Marathon Oil Corporation (NYSE:MRO) Q3 2022 Earnings Conference Call November 3, 2022 9:00 AM ET

Company Participants

Guy Baber - Vice President, Investor Relations

Lee Tillman - Chairman, President and CEO

Dane Whitehead - Executive Vice President and CFO

Pat Wagner - Executive Vice President, Corporate Development and Strategy

Michael Henderson - Executive Vice President, Operations

Conference Call Participants

Neal Dingman - Truist Securities

Scott Hanold - RBC Capital Markets

Jeanine Wai - Barclays

Doug Leggate - Bank of America Merrill Lynch

Paul Cheng - Scotiabank

Operator

Welcome to Marathon Oil Third Quarter Earnings Call. My name is Sheryl, 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]

As a reminder, the conference is being recorded. I will now turn the call over to Guy Baber, Vice President, Investor Relations. Sir, you may begin.

Guy Baber

Thank you, Sheryl. Thank you as well to everyone for joining us on the call this morning. Yesterday after the close, we issued a press release, slide presentation and investor packet that addressed our third quarter 2022 results. Alongside those standard earnings materials, we also issued a separate press release and slide deck, addressing our acquisition of the Ensign Natural Resources’ Eagle Ford assets. All of 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; and Michael Henderson, Executive VP of Operations.

As a reminder, 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 will refer everyone to the cautionary language included in the press release and the presentation materials, as well as to the risk factors described in our SEC filings.

We will also reference certain non-GAAP terms in today’s discussion, which have been reconciled and defined in our earnings materials.

With that, I will turn the call over to Lee and the rest of the team, who will provide prepared remarks. After the completion of the remarks, we will move to question-and-answer session. So in the interest of time we ask that you limit yourselves to one question with a follow-up. Lee?

Lee Tillman

Thank you, Guy, and good morning to everyone listening to our call today. To start, as always, I want to first thank our employees and contractors for their dedication and hard work, as well as their commitment to our core values, especially safety and environmental excellence. We are a results-driven company, but we are equally focused on how we deliver those results. I am proud of our entire organization.

As Guy mentioned, in addition to our standard quarterly earnings materials, we are also very excited to discuss our acquisition of Ensign Natural Resources’ Eagle Ford assets, a truly compelling opportunity for our company that furthers each and every one of our core strategic objectives.

While there is no shortage of highlights from our third quarter financial and operational results, our continued return of capital leadership is certainly near the top of the list. In fact, our third quarter shareholder distribution set a new record for our company.

Dane will start there and provide a bit more context around our return of capital success and then Mike will walk us through our third quarter financial and operational results and outlook in more detail. We will then spend the balance of our opening remarks on our material expansion in the Eagle Ford. Needless to say we have a lot of ground to cover today, so let’s get started.

Over to Dane.

Dane Whitehead

Thank you, Lee and good morning, everybody. We returned a significant amount of capital to our shareholders through the cycle, the foundational element of our value proposition in the marketplace.

As we have consistently highlighted, we believe our return of capital framework is differentiated in our peer space, uniquely calibrated to operating cash flow, not free cash flow, prioritizing our shareholders’ first call on our cash generation. This is especially important in a market characterized by inflationary headwinds and represents a strong commitment to our shareholders.

And during the third quarter, I am pleased to announce we further built on our return of capital leadership by setting a new quarterly shareholder distribution record for our company corresponding to over 80% of our CFO and essentially 100% of our free cash flow to equity holders.

Total third quarter shareholder distributions amounted to $1.2 billion, translating to an annual distribution yield of around 24%, a yield that’s not just at the top of the E&P peer space, but at the very top of the S&P 500.

While we had guided third quarter return of capital to at least 50% of our CFO, due to strong operating and financial performance, our financial strength, including our replenished cash balance and favorable market conditions, including clear value in our stock price, we saw an opportunity to materially step-up the pace of repurchases.

We bought back $1.1 billion of stock during the third quarter. The timing of our decision proved beneficial as third quarter buybacks were executed at an average price of around $24 a share, well below current trading levels.

While our commitment to an operating cash flow driven, return on capital model remains differentiated, so is our commitment to significant ongoing share repurchases and the cumulative benefit of this approach has become pretty hard to ignore.

Since kicking off our share buyback program last October, we repurchased $3.4 billion of our stock, driving a 20% reduction to our outstanding share count in just 13 months, contributing to significant underlying growth in all of our per share metrics.

We continue to believe buying back stock is a good use of capital at current market conditions and consistent with this belief, our Board has again topped up our outstanding buyback authorization to $2.5 billion.

Looking ahead, to the fourth quarter, we expect to execute around $300 million of share repurchases and we will ensure we fully meet our commitments to the market to return at least 50% our full year 2022 CFO to equity holders. This will represent a peer leading 2022 annual distribution yield.

