital investment in the Northern Delaware, Oklahoma and our resource play exploration program, those opportunities aren't going anywhere. They provide us with important capital allocation optionality and associated returns in an improving commodity price environment.

Along with resetting our investment levels, we are also resetting our cost structure. Our objective is to further enhance our competitiveness, reduce our cash flow breakevens and position our company for success in a lower more volatile commodity price environment.

More specifically, we are driving annualized cash cost reductions of approximately $350 million or 20% relative to our initial 2020 budget. We expect to fully realize these savings by the end of this year. And approximately 40% of these cash cost savings are attributable to our fixed cost structure, savings which will be sustained even in a recovery with higher commodity prices and increased production volumes.

These savings are the result of broad-based measures with reductions across numerous expense categories: production expense, G&A, shipping and handling and production taxes. Significant initiatives include base salary reductions for myself, as well as other corporate officers, a reduction in our Board of Director compensation and broad U.S. workforce actions that have reduced our U.S. employee base by 16% and our contractor base by 70%.

These actions will contribute to annualized G&A expense reductions of 17% in comparison to 2019. Importantly, while such reductions reflect a realignment of company resources to a lower level of capital investment, we are retaining a foundation of essential talent to support an efficient recovery in our capital investment over time.

We have also taken the opportunity to flatten and streamline our operations organization, leveraging the strength and flexibility of our common asset team model. And our functional support teams have followed suit to recalibrate to this new and more efficient operation structure.

To put these cost efforts into perspective, total annualized reductions taken straight to the bottom line will result in a $5 to $6 per barrel improvement in our cash flow breakeven oil price. This will enhance our ability to generate free cash flow in any recovery scenario.

Behind all of the actions we have taken, we are first and foremost prioritizing the financial strength of the enterprise, protecting our balance sheet, our liquidity and our cash flow generation. We made the difficult decision to temporarily suspend both our quarterly dividend and our share repurchase program. This decision was not an easy one and reflects the dramatic commodity price weakness and the significant uncertainty surrounding both, the macroeconomic and oil supply and demand outlook. We have always stated that shareholder return must be supported by sustainable free cash flow from the business.

Returning capital to our shareholders remains a core strategic objective for our company. But amid current macro uncertainty, we are first prioritizing our financial strength and liquidity. We have characterized our suspension as temporary and we plan to resume returning capital to our shareholders upon improved visibility into normalizing macroeconomic conditions and ultimately, upon line of sight to sustainable free cash flow generation.

We have also taken specific action to protect our cash flow, especially during this near-term period of peak physical oversupply. More specifically, we have hedged the majority of our near-term production with a hard floor, 117,000 barrels per day of second quarter oil, with fixed price swaps and two-way collars, at a weighted average floor of over $30 per barrel.

We also have hedged the majority of our NYMEX trade roll exposure during the second and the third quarter, helping insulate realized pricing on certain sales contracts from the impact of contango in the forward curve. Additionally, our marketing team entered into a modest amount of fixed price sales during the second quarter across various basins, opportunistically protecting our cash flow with some of the best realizations during the quarter.

Given the interest in the topic, perhaps just a brief word on our curtailment strategy. Rest assured, we continue to diligently monitor the need to economically curtail some level of our production to maximize our cash flow and returns. We are advantaged by our size, our contracting strategy, as well as our exposure to multiple basins and different end markets.

With the majority of our baseload production on term contract, we have seen essentially no issues regarding flow assurance. As such, curtailment decisions for us are primarily voluntary economic decisions to defer production into a more favorable price environment. Our exposure to economic curtailment is limited, due to the extremely low variable cash costs across our U.S. portfolio, which averaged below $5 per barrel.

During second quarter, we have thus far curtailed very little production. We have the flexibility to potentially curtail up to a maximum of 25,000 barrels of oil per day on average for the quarter. But these decisions will be evaluated on an ongoing basis, leveraging the best available market data and recognizing our very low variable cash costs.

Our ultimate liquidity position and balance sheet remains strong and we intend to keep it that way. Total liquidity at the end of first quarter amounted to $3.8 billion, including over $800 million of cash and an undrawn $3 billion credit facility. We have no significant debt maturities until November of 2022. We remain investment-grade rated at all three primary credit agencies, with recent reviews from both Fitch and S&P.

