HOUSTON, Marathon Oil Corporation (NYSE: MRO) has reported third quarter 2018 net income of $254 million, or $0.30 per diluted share, which includes the impact of certain items not typically represented in analysts' earnings estimates and that would otherwise affect comparability of results. Adjusted net income was $200 million, or $0.24 per diluted share. Net operating cash flow was $963 million, or $889 million before changes in working capital.
"Another quarter of outstanding operational execution and capital efficiency across our multi-basin U.S. portfolio has again delivered production out-performance and enabled us to raise annual resource play production guidance for the third consecutive quarter, with no increase to our development capital budget. Each of our asset teams contributed to this strong outcome, highlighted by basin leading results and continued core extension in the Eagle Ford and Bakken, the successful transition to primarily multi-well pad development drilling in Oklahoma, and the progression of important multi-well tests alongside strategic advancements in the Northern Delaware," said Marathon Oil president and CEO Lee Tillman. "Consistent execution and our commitment to capital discipline have resulted in more than $630 million of year-to-date organic free cash flow generation, enabling us to return additional capital to shareholders through $500 million of share repurchases. At the same time, we maintained our focus on resource base enhancement, as evidenced by organic inventory upgrades in the Eagle Ford and Bakken, our successful participation in the recent New Mexico lease sale, and the spud of our first exploration well in the emerging Louisiana Austin Chalk play. We remain on track to deliver a strong rate of change in our key financial performance metrics, highlighted by an expected annual increase of 85 percent in corporate cash return on invested capital (CROIC) at $65/bbl WTI. Looking ahead to 2019, our framework for success will not change: a focus on corporate level returns, differentiated execution, free cash flow delivery at conservative oil prices, and the return of capital back to shareholders."
Third quarter development capital expenditures, before working capital, were $557 million, down 8 percent sequentially. Net cash provided by continuing operations was $963 million during third quarter 2018, or $889 million before changes in working capital. The Company's 2018 development capital budget remains unchanged at $2.3 billion.
Outside of the development capital budget, total resource capture spending totaled $151 million during third quarter, including both Resource Play leasing and exploration (REx) and small bolt-on acquisitions. This year's resource capture spend has been more than fully funded through divestiture proceeds received in first quarter 2018.
Third quarter 2018 REx capital expenditures totaled $46 million, bringing year-to-date REx spend to $294 million. The Company spud its first Louisiana Austin Chalk exploration well, with results anticipated in 2019. Though episodic in nature, the Company anticipates REx capital expenditures of $50 to $100 million during fourth quarter 2018 representing no change to full-year REx capital spending guidance.
In the Northern Delaware the Company acquired 1,800 net acres in New Mexico for $105 million in the Bureau of Land Management (BLM) lease sale. These bolt-on leases include an attractive 12.5 percent royalty interest and a 10-year term, and are synergistic with the Company's existing footprint in the play.
Marathon Oil expects fourth quarter 2018 U.S. production to average 295,000 to 305,000 net barrels of oil equivalent per day (boed). The Company expects fourth quarter 2018 U.S. resource play production to average 290,000 to 300,000 net boed, with oil production expected to increase approximately 5 percent sequentially despite a planned modest quarter-on-quarter reduction in wells to sales. Full-year wells to sales continues to trend slightly above the midpoint of guidance. Fourth quarter 2018 International production is expected to average 105,000 to 115,000 net boed, affected by the timing of planned maintenance in E.G.
The Company increased its annual 2018 total Company production guidance to 405,000 to 415,000 net boed, up from 400,000 to 415,000 net boed. The Company also raised its guidance for annual resource play oil and barrel of oil equivalent (boe) growth to 30 - 34 percent, up from 28 - 32 percent previously, with oil expected to be at the high end of the range. All guidance is adjusted to reflect the divestment of non-core U.S. assets that closed in July, and which contributed 1,000 boed (75% oil) to third quarter production, as well as an international asset sale that closed in August, and which contributed 1,400 boed to third quarter production (100% oil).
U.S. E&P production averaged 304,000 net boed for third quarter 2018, including oil production of 174,000 net barrels of oil per day (bopd). Oil production was up 5 percent compared to the prior quarter and up 28 percent from the year-ago quarter on a divestiture-adjusted basis. Third quarter production from the U.S. resource plays was 294,000 net boed, including oil production of 168,000 net bopd. Third quarter U.S. E&P unit production costs were $6.14 per boe. In July, the Company closed on the previously announced sales of its non-operated Gunflint and Troika assets in the Gulf of Mexico and a CO2 flood in West Texas, which collectively averaged production of 1,000 boed (76% oil) in third quarter 2018 and 5,000 net boed in the first half of the year (76% oil).
EAGLE FORD: Marathon Oil's Eagle Ford production averaged 115,000 net boed in the third quarter, compared to 106,000 net boed in the prior quarter. The Company brought 38 gross Company-operated wells to sales with an average 30-day initial production (IP) rate of 1,680 boed (63% oil), including 12 wells with an average 30-day IP rate of 1,400 boed (81% oil) in the extended core of Atascosa County. The Eagle Ford asset again generated significant free cash flow in the quarter through a combination of well performance and oil realizations above WTI due to strong LLS-based pricing.