Dialing back the pace of buybacks a bit at the end of the year will allow us to build some additional cash in the fourth quarter, enabling us to increase the cash funding portion of the Ensign acquisition, which as you will hear in a minute will contribute to a higher level of shareholder distributions in 2023 and beyond.

In addition to increasing our buyback authorization, our Board has also approved another increase to our base dividend, demonstrating the important synergies that exist between our base dividend and accretive buybacks. The increase of the dividend was entirely funded through year-to-date share repurchases.

To summarize, we have been clear about our commitment to return significant capital to shareholders. We believe our operating cash flow driven framework is a strong commitment to our shareholders protecting distributions from the impact of capital inflation. Our consistent execution of accretive buybacks has driven peer leading per share growth of 20%.

We have built one of the strongest return on capital track records in the entire S&P 500 over the trailing four quarters and we are fully committed to extending this leadership with our 2023 distribution profile further enhanced by the highly accretive Ensign acquisition.

I will now turn the call over to, Mike, who will briefly walk us through our third performance and outlook. Mike?

Michael Henderson

Thanks Dane, and good morning to everyone. Third quarter was yet another strong financial and operational quarter, highlighted by over $1 billion of free cash generation at a reinvestment rate of just 29%.

Our oil and oil equivalent production increased sequentially to 176,000 barrels of oil per day and 352,000 barrels of oil equivalent per day, outperforming our guidance provided in the last earnings call, driven by achieving the high end our quarterly well sales guidance and new well outperformance in both the Eagle Ford and Permian.

In the Permian, specifically, we returned to our highest level of activities since 2019. We brought 13 wells to sales, including eight 2 mile laterals, which are more representative of the go-forward program for this asset.

Productivity for those extended laterals is very strong, including three laterals wells deploying our latest completion design that delivered an average IP30 over 3,800 barrels oil equivalent per day.

The future for our Permian is bright amplified by our success in the Texas Delaware oil play. We developed both the Woodford and Meramec with our initial four-well pads expected to deliver first oil in early 2023.

Stepping back a bit to the updated full year 2022 financial and operational outcomes, our outlook remains compelling. We raised our EG equity income guidance by another $70 million to over $600 million.

EG equity income guidance is now more than double what it was at the beginning of the year, due to strong operational performance and upside in pricing, especially for European natural gas, where our commodity exposure remains under appreciated.

And while we are -- we already have differentiated European LNG price exposure that has contributed to stronger financial performance this year, we will see significant increase to our global LNG price leverage in 2024, as our legacy Henry Hub linked LNG contract expires, which will potentially drive a step change increase in EG’s financial performance, as we have more equity molecules exposed to the global LNG market.

We also raised our 2022 capital spending guidance to $1.4 billion, an increase of $100 million from prior guidance due to a combination increment inflation and targeted efforts to protect our execution and operational momentum into 2023. We expect this additional capital to set us up for success next year, protecting our production profile early in 2023, mitigating our execution risk and improving operational continuity.

Despite this increase in our capital budget we still expect to lead our peer group in 2022, free cash flow yield, re-investment rate and capital spending per barrel production, as depicted in slide 11 of our earnings deck. In other words our delivery against the metrics that matter remain intact.

Looking ahead to 2023, while, it is too early for explicit guidance, as we are actively optimizing our plan and working to integrate the Ensign assets. A case to be remains the maintenance program in order to deliver maximum free cash flow, significant return of capital and continued our share growth, while maintaining our investment-grade balance sheet.

Under this maintenance scenario and incorporating the targeted efforts we are already taking in 2022, we would expect to mitigate the year-over-year increase to our pre-Ensign 2023 capital spending to the 10% to 15% range.

I will now turn it over to Lee to discuss the strategic rationale of the Ensign acquisition.

Lee Tillman

Thank you, Mike. Hopefully, you have all had a chance to review our dedicated Eagle Ford acquisition press release and associated slide deck. I am especially excited to talk to you today about the strategic rationale for this transaction, as this satisfies each and every element of the exacting acquisition criteria, as you have heard me and the rest of the team talk about on these earning calls.

While we have assessed each and every opportunity that has come to market in recent years in our core basins, we truly believe this asset offers a superior risk adjusted return profile, especially given our experience and knowledge in the Eagle Ford, while striking the right balance between immediate free cash flow accretion and future high quality development opportunity. This is a truly unique asset.

Going back to our M&A framework, this transaction checks all the boxes, immediate financial accretion, return of capital accretion, accretion to inventory life and quality, and industrial logic with enhanced scale, all while maintaining our financial strength, conservative balance sheet and shareholder return commitments.