With the measures we have taken, significantly reducing our capital investment, driving meaningful reductions to our cost structure, protecting our cash flow balance sheet and liquidity, we feel very good about how we have positioned our business. Over the second half of this year, we project a cash flow breakeven oil price in the low $30 per barrel range. And even at current forward strip pricing we would expect to be free cash flow neutral during the fourth quarter.

Our collective actions position our company well not only for today's reality, but for the eventual recovery in commodity prices. And as we come out of the down cycle, we will remain committed to the core principles that have long guided our strategy, a commitment to corporate returns first, a focus on sustainable free cash flow generation in a lower and potentially more volatile commodity world and an objective to return capital to shareholders, all underpinned by our multi-basin portfolio and the strength of our balance sheet.

Our world, our society and our sector will be forever changed by the global crisis that is the current pandemic. We have never experienced at least in my adult life, a global health crisis that has essentially paused the U.S. and most of the world's economies. Beyond the broad health and socioeconomic impacts, the ramifications for oil and gas have been immediate and will ultimately be far reaching. Even before this crisis, our industry was evolving with a welcomed and renewed focus on return, sustainable free cash flow, shareholder return as well as ESG performance.

How rapidly demand returns is an unknown, but we know for the world to recover, it will require affordable reliable and accessible energy in the form of oil and gas. The recovery will also require the very best and most talented people and that is why our organizational design and our workforce capacity is so critically important. We have chosen to focus on what we can control. And importantly, the number one priority remains the health and safety of our employees and contractors.

We believe the best solution to our current crisis is to get the world healthy and back to work, while not abandoning the free market principles that have created U.S. energy independence. We are looking for bailouts, but we are looking for stability in energy markets that allows us to compete on equal footing and continue investing in and protecting American Energy Security.

Over the last few weeks, I've reminded numerous government officials', regulators and policymakers that it was the oil and gas sector that was an important engine for economic recovery coming out of the 2008 financial crisis and we will be a major force for recovery from this global pandemic as well.

Thank you and I will now hand over to the operator to begin the Q&A.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And from JPMorgan Chase, we have Arun Jayaram. Please go ahead.

Arun Jayaram

So Lee, good morning.

Lee Tillman

Good morning, Arun.

Arun Jayaram

Yeah, I wanted to see if you could maybe elaborate a little bit more on your expectation on the trajectory of U.S. volumes? And as well I was wondering if you could maybe talk about how the margin or revelation profile is shaping up in both the Bakken and Eagle Ford?

Lee Tillman

Yes, absolutely, Arun. Well first of all I think we have to recognize that current environment is extremely dynamic and we're going to have to continue to be responses just as we have been in the first part of the year and we have that flexibility. What we've tried to do is provide a little bit of an underlying kind of production framework as well as some incremental color on our wells to sales to help guide people in terms of our production trajectory.

Clearly, our strategy is to high-grade our capital to the Eagle Ford and the Bakken. We are focused on value and returns obviously not volumes. With though, the 2Q pause in activity which in our view is the appropriate response to very weak pricing, we just don't see investing right now into an oversupplied market as a good solution. With that pause, it's very reasonable to expect that we will have somewhat of a third quarter production trough in our 2020 profile.

But from that point forward, we're going to have pretty ratable CapEx through the second half of the year. But with that, our wells to sales are actually concentrated in the fourth quarter, particularly in the Eagle Ford. So, as we exit 2020, our view is that we will see an improving trend in production volumes in fourth quarter, again leveraging this very strong base of core capital-efficient production in the Eagle Ford and the Bakken.

In terms of margins obviously, we watch that very carefully particularly as it pertains to some of the ongoing discussion around curtailment. But as we look at the forward curve today and the differentials as we understand them in the two basins of interest the Bakken and the Eagle Ford, we feel very good about the level of reinvestment that we plan to put back to work starting in the third quarter and then continuing on into the fourth quarter.

Arun Jayaram

That's very helpful. And my follow-up Lee, since you've been CEO, you've really walked a walk in terms of returning cash to shareholders. You mentioned well over 20% of CFO back to shareholders. That said, I know one of your key objectives was to better position the company relative to the S&P versus E&P. So, I was wondering if you could provide a little bit more thoughts on the dividend cut and factors that could support maybe it's an oil price where we could see you resume this method of returning cash to shareholders? Because I know this is something that's really important to you that you've done since being CEO?

Lee Tillman

Yeah. I'll maybe say a few things and then ask Dane to jump in as well. You're right, we have had a very strong commitment and Arun as you know a track record of delivery on return of cash to shareholders. But that's always been predicated and governed by our ability to generate sustainable free cash flow. We've always said that, we aren't going to spend money that we haven't earned and that includes our shareholder returns.

