PIPELINE TO FUTURE
Marathon CEO positions the oil company for decades of shale production.
Lee Tillman took the reins of Marathon Oil in 2013 following nearly 25 years as an engineer and vice president at Exxon Mobil.
Marathon and its refining arm, Marathon Petroleum, had been split in 2011. His not-so-simple task was to take a formerly integrated oil company and turn it into a more profitable and leading exploration and production independent.
Fast forward to 2019 and Houston-based Marathon is now a U.S.-centric shale player focused primarily on Texas, New Mexico, Oklahoma and North Dakota.
The president, CEO and chairman of Marathon recently sat down with Texas Inc. to discuss the transformation he’s led as well as the future of some of America’s most productive oil and gas fields.
Q: So how did we get here?
A: It’s a multiyear transformation our company has been through. I joined Marathon in 2013, and we’ve really moved from what had been an integrated company model with downstream to more of a global diversified E&P to, today, a very concentrated, U.S. resource play-focused company.
Q: How much of this meshes with what Wall Street wants — more focus and shareholderfriendly strategies?
A: I think that journey is particularly relevant today as we see investor sentiment moving toward a more mature shale model to invest in. We have constructed a strategy that now very much aligns with where investors want to take this space. Last year, capital discipline was the phrase that was probably most in vogue. We were clear that we have a very precise working definition of capital discipline in our company. Every dollar of developmental capital we spend is going to be moving our enterprise returns higher. Secondly, we’re going to have a disciplined capital budget. Third, we’re going to prioritize sharing some of that cash back with our shareholders.
Q: Is that a not-so-subtle suggestion that other companies aren’t as capital disciplined?
A: In 2018, we set a $2.3 billion developmental capital budget. Many others wavered throughout the year. Many budgets in our peer group went up. We held true. Our message was our budget is not a suggestion; it’s a commitment. While holding that budget flat, we essentially raised our guidance for U.S. production for three consecutive quarters. That framework is not only what the energy investor is wanting us to pursue, but the general investor. Investors have options.
Q: How much have Marathon and the overall industry struggled to attract and keep that general investor?
A: I think the industry, particularly the shale industry, has struggled with that. When you look at the last decade it was a decade of land grabs, a lot of value destruction, write downs, you name it. I think what’s occurring now is we’ve kind of gone through that initial phase of maturity in the unconventional plays. Those companies that have been smart have set themselves up for what we think are pretty basic investor expectations. Our story has been five years in the making. The industry still has some credibility and some trust to build up with investors, particularly generalist investors. We’ve seen some right things in 2018, and we’ve seen some aspirational things talked about in ’19, but very few have really proven it to say we’ve been there and done that. It’s going to take multiple quarters — maybe even multiple years — of delivering against that model to really uplift the whole sector and get the relative weighting of the oil and gas space back to where it should be given the importance of this industry.
Q: Where does Marathon sit in terms of taking shale to the next level of more efficient drilling and production — the so-called manufacturing or factory mode?
A: If you’re going to execute on this newer kind of shale 2.0 — whatever you want to call it — you’ve got to have a multibasin orientation. We have some plays that are in that full-field development mode, or manufacturing mode. That’s the Bakken and the Eagle Ford. We have some assets in that early development phase where you’re just starting to get out there and do multipad drilling. That would be Oklahoma for us. And then you have more delineation and appraisal assets like the (Permian Basin’s) northern Delaware where you’re still very much at that early, early phase.
Q: What about exploration? A: We go one step in front of that and have what we call our resource play exploration team. We affectionately refer to them as REX. That team is looking at what’s next — both new basins or opportunities near our existing basins. For instance, the best example that’s in the public domain is the Louisiana Austin Chalk leasing that we did last year. We leased 260,000 net acres that’s largely contiguous at less than $850 per acre. The goal there is to capture that acreage at low entry costs and, in a success scenario, be able to generate very much outsized, fullcycle returns. That’s the whole purpose of REX.
Q: And how are things progressing in the Permian?
A: We’re on mostly in the northern Delaware on the New Mexico side. So it’s Eddy and Lea counties. Texas has much more maturity there. But, bear in mind, New Mexico has had conventional production with a long and storied history. Marathon Oil and its predecessor companies have been in New Mexico conventionally as well. We have to be good corporate citizens there and earn our right to operate there every day. That’s through business integrity. We do that on the Texas side, and we’re going to do that on the New Mexico side.
Q: What about the issues with the lack of pipelines, roads, social services and more in the area?
A: I think that’s a shared concern really on both sides. I don’t think that stops on the state line. One thing you can recognize is that in New Mexico, you have more of a mix of federal and state lands. On the Texas side, you’re dominated really by state and private ownership.
Q: Are those pipeline issues and other factors why Marathon is moving slowly in the Permian?
A: Certainly part of it is broader infrastructure, but really for us it’s all about making sure we’re driving our returns. When you’ve got a multibasin portfolio, we allocate capital to the highest returns. We’ve got to bring our returns up. So our capital allocation in 2019 is about 60 percent to the Eagle Ford and Bakken. It’s 40 percent to the northern Delaware and Oklahoma. Our more mature assets are getting more of the capital allocation than our less mature assets. In the northern Delaware, with some of the (pricing) differential issues and some of the (pipeline) takeaway constraints, we’ve been very thoughtful. A lot of the work we’re doing today is preparing us for full-field development there. We’re understanding the interaction of wellspacing design and completion design. We’re getting prepared for water management, which is going to be very critical there. We’re getting prepared for takeaway capacity, both gas, oil, as well as water. All of that is preparing us so we can keep our lease operating expense low and keep our margins high. Today, we’re growing, but we’re growing on a relatively small base there. It’s not a material portion of our overall production base. But, in the future, that will change. The ground we’re plowing today is getting us prepared for that.
Q: Why does it seem like the industry often treats South Texas’ Eagle Ford as yesterday’s news?
A: It’s kind of shocking. The top operators, which I’d include Marathon, are very much investing in the Eagle Ford. It used to be that core Karnes County was where everyone was focused. That was the best rock and the best returns. Now what we’ve found as we use these subsurface workflows is we’ve now been able to extend that core out. We’re now doing these things in Atascosa County. Today with modern completions designs, those wells are competing right at the top of our portfolio. No other play has better fullcycle returns than the Eagle Ford.
Q: How much life does the Eagle Ford have left?
A: Between our two most mature assets — the Bakken and the Eagle Ford — at our current 2019 activity levels, we talk about having about a decade or so of inventory left.