I will personally walk through each of these key points. First, this deal is immediately and significantly accretive, expected to drive double-digit accretion to all key financial metrics. More specifically, we are modeling an approximate 17% increase to our 2023 operating cash flow and a 15% increase to our 2023 free cash flow.

Accretion is even stronger on a per share basis and will only improve as the additional cash flow generation will support a higher level of share repurchases, further reducing our share count and driving incremental per share growth. It’s also accretive on a debt adjusted per share basis.

The cash consideration paid for the asset is attractive at just 3.4 times 2023 EBITDA with a 17% 2023 free cash flow yield, highly accretive relative to Marathon Oil’s standalone metrics at the same price stack.

Second, this transaction is accretive to our return of capital profile, as the additional cash flow generation will go straight to our shareholders, consistent with our unique and transparent operating cash flow driven framework.

Simply put, we remain committed to returning at least 40% of our CFO to shareholders in 2023 and beyond at prices above $60 WTI. But we will now be delivering this return of cash from a higher base of CFO.

Therefore, the 17% cash-flow accretion I just discussed will translate to an increase in our shareholder distribution capacity by an equivalent 17%. Additionally, we plan to raise our quarterly base dividend by another 11% post-transaction close to $0.10 per share, taking full advantage of the cash flow accretive nature of the deal.

Third, this transaction offers compelling industrial logic and is accretive to our inventory life with locations that immediately compete for capital, enhancing our cash flow sustainability. We are adding 130,000 high working interest, operated net acres adjacent to our legacy position, fully leveraging our knowledge, experience and operating streams, and a high confidence capital-efficient basin, where we have a demonstrated track record of execution excellence.

We are acquiring more than 600 undrilled locations, representing an inventory life greater than 15 years, with locations that immediately compete for capital in the Marathon Oil portfolio, not an easy bar to clear by any means.

Finally, we are executing this deal while maintaining our investment grade balance sheet with our net debt-to-EBITDA are expected to remain below 1 and our financial strength firmly intact. Importantly our valuation was based on a nominal one rig maintenance program, no assumed synergy credits and no redevelopment refrac upside.

With that overview of the strategic rationale, I will turn it over to Pat to discuss the inventory depth and quality of this asset, which we believe is an especially critical and differentiating element of this deal.

Pat Wagner

Thanks, Lee. I will focus my comments on slide six of our acquisition deck, speaking specifically to the inventory quality of this asset since it’s a differentiating factor compared to recent asset packages we have evaluated.

As Lee mentioned, we have assessed every asset that has come to market in our core basins in recent years, especially in the Eagle Ford and Bakken, we believe this asset is truly unique, given its attractive combination of immediate cash flow accretion and future development opportunities. Due to the unique history of this asset, there has been limited drilling activities since 2015, effectively preserving the high quality inventory.

Additionally the Ensign team has done an excellent job of cleaning up some legacy midstream contracts, consolidating operatorship and ownership ventures. The end result is a high margin, 99% operated, 97% working interest, 130,000 net acre position in the core of the Eagle Ford, significant high return undrilled inventory.

Our technical teams have spent significant time and effort analyzing each and every DSU on this acreage, a bottoms effort -- bottoms up effort to truly understand the quantity and quality of undrilled inventory.

We came away from this process impressed, signing value to over 600 undrilled locations, representing an inventory life in excess of 15 years, using conservative spacing development assumptions.

We see value in this position across all three phase windows, condensate, wet gas and dry gas, with significant inventory that immediately competes for capital, especially in the condensate and wet gas phase windows.

The undrilled condensate inventory has the potential to deliver some of the best returns at highest capital efficiency in the Eagle Ford and therefore the entire Lower 48. And the economic dry gas inventory enhances our longer term development optionality and further strengthens our underlying resource base.

A simple analysis of external third -party data validates the quality of Ensign’s inventory, as shown in the charts on the right-hand side on slide six in our deck. Screening all wells brought online since 2019 Ensign’s 12 month oil equivalent productivity on a 15 to 1 value basis has been among the very best in the Eagle Ford.

And on a capital efficiency basis analyzing 12 month cumulative production relative to total well cost, Ensign has proven to be one of the most capital efficient operators in the entire U.S., outperforming every large cap E&P in our peer group.

It’s worth highlighting that the Ensign acreage also includes 700 existing wells, many of which are pre-2015 early generation under stimulated completions, which likely left substantial recoverable resource behind.

We therefore see upside potential associated with redevelopment and/or refracs on the acreage, especially considering our track record of high return successful development on our legacy position.

Peers have been successful refracs on asset on offsetting acreage to Ensign and Ensign has recently brought online three refrac test of their own with encouraging early results. Importantly all of this represents pure upside for us, as we assign no redevelopment refrac upside in our valuation of the asset or in our inventory count.