And so as painful as it was to temporarily suspend both the dividend and the share repurchase program, prioritizing liquidity balance sheet strength in this current very uncertain environment was absolutely the right answer for all shareholders. Nothing has changed in our strategy. We have to obviously though see a point in time where we have much better visibility on what that sustainable free cash flow generation is going to look like. And you should expect us again to start with the objectives of returns and sustainable free cash flow with volumetric simply being an outcome. And once we start seeing that free cash flow, obviously, we have a lot of optionality with what we use that for.

And maybe I'll let Dane jump in a little bit on that point.

Dane Whitehead

Yeah. Thanks Lee. Arun, obviously, dividend suspension is the decision not taken lightly. We really want to understand the duration of this price downturn and it doesn't feel like a great time to be borrowing money to pay dividends. But as Lee said in his opening comments, we want to come out of this help giving you with great financial flexibility. And we're pulling the levers to position ourselves to do that.

Definitely view this as a temporary suspension. As we get into a more normalized world and we're in a line of sight to free cash flow, obviously, we're going to have some decisions to make as it relates to capital activity levels, leverage and returning cash to shareholders. And those are the trade-offs we'll make over time as we get back into a more normal world. We would look forward to being in a position to make those decisions.

Arun Jayaram

And I just wanted to give a welcome to Mike Henderson congrats, and as well as to Mitch. So thanks again.

Mike Henderson

Thank you, Arun.

Operator

From Wells Fargo, we have Nitin Kumar. Please go ahead.

Nitin Kumar

Hi, good morning, Lee, and thank you for the update. I guess just following up on the curtailments a lot of your peers have talked about curtailments particularly in the Bakken. You've indicated a willingness to do so but you're not doing them right now. Can you help us bridge the gap? Is there something about your operations or your marketing strategy that is allowing you to sustain volumes particularly in the Bakken where we've seen pretty wide pricing?

Lee Tillman

Yeah. Well, first of all good morning. Obviously -- first of all, let's just talk at a high level about curtailments. Sensibly for us any curtailment decision that we take right now is purely economic driven. And for us that means that we look at the variable cash cost and obviously realized pricing within that basin, which of course would include the differentials.

And so to the extent that we make that decision, it is a decision that should be at a minimum neutral but hopefully positive with respect to cash flow. So setting the volumes impact to the side the financial impact of curtailment done correctly should be relatively small. So I just wanted to say that upfront.

Thus far, both of our key basins where we have significant oil production, the Eagle Ford and the Bakken, we clearly are watching the differentials there as well as the market prices very carefully. We have been able to, obviously, because of our low variable cost clear that hurdle in those basins thus far generally speaking. But we continue to watch price discovery as we market our June barrels. And we have the flexibility, but it's really at our choice and it will be an economic choice that we would make.

To date we just haven't done much of it because it hasn't been the right thing to do from a cash flow perspective. But certainly we want to preserve that flexibility. In terms of just general -- our general approach to marketing and maybe the flexibility, maybe I just may ask Pat to offer a few comments on that.

Pat Wagner

Sure Lee. Good morning, Nitin. Just our overall marketing strategy is, one, we're advantaged by our size and our exposure to multiple basins in different end markets. I'll remind you that we're over 50% leverage to MEH, Brent and LLS. The majority of our production is on term contract, but we do purposely maintain some spot exposure for times like this to provide us flexibility and optionality to move to different end markets when we see pricing dislocations.

Specifically to the Bakken, we have again a portfolio approach there where we've diversified we're exposed to MEH via DAPL, Brent via Rail, Cushing via Pony Express and the Clearbrook market. Although, the majority of our barrels are termed up, we have been able to move things around. And we -- as Lee mentioned in his opening comments we did some fixed price sales in the second quarter and those turned out to be some of our highest net facts. In the basin itself, we've seen improving differentials as supply has come down a bit. And so we're positive looking forward about the Bakken right now.

Nitin Kumar

Great. Thank you, gentlemen. That was very helpful. Lee, the second question I have is around the cost savings. You mentioned that 40% of them are targeting the fixed cost structure. Any sense of the -- on the variable piece of it? Do you expect that to come back very quickly in 2021? Or are there more sticky pieces of that that we're not appreciating from our vantage?