BAKKEN: In third quarter 2018, Marathon Oil's Bakken production averaged 85,000 net boed, up 4 percent compared to 82,000 net boed in the prior quarter. Oil production was up 5 percent sequentially. The Company brought 21 gross Company-operated wells to sales with an average 30-day IP rate of 3,460 boed (76% oil), with activity primarily concentrated in Myrmidon. In West Myrmidon during third quarter, a six well pad achieved an average 30-day IP rate of 4,745 boed (73% oil). Three of these wells established new Three Forks Williston Basin records, including the Jerome well with an average 30-day IP rate of 6,380 boed (75% oil). The Company also continues to extend the core of its acreage position, with the two-well Lars pad in southern Hector achieving an average 30-day IP rate of 1,810 boed (83% oil) and plans are on track to test the Ajax area before year-end. Marathon Oil is in full compliance with state gas capture requirements, and anticipates no impact to forward development plans.
OKLAHOMA: Marathon Oil's Oklahoma production averaged 73,000 net boed during third quarter 2018, down from 80,000 net boed in the prior quarter, with only 11 wells brought to sales. This is consistent with the Company's successful transition from leasehold drilling to primarily multi-well pad development. In the STACK, the Company brought on two Meramec overpressured pads at different equivalent well spacing that illustrate the consistency and predictability of optimized development at the drill spacing unit (DSU) level. The Irven John infill pad on four wells per section equivalent spacing achieved an average 30-day IP rate of 1,700 boed (65% oil) and the HR Potter infill pad on seven wells per section equivalent spacing achieved an average 30-day IP rate of 1,485 boed (63% oil). Four of the new HR Potter wells were brought on at the end of third quarter, while the remaining wells were brought on subsequent to quarter end.
NORTHERN DELAWARE: Marathon Oil's Northern Delaware production increased to an average of 21,000 net boed in third quarter 2018, up 24 percent from the prior quarter. The Company brought 18 gross Company-operated wells to sales in the Malaga and Red Hills areas, a mix of development and appraisal wells with an average 30-day IP rate of 1,285 boed (65% oil), or 285 boed per 1,000 foot lateral. A three-well Malaga pad in Eddy county, which targeted Upper Wolfcamp horizons, reported an average 30-day IP rate of 2,275 boed (63% oil), or 540 boed per 1,000 foot lateral. The Company made important midstream advancements during third quarter to protect flow assurance, improve realizations and reduce expenses. Marathon Oil executed a two-year term oil sales agreement with a strategic buyer at attractive terms and signed a gas gathering and processing agreement covering the vast majority of Lea and Eddy county acreage. The Company continues to benefit from its Midland-Cushing basis swaps, with open positions that include 10,000 bopd hedged through remainder of 2018 and all of 2019, and 15,000 bopd hedged for full-year 2020, all at a discount of less than $1 to WTI.
International E&P production averaged 115,000 net boed for third quarter 2018, down 4 percent compared to the prior quarter on a divestiture-adjusted basis. The decrease reflects maintenance activities in both E.G. and the U.K. In August, the Company closed on the previously announced sale of its non-operated interest in the Sarsang block in Kurdistanwhich produced 1,400 net boed in the third quarter and averaged 2,300 net boed through the first half of the year (100% oil). Third quarter 2018 International E&P unit production costs averaged $4.22 per boe.
During the third quarter the Company reduced the estimated cost of the U.K. asset retirement obligation (ARO) by $125 million, primarily due to the capture of favorable market conditions.
In addition to the previously referenced fourth quarter 2018 maintenance, a complete shutdown is planned for E.G. during first quarter 2019 to conduct planned turnaround activity.
The Company has executed $500 million of year-to-date share repurchases, returning additional capital to shareholders beyond the existing $170 million annual dividend. Share repurchases have been more than fully funded by year-to-date organic free cash flow generation of over $630 million.
Total liquidity as of September 30 was approximately $5.0 billion, which consisted of $1.6 billion in cash and cash equivalents and an undrawn revolving credit facility of $3.4 billionwhich was recently extended by one year to 2022.
The adjustments to net income for third quarter 2018 totaled $130 million before tax, primarily due to the income impact associated with the reduction in the U.K. ARO.
A slide deck and Quarterly Investor Packet will be posted to the Company's website following this release today, Nov. 7. On Thursday, Nov. 8, at 9:00 a.m. ET, the Company will conduct a question and answer webcast/call, which will include forward-looking information. The live webcast, replay and all related materials will be available at https://www.marathonoil.com/
CROIC - Cash return on invested capital; calculated by taking cash flow (operating cash flow before working capital + net interest after tax) divided by (average stockholder's equity + average net debt).
Organic free cash flow - Operating cash flow before working capital (excluding exploration costs other than well costs), less development capital expenditures, less dividends, plus other.