I will now pass it over to Dane to discuss financing and our return of capital objectives.

Dane Whitehead

Thanks, Pat. I will be short and sweet. My key point is that we are executing on this accretive transaction, while maintaining our financial strength, our investment grade balance sheet and conservative leverage profile, while continuing to deliver our return of capital commitments to equity holders. Who says, you can’t have it all.

We plan to fund this acquisition with a combination of cash on hand, our credit facility and new pre-payable debt. Financing approach will give us the optionality to pay off the acquisition debt quickly without incurring additional costs.

Importantly, with the incremental debt we expect our net debt-to-EBITDA ratio to remain below 1 times at the forward curve and even testing our leverage against more conservative price deck, $50 per barrel WTI to $60 per barrel WTI, we remained in the zip code of 1.5 times leverage by the end of 2023.

We have received constructed -- constructive feedback about the deal from the ratings agencies, given the improvement to our scale and sustainability, coupled with the limited impact to our leverage profile.

We also believe that tangible assets acquired in this transaction are eligible for full expensing in 2022, contributing to our income tax optimization efforts, another positive aspect of this deal that could differ our exposure to AMT.

Bottomline our balance sheet remains rock solid, giving us the financial flexibility to do an attractive deal like this and pay down our acquisition debt in short order while simultaneously enhancing our return of capital to equity holders.

Additionally, as we have already stated, our commitment to return of capital framework remains steadfast. In 2023 and beyond our objective remains return at least 40% of our CFO to equity holders and potentially more if market conditions are supportive, all driven by a higher base of cash flow consistent with the financial accretion of the Ensign deal.

Back to Lee for wrap-up.

Lee Tillman

Thank you, Dane. Consistent with our earlier remarks it remains too early to offer up any detailed 2023 capital spending guidance, as we are still working our plan and optimizing the integration of an accretive new asset.

Yet, I can say that our strategic objectives will remain unchanged to continue delivering peer and market leading free cash flow generation and return of capital to shareholders, all of which is further strengthened by the Eagle Ford acquisition.

Our case to be for 2023 is the maintenance program that efficiently and expeditiously integrates the Ensign Eagle Ford assets and that continues to focus on growing per share metrics.

For years, now I have reiterated my view that for our company and for our sector to attract increased investor sponsorship, we must deliver financial performance competitive with other investment alternatives in the market, as measured by corporate returns, free cash flow generation and return of capital, more S&P, less E&P.

Today we are successfully delivering just that kind of performance. Our challenge now is to prove that our results are sustainable quarter in and quarter out, year in and year out. We are up for the challenge.

Our compelling investment case is simple, capital discipline, sustainable free cash flow protecting commodity price upside, market leading return of capital to shareholders and per share growth. And we have a track record of delivery, underscored by this quarter’s record setting shareholder distribution.

Our multi-basin U.S. portfolio has only been strengthened with the balanced Eagle Ford acquisition, and our complementary integrated gas business in EG brings a growing and differentiated exposure to the global LNG market that is unique among our peers.

To close our call today, I want to reiterate how proud I am of how we have positioned our company. We are delivering financial outcomes at the very top of the S&P 500, and just as important, we are doing so while adhering to our core values, supporting the continued responsible development of much needed oil and gas that is absolutely critical to furthering global economic progress, lifting billions out of energy poverty and protecting the standard of living we have all come to enjoy.

With that, we can open up the line for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Neal Dingman from Truist Securities. Your line is now open.

Neal Dingman

Good morning, guys. Congrats on the deal. It looks quite good. My question is on the Ensign deal. You gave a lot of color around this guys, but I am just wondering, in sort of broad strokes, how are you thinking about, obviously, comes with some great PDP but also you mentioned Lee some really nice undrilled inventory. I am just wondering, number one, how do you sort of think about value in-between the two, and then, secondly, now with almost 300,000 in Eagle Ford, a good bit of this be focused on drilling the new Ensign next year in your Eagle Ford activity.

Lee Tillman

Yeah. I think just on the value component Neal, when we think about the valuation, I would say in general, we would kind of put in almost in that 50-50 between PDP and future undrilled development opportunities.

I think that was one of the unique aspects of this deal was that it really hit the sweet spot between immediate and significant cash flow accretion, with inventory life accretion, with Inventory that competes immediately for capital. So that really stood out to us and made this deal quite unique.

In terms of how we view it, I mean, obviously, we are still in the midst going through our detailed budget for 2023. We model this from a valuation perspective, as a maintenance program that would layer on top of an enterprise maintenance program that we are thinking about for 2023.

We believe that the bulk of these locations and Ensign compete for capital in today’s portfolio and so that’s just going to be part of the detailed allocation process that we are going through today. But for us the case to beat remains maintenance capital and Ensign would in essence be layering on top of the enterprise.