Lee Tillman

Yes. I mean just maybe as a reminder of some of the points that I made in my opening remarks, some really great work by the teams on really attack -- I mean, we came as this crisis unfolded, our perspective was we were going to pull every lever that we had available. I mean, we wanted to really get in there and again exercise the control on the aspects of our business that are important to really impacting our breakeven cost. And the cost structure was a key element of that.

And it's been a track record for us over time as well. This was just, I think, a catalyzing event for us. As I stated in my remarks, we expect about $350 million of annualized cost reductions and we will achieve that annualized run rate essentially at the end of this year. That's about 40% of that cash cost savings is what we would consider to be fixed cost so that's the part that we would be able to carry forward with us into 2021, regardless of where volumes and pricing find themselves. So those variable elements will continue to move around.

We do expect though, even though, we don't expect to see the full value of those savings until end of year, we still expect to capture about $260 million of that $350 million in 2020. Obviously, an element of that was in our production expense category. An element of that was also in our G&A category. We've already talked about some of the broad workforce actions that we're taking, some of the salary reduction actions that we're taking at the officer and the Board level.

All of that combined contributed to this annualized corporate G&A expense savings of about 17% relative to 2019. So pretty significant savings and really a reset on our G&A run rate going forward and that's sustainable. We don't expect that obviously to be impacted in a future price environment. So those are savings that we have irrespective of what the recovery might look like.

Nitin Kumar

Great. Thank you, Lee. Thank you for your time.

Lee Tillman

Thank you.

Operator

From Goldman Sachs, we have Brian Singer. Please go ahead.

Brian Singer

Thank you. Good morning.

Lee Tillman

Good morning, Brian.

Brian Singer

I wanted to see given your breadth across the major shale plays and as well the history that you have in some of these if you could kind of run through both the decline rates that you see on your assets there? And then given the focus now on trying to mitigate base declines what measures are available? And what measures you're taking there? And how that plays? And how we think about that? And how you think about the production trajectory over the next three or four quarters excluding the impact of shut-ins?

Lee Tillman

Yes Brian. I'm probably not going to get in at a basin level because a lot of those declines are so dependent upon what your starting point is and what the investment levels were that are right in front of that. If you have a very large obviously growth wedge you're going to see those one and two year declines really dominating things. But what I will say, is that the reason we provided that underlying guidance of nominally that 8% decline was to give you at least a feel for the portfolio view of what was occurring in the basins particularly, as we go to essentially concentrated activity only in the Bakken and the Eagle Ford. But I would just say in general as we look at industry data, the base level declines across all four of our basins are not dissimilar to what you would see from other industry players.

In terms of mitigating the base decline, it's actually a concept that we haven't dealt with recently right? I mean, this has been an industry that generally has been in some type of growth mode at least for the recent history. But it does amplify some of the things that we have invested in. And maybe I'll let Mitch and/or Mike just throw in a little bit of what our asset teams are doing to really help us mitigate and protect what are our most valuable barrels.

Mitch Little

Sure, Brian, this is Mitch. Just picking up on really the last point that Lee made. We've talked for multiple years now about the investment we're making in our digital footprint. Certainly, started in the Eagle Ford with centralized control centers that provide us remote visibility to our 1800-plus wells across that basin. We've expanded that now across the basins at large and have now supplemented that with additional automated tools that allow real-time scheduling and prioritization of wells at risk or production regularity such that we can divert the resources automatically with the right skill set and the right proximity to really reduce any amount of deferred production there.

Coupling that with other digital solutions like some very detailed data analytics on our ESP-driven wells which largely are in the Bakken, but leveraging the years and millions of data points there from ESP performance to track that performance and develop algorithms that help us stay in front of any required maintenance or artificial lift transitions there.

I could go on and on. There's been a lot of investment in the digital framework and foundation that we're now building additional tools on top of to really leverage that base production optimization.

Brian Singer

Great. And then -- that's really helpful. And then my follow-up is with regards to M&A. I know it comes up a lot Lee and you've been a pretty staunch avoider of doing bigger picture M&A. And I wondered assuming prices do move higher at some point here over the next couple of years how you think about valuations have come down for assets and companies? Whether there's any change to how you think about the resource exploration and one day ramping that back up relative to looking out at M&A opportunities?

Lee Tillman

Yes, I think we've always talked about a portfolio of things that we want to do to continue to enhance our resource base. It's uplift and organic enhancement in our existing basins. It's small scale and very selective bolt-ons and acquisitions. And then of course as you mentioned Brian it's the REx program as well.