Neal Dingman

Great, Great details. And then maybe just a follow-up, second one for Mike, maybe on the Delaware. Mike, now with all the activity now that you have had recently the Delaware, I am just wondering if you have any deferred sort of thoughts or expectations on that play then you had, obviously, earlier this year prior to really stepping up activity there.

Michael Henderson

Yeah. Neal, so I will take a run at that. I think they the results that we have seen this year have been impressive, 30 wells to sales, and obviously, in the Florida another five or so coming on in the fourth quarter. And most of those wells that we are bringing online this year 1.5 miles, 2 milers.

I was pretty excited, as we look-forward to next year 2023. We are probably only going to bring in on two milers. So when you look at the third quarter 2022 and very strong well performance and execution from the team, I think we mentioned it in the deck. The 13 wells to sales, eight were 2-mile laterals.

I think that’s mentioned more representative of go-forward program. And again, as we touched those wells averaged over 2,700 barrels of oil equivalent per day. Over the first 30 days, that was at 73% oil cut.

And then, probably, most exciting were the three [inaudible] wells that we brought online. Those were latest design up space, largely completions and look to be some of the best Delaware Basins that we brought on this year, IP 30, 100 barrels of oil per day. So I tried to share all of that and I think you teased it out well for next year.

And we are probably going to be similar next year in terms of about 70-30 split on capital with 30% of the capital going to Permian, but I think it teased it up well for next year. And the team got back, hit the ground running. So we are pretty excited about what future brands spend more in the Delaware for us.

Lee Tillman

And I would just add too to that, Neal, the team continues to do some really good blocking and tackling to give us the ability to do extended laterals through trades, et cetera, across our position.

And that was always kind of our theory, when we made the original acquisition that over time we would continue to build a more contiguous position, which would give us more access to extended lateral drilling and that’s exactly what the team has delivered.

Neal Dingman

Great details guys and again congrats on the deal, sort of looks positive.

Lee Tillman

Thank you, Neal.

Operator

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

Scott Hanold

Yeah. Thanks. Hey. If we can touch base on the Ensign acquisition a little bit. Obviously, you guys made a pretty good case. It’s got very strong economics especially in the condensate window. But could you give us a little color on, how you think about that acquisition holistically, does have a little bit more balanced hydrocarbon mix. I think traditionally Marathon very -- had a very much higher oil kind of cut focus. So how do you think about that as you layer on this within the total corporation? And when you talk about maintenance activity next year, I think, you have historically talked about it on a barrels of oil kind of thought process. Does that change a little bit because this asset again has a little bit more of a gas mix?

Lee Tillman

Yeah. No. All great questions, Scott. Let me start a little bit on, if you will, the product mix of Ensign. First and foremost, we are driven by returns and economics and the Ensign inventory is extremely competitive within our portfolio. In terms of delivering economic returns, which in essence translate into our sustainable free cash flow and return of cash model. So its best with that -- those locations will underpin for us.

So I wouldn’t say we are agnostic to product mix, but we are much more focused on the economic returns and the competitiveness of these locations. So the -- if you will, the one-third, one-third, one-third mix that we see at Ensign, that to us in and of itself is it’s a bit arbitrary and we are more focused again on returns.

When we think about maintenance going forward, certainly, oil is still what we are flattening on. I mean we still, when we talked about maintenance we are referring to oil production. And the positive there is that, Ensign will contribute to continuing to hold that maintenance level of oil production, but now at a higher level.

And just to maybe even step back, when you think about even Ensign coming into the enterprise portfolio, we still loss of maintenance are around 50% oil. I mean we may drop down a little bit with Ensign in the mix, but at the enterprise level we still have balance between nominally 50% oil, nominally 50% gas and NGLs now. At Eagle Ford, at a basin level, we will be getting a little bit more gassy, but the reality is it’s we are still 50% plus oil in the Eagle Ford, even with bringing the Ensign asset into play.

Scott Hanold

Appreciate that context. And if we can pivot a little bit to shareholder returns, I mean, your buybacks this past quarter was pretty impressive, the level that you guys were able to accomplish. And now thinking about this acquisition, and obviously, the debt you will have to take on for this acquisition. Should we think about at least in the near term until, I guess, obviously, visibility on, I guess commodity prices is a little bit better into next year. Will you -- obviously you still hit your commitment, but maybe temper from existing your recent pace and also does this hedging -- your thoughts on hedging different now, since you have taken on a little bit more leverage?

Dane Whitehead

Hey, Scott. This is Dane. I will take the first cut at that. Thank you for acknowledging the fact that we believe the doors off shares repurchases are 82% of CFO, well, I like the share repurchases in the quarter and that was certainly a high watermark for us. Historically that I think really demonstrates our commitment to driving that high return when we have the capacity to do it.