But in terms of large-scale M&A again that's just not something we're not spending time on today. It's -- right now it's very much an inward focus to make the company as strong as possible in this period of very high uncertainty and volatility. We came into this crisis in a very good position. And we want to exit also in a very strong position.

So, right now, I mean the types of things that Mitch just described in the operations that's where we're spending our time on the things that we have control over the money we spend how we spend it how efficient we run our operations optimizing day-to-day production and capacity that's where our efforts are.

But we do see a point in time as we get back to that stronger commodity price and more stability having the access to free cash flow to continue to drive those other aspects of resource capture. Those haven't gone away. They're not lost opportunities in that sense. And so we just have to be patient until again our financials give us the flexibility to continue to pursue those areas.

Brian Singer

Thank you.

Lee Tillman

Thanks Brian.

Operator

From SunTrust we have Neal Dingmann. Please go ahead.

Neal Dingmann

Good morning Lee and rest of the team. My first question Lee is really you hit this on a little bit earlier but I'm just wondering if you could just talk a bit more on how you all view your -- specifically your decline rates in the Bakken and Delaware just on a more or less on a -- I would just call it the base decline rates that I'm looking for on a go forward? I guess my thought would be that perhaps this is improving a bit as you slow down a bit. So I'm just wondering how you all view the base declines these days.

Lee Tillman

Yes, well, obviously, base decline is obviously quite important right now as we model the business. And clearly we can get in some basin-specific discussions if you want to reach out to Guy and the guys to have that dialogue. But I would just say Neal in general at a high level there's nothing anomalous in what we have observed in base decline from our more mature basins to even our less mature basins. As you know we're still relatively early in the development of our Northern Delaware position.

So, it's at a little bit different stage of development than say what we have for instance in the Eagle Ford we're operating some 1800 wells there. So all of these assets are a little bit different point in time. And so you will see a little variability in their base decline based on the vintage and the legacy of the production that underpins them.

So, I'm not trying to avoid your question. I'm just saying that there are a lot of factors and it's very difficult to give a straight-up answer because it really depends on where you are in that asset's maturity and what the preceding investment cycle has looked like in that asset. But I would say there's nothing anomalous in any of those basins as we observe today.

Neal Dingmann

Okay. Okay. That's what I was going for that last part Lee. Thanks. And then just second one question on the financials specifically on the -- you mentioned the -- it appears like cash conservation continues to be one of your primary objectives. I'm just wondering that I assume will continue to be the case.

And if so would that cause you to potentially curtail some of your Bakken and Mid-Con a bit longer than you might otherwise in order again as prices already coming back today last week et cetera? Some others have talked about already bringing curtails back almost fully back on. I'm just wondering given you all have had a nice success of staying very conservative would this cause you to maybe curtail a bit longer?

Lee Tillman

Yes. Well first of all on -- I'll maybe hand over to Dane talk a little bit about cash conservation and how we think about cash in just a moment. But on the curtailment question, just first of all start -- our starting point is our most economic barrels are flowing barrels. And we have -- across our U.S. portfolio, our kind of average variable cash cost is $5 or a little less than $5 across that portfolio. So in essence to really have an impact on cash flow -- negative impact on cash flow, you would have to see realizations. Obviously, that would drop below those cash costs. Otherwise those flowing barrels are the barrels that you want to keep online. And that would absolutely be our strategy

Now if we see barrels that start becoming a negative drag on our cash flow then we would take a different set of options. And as Pat described, we have a tremendous amount of flexibility should we elect to use it. But it's really at our election and that will be done on an unhedged cash consideration basis. Again, just because you have financial hedge instruments in place, doesn't give you the license to kind of make bad decisions or destroy capital. I mean to me those are independent decisions. And so economic curtailment is something that is front and center. We have the tools in place at a basin level. If we see excursions that drive those into negative territory, you should expect us to take action. So with that maybe I'll let Dane just say a few words about cash and uses of cash going forward and how we might scale into that.

Dane Whitehead

Yes, Neil. Obviously, we come into this in a really good position from a liquidity perspective with $3.8 billion. $800 million of that is cash. I think Lee noted the levers we pulled that we just talked about have reduced our free cash flow breakeven price by $5 to $6 a barrel, which is pretty dramatic in a good way. And we -- even at forward curve we'll be free cash flow breakeven in Q4. I would say pretty close to that for the full second half at the forward curve. So that has been a very significant focus for us and will continue to be. Certainly, if we see negative realizations anticipated in certain areas that would drive curtailment decisions. So I think I'll just leave it at that.

Neal Dingmann

Very good. Thanks for the details guys.

Operator

From RBC Capital Markets, we have Scott Hanold. Please go ahead.

Scott Hanold

Yeah. Thanks. I just want to kind of elaborate a little bit more on that last sort of answer and line of questioning. And I think it's important that you guys obviously have shown that sustainability into 4Q to enter into 2021. But just I understand right, you talked about reducing your breakeven by around $5. So when I'm looking at what does Marathon look like in 2021? And I know your breakeven price before was somewhere in the mid to upper 40s. Does that infer that as you get into 2021 we'll be somewhere in the low $40 per barrel range in terms of that breakeven level?

Lee Tillman

Yes. Scott, this is Lee. Yes just maybe let me -- obviously, we haven't done detailed business planning for 2021. And so this is a little bit of a theoretical exercise, but maybe just let me share a few thoughts on that. If we think about the activity level that we're going to carry into fourth quarter for the Eagle Ford and Bakken, which is still a relatively modest level of activity. If we project that activity and essentially look to maintain U.S. oil production kind of in those fourth quarter kind of levels, we expect that we could do that for something on the order of $1 billion or less in 2021. And that would have a corresponding breakeven probably a bit south of $40. So just to maybe frame that up and again I'm not promoting that we're moving to maintenance capital in 2021. I'm just trying to give you a little bit of a benchmark that if we just extended that production held it relatively flat from that improving fourth quarter, again we'd be kind of in that $1 billion capital range and we could deliver that program well below $40.

Scott Hanold

Yes. I mean that' actually exactly what I was looking for. That's great. And I'm going to keep diving into kind of the same kind of subject matter. As you kind of look at the long-term strategy and I think it's been mentioned before and I think it's pretty clear you guys are very focused on shareholder returns. Considering what's obviously transpired here over the course of the last several weeks and months with the industry and with the volatility in oil prices, does that change your view on how you look at growth rates and levels of sustainable free cash flow going forward? Does that change how you manage your business? And how does your hedge policy fit into that as well?

Lee Tillman

Yes. Well first of all from just a high-level strategy standpoint, we have a near-term dislocation. That doesn't change our long-term strategy which is returns first sustainable free cash flow at probably lower and more volatile pricing and then getting that back in the most efficient way possible to our shareholders. We don't believe you should be optimizing on growth rate. We optimize on the financials first. The growth rate is an output. It's just like this year I -- we didn't start on saying we want to mitigate decline, we started with saying how do we maximize our financial performance in the second half of the year. And the same thing will be the case going forward.

We were already on a much more moderated growth track. And, again, if we're going to make the oil and gas sector and specifically, our company an investable thesis, we still have to compete, not only within the peer space, but also within the broader S&P, which means continuing to drive, not only our free cash flow yields, but, also, again, the amount of that, that we're able to get back into the hands of shareholders.

I think by definition that will imply lower growth rates in the future and certainly, declines to sustainment capital in the near-term. Because, one, you simply can't justify it on a returns basis; and two, you're not generating the free cash flow to really get into a very heavy investment cycle yet.

So that part of our strategy is unchanged. It's the long game for us. This is an event-driven correction that we're in right now. We expect that there will be an economic recovery behind it. And with that recovery is going to be demand for the product that we produce.

On the hedging side, maybe, I'll just flip that over to Pat and just let him kind of talk broadly, maybe a little bit about what we did coming into the year, how we've repositioned in the year and how we might look at that going forward?

Pat Wagner

Sure. I would just say, broadly, our hedging philosophy is one that, we're not trying to call the market, but we're trying to protect the downside, but also allow our investors to share in the upside. So we came into the year with about 80,000 barrels a day of three-way collars, with $7 put spread which had about a $200 million value to us.

As we look through the year and we saw the downturn occur, we look for opportunities to set a floor there, but we weren't willing to give up significant value and pay a premium to secure that floor. However, we did have an opportunity a few weeks ago when OPEC+ made an announcement to do that for second quarter. So we monetized some of our three ways into two ways and we set that floor that Lee mentioned in his opening comments.

Our focus is maximizing cash flow. And so that trade for us helped maximize cash flow. We still have three ways for the third quarter and the fourth quarter. And right now, the value of those three ways is significant and we're not going to take a haircut on that value to set a floor at this point, unless we see a better opportunity in the market. We have a dedicated team that continues to look at this on a daily basis. And if we find opportunities to improve the hedge book we will.