We also re-mooted the share repurchase authorization in the quarter, the Board did at $2.5 billion, which should be a strong signal that post Ensign we are going to continue with that kind of a very aggressive share repurchase strategy.

The acquisition itself is 17% accretive, so the -- to our CFO. So the quantum of cash available to return to shareholders is greater. Think about it as pre-Ensign 50% return equals a post-Ensign 40% return. So it’s a significant increase the quantum of cash that we can allocate to shareholders.

We certainly are going to be meeting our minimum 40% return to shareholder threshold. That’s our minimum. We have shown the ability to exceed that up to this point pretty consistently and we would look to do that opportunistically going forward.

The debt that we are going to be taking on is not -- our leverage is going to be in pretty good shape post-close and I think our ability to service that debt is going to be -- we will have lots of flexibility around that and that’s why we are using new pre-payable debt and credit facility so that we can really have a lot of flexibility at a pace that we repay that.

The priority obviously we are going to pay back the debt in an appropriate timeframe, but the priority in our framework given our strong balance sheet is going to be returns to shareholders. So we are going to stay focused on that. You might have asked one other hedging question in there. Pat, did you want to take that?

Pat Wagner

Yeah. Sure. I would just say in general that our philosophy hasn’t changed. Hedging is just one part of the commodity basically managing that. And so, Dane talked about the balance sheet, our balance sheet is still going to be strong, but it contributed incremental debt.

And I think it’s important to focus on really low free cash flow breakeven at some $35. So we are in good shape in any range of commodity prices. So we don’t see a need to just go into the market and hedge because we did this acquisition.

That said, we will be very opportunistic, as we have been in the past, if you see some opportunities that would provide us a little downside protection. We will take those but we don’t feel compelled to do that unless the market shows us something that is compelling.

Lee Tillman

Yeah. I think it’s very important that because of our leverage profile and where it sits that, future debt retirement and achieving our capital return to shareholders, those are not mutually exclusive. We are going to be doing both of those things.

How we gauge those, will obviously be dependent a bit on commodity price, but the way we have modeled it is that we are doing both of those over time. And as Dane stated, with the 17% uplift in CFO by virtue of the Ensign transaction, the 40% minimum is kind of now 50%. In other words 40% is the new 50%, if you will. So we are seeing that accretion and our ability to give return back to shareholders.

Scott Hanold

I appreciate that. Thanks.

Operator

Thank you. Our next question comes from Jeanine Wai from Barclays. Your line is now open.

Jeanine Wai

Hi. Good morning, everyone. Thanks for taking our questions. Hey. Maybe just…

Lee Tillman

Good morning, Jeanine.

Jeanine Wai

Good morning. Hey. Maybe just following up on a couple of your comments there, so buybacks are expected to be $300 million in Q4, which will help rebuild the cash balances. In terms of how the deal impacts 2023, can you provide a sense of the rough split envisioned between the cash revolver and the new debt for funding the deal and whether your view on cash levels has changed for 2023?

Dane Whitehead

Yeah. So I think -- I would think about the cash versus debt split to be cash roughly 45% of the funding and the balance from a mix of revolver borrowings and new pre-payable debt, which should be terms loans or go to debt capital markets to get that. We are still assessing the most advantageous approach there. I am sorry, what was the…

Jeanine Wai

Okay.

Lee Tillman

Cash count.

Dane Whitehead

Cash -- oh, the cash count. Yeah. Sorry about that. So, obviously, we are going to dial back share repurchases towards the end of the year. We will use a portion of the $1.6 or so that we forecast at the end of the year for the acquisition.

As we head through next year, I still think this sort of $300 million to $500 million cash balance to enable us to manage interim month working capital is a good number to work with. And within that quantum of cash that we are generating, we will be able to service the debt and make the shareholder distributions, like, we have historically but at a higher point.

Jeanine Wai

Okay. Great. Thank you for all that detail. Maybe pivoting to another asset in the portfolio here in EG, there is certainly upside to EG income starting in 2024 relating to striking the new contractors, you mentioned in your prepared remarks. In terms of other upside, I think that, LNG plant was originally meant to have a footprint, so that it could be twinned. And just wondering if that’s on the horizon anywhere on your radar maybe in the medium or longer term? Thank you.

Lee Tillman

Yeah. Jeanine, yeah, there is a tremendous value proposition for us in EG. We have talked about it and really two areas. One of course is the Alba Gas condensate field, our equity production there. And then there is this world-class infrastructure that we have there in Punta Europa, the LNG plant storage offloading, as well as the gas plant and the methanol plant.

Our number one objective right now is to continue to load the existing LNG train. And one of the first steps in that was to bring in some third-party gas, which was by virtue of the land development, basically, the Alen Partners brought that gas to our plant.

Essentially they invested in the infrastructure, built the pipeline and we have been able to take advantage of those third-party molecules through both, if you will, travelling through that facility, but also percentage of proceeds, hence our exposure to global LNG pricing.

And so, our vision is that there will continue to be opportunities that are not dissimilar to Alen, where we will be able to drive more molecules and continue to at least base flow the current LNG trend.

We are sitting in one of the most gas prone areas of West Africa both in terms of indigenous gas in EG but also cross-border opportunities, including Cameroon, as well as Nigeria, as they look for an accretive home to their gas molecules as well.

You are correct in that the facility was designed for expansion beyond the base flow, but today our number one priority is ensuring and we have the gas that can help us grow the current train really through the next decade.

Jeanine Wai

Great. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Doug Leggate from Bank of America Merrill Lynch. Your line is now open.

Doug Leggate

Thanks, everyone. Thanks for getting me on. Dane, I wonder if I could ask you a question on cash tax. There is an interesting footnote or comment on the acquisition slide deck about the -- I am not going to get this description exactly right, but it looks like some of the acquisition cost can help your cash tax position. So I wonder if you could just walk us through, how has that evolved with the AMT and how does Ensign help you? How should we think about cash tax?

Dane Whitehead

Yeah. Sure, Doug. Thank you for cash tax question for us.

Doug Leggate

Yeah.

Dane Whitehead

But very great, so prior to the Inflation Reduction Act, we were not going to be cash taxpayers for a couple of years under the traditional tax system. With the IRA there’s an alternative minimum tax structure, it’s 15%.

And so we could be subject to that if we hit a certain threshold. The threshold is $1 billion of pretax income on average for the three years, 2020 through 2022. So we are still in that measurement -- living through the end of that measurement period.

We do our forecasting. We are pretty close to that $1 billion threshold for that three-year average is kind of a coin flip. And so you look at that and go to close the call what else could move the needle for us and there are a couple of things that we have line of sight to, one of which relates to Ensign, but just to give you a little more color runs on the whole playing field.

There is a question about whether we can deduct foreign tax credits for that threshold calculation. We think if we get favorable treasury interpretation on that would be -- which would be very consistent with precedent, that we will be able to in that one, of course, with that threshold calculation.

There’s also the possibility of favorable new legislation on the deductibility of intangible drilling costs and that’s a big part of our capital program. That’s got to be a legislative change, so kind of hard to predict at this point, but that’s a significant move -- needle mover if it does happen.

And then the third one it directly relates to this Ensign transaction is the acquired tangible assets, not the intangible assets, the tangible asset portion of the acquisition price, which is a fairly significant number and if that’s -- that will be eligible for expensing in 2022 for purposes of this threshold calculation, assuming we close the deal as we plan this year.

So without really kind of quantifying all those for you today, Doug, they are all moving sort of in the right direction in -- on the margin certainly this Ensign deal could help us defer paying AMT taxes until 2024 which would be nice.

Doug Leggate

Yes. That’s really helpful. I guess that’s kind of what I was trying to get at is how much you can shield your tax from this transaction. So thank you for that. I guess my follow-up, there’s so many things we could try and address today, but I want to try and hit the comment about the Shell marketing agreement on LNG. Obviously, there’s been -- there’s a lot of moving parts, when you go from equity gas to a land gas and then this transaction, I guess, so the legacy contract rolls over at the end of 2023. How should we think about the delta, if all things were equal on LNG pricing, let’s say, flat, no change in the commodity. How would your exposure shift on January 1, 2024, versus where it is today, given the mix of all of those things? I will leave it there. Thanks.

Lee Tillman

Yeah. Doug, yeah, just -- first of all, listen all of that, just for clarity on kind of how things flow today through selling back, we put it in the chart, just because it gets more complex through all the equity companies there.

But today, of course, Alen is third-party molecules, not equity molecules that flow through the gas plant, the LNG plant. They are sold through there and then on the backend we receive a percentage of proceeds from that contract. That will not change post 2024. That runs the term of the Alen production.

Relative to what we refer to as Alba Tail, which are the remaining Alba production post the current Shell contract, which runs its course at the end of 2023, those molecules are open for negotiation into the current marketplace. So we would move from essentially a Henry Hub-linked contract to more of a global LNG-linked contract on those equity molecules that would be flowing post 2024.

Based on today’s market conditions and obviously the arbitrage between something like a TTS to Henry Hub, we would expect to see a material uplift there, despite the fact of course that we are on a decline in the Alba Field. We would expect to see financial uplift, as we make that shift from more of a Henry Hub linked to more of a global LNG basis and those negotiations will be going on really starting next year to finalize those new contracts post 2023.