Lee Tillman

I, maybe, would just emphasize one other thing though and I've said this once and I just want to reiterate it. Financial hedges, financial instruments are not a license to destroy capital and drilling programs that don't make returns. I mean, we can take the gains from our financial instruments and still be very disciplined in the investment space to be focused on returns.

And just as I look, particularly, here in the near term, we have an oversupplied market. U.S. supply needs to come down. Returns are certainly subpar in the current environment. Building more capacity and investing in more capacity for us in the near-term simply does not make economic sense from a return standpoint. It doesn't mean that we can't take advantage of the financial returns from our hedge book, but you should expect us to be very disciplined on the capital reinvestment side.

Scott Hanold

Appreciate all that. Thank you.

Operator

From Citigroup we have Scott Gruber. Pleas go ahead.

Scott Gruber

Yes. Good morning.

Lee Tillman

Good morning, Scott.

Scott Gruber

So you'll be building DUCs in 2Q with the frac holiday and then it looks like you'll be consuming some in the second half. At year-end, where you have a DUC backlog that's above and beyond, will be considered normal under a three-rig program? And how big could that be?

Mike Henderson

Hey, Scott, it's Mike here. Yes, we'll gradually work through some of our DUC inventory in the Eagle Ford and Bakken, as activity picks up in the third quarter. We do, however, plan to exit the year with a comfortable level of DUCs. That will give us some momentum and some optionality as we head into 2021.

Scott Gruber

Got you. And can you talk to the oil price at which you consume those DUCs in 2021? How should we think about it?

Lee Tillman

Well, yes, I think from an investment criteria standpoint, I think, we've already addressed that to some extent, Scott, which is, first and foremost, we're not going to invest money into new capacity until the returns justify it. We've talked about already our extremely low variable costs. We've talked about some of the things that we're doing in our fixed cost structure as well.

So we continue to, in essence, uplift the economics across our portfolio. But the combination of needing adequate return to help drive our corporate level returns, plus the need to fund that through free cash flow generation probably says to really amplify beyond say basic maintenance levels of capital investment, you're going to need to be kind of pushing in the $40 range at least, because one, you'll be creating higher returns; two, you'll be creating financial flexibility from free cash flow that you can then make a decision on whether that gets reinvested back in the business or is it used in other places.

Scott Gruber

Appreciate the color. Thank you.

Lee Tillman

Thank you.

Operator

From Scotiabank, we have Paul Cheng. Please go ahead.

Paul Cheng

Thank you. Good morning guys.

Lee Tillman

Good morning, Paul.

Paul Cheng

Two questions -- thank you. Two questions, that at some point price will get better. And at that point how is the priority? Which is going to move first? You're going to increase the spending, so that you will be doing more drilling and completion? Or that you will restart the distribution back to the shareholder first?

Dane Whitehead

Yes. Hi. This is Dane. I'll take a first cut at that. I would -- like I mentioned earlier our options as we get back to free cash flow will be a modest increase in capital spending, which to the extent that we do that we would certainly not outspend cash flow, but it makes sense to do some of that to rebuild our cash flow base our EBITDA base.

Beyond that this is kind of an environment, we've been talking about this for a while now where lower leverage is probably a better thing to do in the future E&P model given the volatility and unexpected movements, we've seen in commodity markets over the past say five years, and so that's an option too. I guess to that end let me just touch on that since we haven't talked about it, we don't have any maturities, debt maturities until late November 2022.

So there's nothing pressing there, but we've got some tools in the toolkit including $400 million of muni debt capacity, tax-free debt capacity that we hold in treasury that we can utilize to refinance a portion of that 2022 maturity. We've also kind of taken advantage of these historically low interest rates by legging into some port starting interest rate swaps associated with our 2022 and 2025 maturity and we're in those at sub 1%. And for 2022, we've got $500 million in notional value hedge and for the 2025, it's $250 million.

So -- for -- the ability to refinance very economically a portion of those next maturities is there for us. And in a free cash flow environment, we could also think about deleveraging.

And then, of course, return to shareholders is really important in our model. So reinstating our dividend at some point makes -- certainly makes sense. I don't think any of these three things, I've talked about are mutually exclusive. They can be done in combination. And just rest assured we'll be really thoughtful and we'll do those things in what we think -- feel is the right sequence, but also not be too rash and put the firm at risk in case we have another downturn.