Doug Leggate

Presumably you quantify at that time. Lee, would that be fair?

Lee Tillman

Yeah. No. I think just like we have done, I think, we have tried to give a lot more visibility and transparency on EG by providing equity income guidance, et-cetera. As we get and understand what those new commercial terms are going to be like, we absolutely intend to share that with the market, so there’s clarity on what that will do to the EG financials.

Doug Leggate

That’s terrific. Thanks fellas. Appreciate it.

Lee Tillman

Thank you, Doug.

Dane Whitehead

Thank you.

Operator

Thank you. Our next question comes from Paul Cheng from Scotiabank. Your line is now open.

Paul Cheng

Hey, guys. Good morning.

Lee Tillman

Hey, Paul.

Dane Whitehead

Good morning.

Paul Cheng

Two question. One is, I think, I have to apologize first. In terms of the new debt that you take on or that we are looking at that $3 billion, in a perfect external environment, how quickly you want to or you feel is the optimum pace of paying that down or that you get the net debt back, if we do that $3 billion? So that’s the first question. In an ideal world, so if the commodity price is as good as you hope, then how quickly that you want to pay it down? The second question on the 600 Ensign inventory, do you have a split between the condensate window, wet gas and dry gas? Thank you.

Dane Whitehead

I think that the pace of the debt reduction, our -- sort of our base case, we model this out and just used to sort of aggregate the forward curve, we feel very comfortable for us to pay this over say a 24 month period. That will be incremental debt.

If we get a tailwind on commodity prices or help on AMT, things like that, it’s going to give us much more flexibility to both deal with the debt in a more expeditious fashion if we want to or increase shareholder distributions and in a perfect world book.

So there’s quite a bit of flexibility with revolver borrowings. I guess, technically they aren’t due until 2027. That’s when the bulk revolver has been extended to. So we have a lot of flexibility in there. But my bias -- I guess, my personal bias is to get the debt and the interest cash payments out of the system as quickly as possible without stressing something else like the distributions.

Pat Wagner

This is Pat. I will take the question on inventories. Without going into too much specific, I would just say that, the vast majority of the locations that we have described, i.e., in the condensate and wet gas window, and as Lee and I mentioned it, those compete very favorably in our inventory today and those would be the ones that we attack first few years.

Lee Tillman

Yeah. And if I could add just to maybe amplify that, I want to emphasize again that we have taken no credit and that inventory count or the potential upside that exists in redevelopment and refracking the 700 existing wells.

And I think it was probably Jeanine that also pointed out that the teaser that had come out on Ensign recorded 1,200 wells and so we are taking a very conservative approach and really putting our own technical view on that inventory.

So we feel very confident in the 600 -- over 600 undrilled locations that we probably we believe that to be conservative. It was a strong basis for the valuation that continues to protect potential upside for us as well in the future.

Paul Cheng

And can I ask that whether you guys have any preliminary -- I know you are certainly on, but preliminary potential, call it, synergy benefits from this deal and what is the OpEx cost for Ensign operation?

Lee Tillman

Yeah. I will maybe say a couple of things and let Mike jump in. Right now, we included none of that fall into the valuation equation. But our expectation is that our excellent Eagle Ford asset team is going to find ways to drive even more value with this acquisition and so contiguous to our legacy position, we believe those savings will come.

And Mike you may want to talk a little bit about kind of the unit kind of cash cost that we think we are bringing in with Ensign and how that looks relative to the Eagle Ford, and quite frankly, the rest of the enterprise.

Michael Henderson

Yeah. I mean, it’s fairly short answer on that one, Paul. The OpEx, that we are bringing in it’s actually it’s more Eagle Ford and more then the company toward at the moment. So that should be a net positive.

Maybe a little bit in terms of just some of the synergies. Well, just the fact that it doubles our footprint, increases our size and scale and positive, a shout out to the Ensign team. They have done a great job with some of these recent wells that they brought online.

I do think just given our expertise and the scale that we can continue to optimize both on well productivity and cost, and so there’s potential upside there that again is baked in. And just that increased scale and basin as well is going to help us with the supply chain side of things.

It’s still a tight market out there, so I think anyway which that we can bring there is a positive and then the other one is obviously the potential positive implications, with regards to AMT that Dane mentioned quite a while ago. Again, I think, the positive thing is that, we have not baked any of that and that’s potential upside for us as we get into the asset proper.

Paul Cheng

So thank you on that. I will follow-up. Hope I am sure we will be talking more about that in the future.

Lee Tillman

Thank you.

Operator

Thank you. We have no further questions at this time. I’d like to turn the call back to Lee Tillman for closing 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 needs now more than ever. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.