Lee Tillman

Yes. Paul if I could also just jump in for just a minute. I would just say, we've always had kind of a midterm objective of reducing our gross debt. That's always been an internal objective for us. I think the current crisis has probably amplify the need to really be mindful of your debt load.

I mean, I think we should expect that we're in somewhat probably of a range-bound commodity that's going to have a lot of volatility. And within that model that would tend to drive you toward a little bit more emphasis on debt reduction. But I fully agree with Dane that we have a lot of flexibility. These are not mutually exclusive options. I think we would start staging into investment and establishing a solid base of production to drive our EBITDA. And then I think all the options open up again at that point.

Paul Cheng

And maybe in terms of sequencing that when the time is right that you start to be investing in the business? Should we assume that it's really going to Eagle Ford first? And then at what point or the -- under what market condition you will say okay now that I can go back into Northern Delaware and also stack or that maybe perhaps even into the Texas Permian and Austin China game?

Lee Tillman

Yes. Yes.

Paul Cheng

So trying to understand what condition that we need and what sequence that we're talking about in different play is going to attract money first?

Lee Tillman

Yes. No, I've got it Paul. Yes, I think what I would say on that is that before our original budget if you recall was still 70% Bakken and Eagle Ford, 30% essentially Northern Delaware and Oklahoma. And that was largely driven by our views of commodities. Black oil was being highly rewarded and generated our highest returns. Basins that had more reliance on secondary product pricing like gas and NGLs were certainly at more of a deficit. And hence, the capital allocation that you saw even in our original plan. As that has continued to materialize obviously the capital efficiency that exists in the Bakken the Eagle Ford made it kind of our first stop from a capital allocation standpoint.

But as we look forward into a more normalized environment, and certainly, if we see for instance as we see the oil supply response, if that also translates into a gas supply response that strengthens gas prices as well as potentially secondary products like NGLs then certainly that would be an impetus to reevaluate places like Oklahoma and Northern Delaware and they become much more competitive than with more of the pure black oil plays that we have in the Bakken and the Eagle Ford.

So it's all going to be driven by returns that's going to always be at the center of our capital allocation, but those relative product valuations do change how we think about that allocation going forward. So, I'd like to think that maybe we'll see some structural strengthening in the gas complex for instance and that will clearly favor some of the other opportunities in our broader portfolio.

Paul Cheng

Thank you.

Lee Tillman

Thank you.

Operator

We have time for one more question. From Wolfe Research, we have Josh Silverstein. Please go ahead.

Josh Silverstein

Yeah. Thanks. Maybe I'll just throw in a quick one at the end here. The international run rate was about $100 million of quarterly EBITDA last year. I know, there were a couple of moving pieces with maintenance and some mitigation discussed. But just wanted to see where you – where the expected annual run rate would be this year? And how that would look next year as the land backfill starts up?

Mitch Little

Yeah. Hey, Josh it's Mitch. Trying to address your question without sort of disclosing confidential natures of contracts et cetera, but I think it's fair to say that EG is not immune from the same pressures we're seeing across the rest of the business. And for a little bit more color we've got four primary revenue streams there. The condensate stream which is sold in the open market, Brent-linked pricing makes up a meaningful portion of that plus then we've got natural gas liquids that are produced and sold to European markets and that gets reflected in equity earnings. Methanol as well sold into European and Gulf Coast markets, certainly experiencing some near cyclical lows recently in that product line as well. And then lastly, through the LNG, we've got EG LNG. We've got a Henry Hub-linked contract.

And certainly, with the declines that are – we're seeing and expected to see in U.S. oil and associated gas production seen some recent price support there in the Henry Hub market, and certainly the forward curve suggesting some continued strengthening in the back half of the year and through next winter.

So if that holds we'll certainly enjoy a bit of an improvement in the equity earnings on the LNG side. With respect to Alen project is still on track progressing ahead according to schedule and we would still expect those volumes to start flowing in the first half on 2021. And of course through the contract structure, there we also enjoy exposure to market prices.

Josh Silverstein

Thanks for the color guys.

Operator

Thank you. We'll now turn it back to Lee Tillman for closing remarks.

Lee Tillman

Thank you. I could not be more proud of the dedication of our people that have adapted to these largely uncharted waters we're navigating. They continue to fulfill our mission of delivering affordable, reliable, accessible energy the world needs today and that it will need when the economy gets back to work. Thank you for your interest in Marathon Oil.

Operator

Thank you. And ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.