Marathon Oil Corp. (MRO) Q1 2021 Earnings Call Transcript

Marathon Oil Corp. (NYSE: MRO) Q1 2021 earnings call dated May. 06, 2021.

Corporate Participants:

Guy Allen Baber — Vice President of International Relations

Lee Tillman — Chairman, President and Chief Executive Officer

Dane Whitehead — Executive Vice President and Chief Financial Officer

Mike Henderson — Executive Vice President of Operations

Pat Wagner — Executive Vice President of Corporate Development and Strategy

Analysts:

Jeanine Wai — Barclays Bank — Analyst

Arun Jayaram — JPMorgan Chase and Co — Analyst

Douglas George Blyth Leggate — BofA Securities — Analyst

Nitin Kumar — Wells Fargo Securities — Analyst

Neil Singhvi Mehta — Goldman Sachs Group — Analyst

Neal David Dingmann — Truist Securities — Analyst

Presentation:

Operator

Good morning, and welcome to the Marathon Oil First Quarter 2021 Earnings Conference Call. My name is Brandon, and I’ll be your operator for today. [Operator Instructions] I will now turn the call over to Guy Baber, Vice President of Investor Relations. You may begin, sir.

Guy Allen Baber — Vice President of International Relations

Thanks, Brandon, and thank you to everyone for joining us this morning on the call. Yesterday, after the close, we issued a press release, a slide presentation and an investor packet that address our first quarter 2021 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 & Strategy; and Mike Henderson, Executive VP of Operations. 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.

Now with that, I’ll turn the call over to Lee, who will provide his opening remarks. We’ll also hear from Dane and Mike today before we go to our question-and-answer session. Lee?

Lee Tillman — Chairman, President and Chief Executive Officer

Thank you, Guy, and good morning to everyone listening to our call today. I want to begin by once again thanking our employees and contractors for their dedication and hard work and putting together another quarter of outstanding execution. Not only have our teams continue to manage through the COVID-19 pandemic as critical essential infrastructure providers. They also successfully overcame the challenges of Winter Storm Uri during first quarter, maintaining their focus on safety, while still delivering on all of our core operational and financial objectives.

Though 2020 was a challenging year for our industry, it also brought with it opportunity. And Marathon Oil chose to leverage the supply/demand crisis to further optimize and enhance our business model. We high-graded and focused our capital program. We lowered our cost structure and we further improved our financial strength and flexibility. As a result, we have dramatically enhanced the resilience of our company, driving our free cash flow breakevens consistently below $35 per barrel WTI and building on a multiyear trend of sustainable free cash flow and getting that cash back in the hands of our investors. And we have dramatically enhanced our ability to sustainably deliver robust financial outcomes.

Financial outcomes that can compete with any sector in the S&P 500 and do so across a much broader and lower range of commodity prices. We recognize that given the inherent volatility of our commodity business that we must offer outsized free cash flow generation, coupled with investor-friendly actions to make a compelling investment case. To that end, first quarter ’21 results are a testament to the strength of our business model and how we have positioned our company for success. During first quarter, we generated over $440 million of free cash flow.

Despite the challenges associated with Winter Storm Uri, production volumes were in line with the midpoint of our full year 2021 guidance, and we are fully on track to meet the annual production, capex and cost guidance we provided at the beginning of the year. And we are on track to exceed our free cash flow objectives. For $1 billion of capital spending, we now expect to generate $1.6 billion of free cash flow at $60 per barrel WTI, up from the prior guidance of around $1.5 billion. This corresponds to a free cash flow yield approaching 20% and a sub 40% reinvestment rate. All at an assumed oil price that is below the current forward curve.

We remain committed to our $1 billion capital program. There will be no change to our capital budget even if oil prices continue to strengthen. We will simply generate more free cash flow and further solidify our standing as an industry leader when it comes to capital discipline, a hard-earned reputation we have established over multiple years. We have accelerated our balance sheet and return of capital objectives, the specifics of which Dane will cover in just a few minutes.

Importantly, everything that we are doing is sustainable. Our peer-leading capital efficiency, our outsized free cash flow generation, our competitive cost structure, our investment-grade balance sheet and our rising return of capital profile. The proof point for this sustainability is our 5-year benchmark maintenance scenario that can deliver around $5 billion of free cash flow from 2021 to 2025 and a flat $50 per barrel WTI price environment or closer to $7 billion of free cash flow at the current forward curve, along with a corporate free cash flow breakeven of less than $35 per barrel throughout the period. And the foundation for these differentiated financial outcomes is our multi-basin U.S. portfolio with well over a decade of high-return inventory, complemented by our integrated gas position in EG.

Finally, we are leading the way in our approach to ESG excellence and are committed to continually enhancing all elements of our company’s ESG performance. Safety remains our top priority, we are building on the record safety performance we delivered last year with a very strong start to 2021, as measured by total recordable incident rate. Best-in-class governance remains at the forefront of everything we do. We have appointed two new directors to the Board this year and remain committed to ongoing refreshment, independence and diversity. We also reduced and redesigned executive and Board compensation for improved alignment with investors as I highlighted early this year. And last but not least, we remain committed to reducing our greenhouse gas emissions intensity. We made tremendous strides during 2020, reducing our overall GHG intensity by approximately 25%.

We are hard at work to achieve our GHG intensity reduction target of 30% in 2021, a metric hardwired into our compensation scorecard as well as our goal for a 50% reduction by 2025, both relative to our 2019 baseline. And we have included $100 million of investment over the five years of the benchmark scenario to support this goal. With that brief summary of how we have positioned our company for success, I would like to turn it over to our CFO, Dane Whitehead, to share the notable acceleration of our balance sheet and return of capital objectives.

Dane Whitehead — Executive Vice President and Chief Financial Officer

Thank you, Lee, and good morning, everybody. At the center of our capital allocation and reinvestment rate framework is our objective to return at least 30% of our cash flow from operations back to our investors. Our capital return strategy prioritizes balance sheet enhancement through gross debt reduction and direct return of capital to equity holders through our base dividend and over time, likely through other return vehicles as well. We have a strong track record of generating free cash flow and directing that cash back to our investors, are fully committed to this model and are well positioned to meaningfully beat our objectives in 2021.

When considering our updated debt reduction target on recent base dividend increase, we’re actually on track to return well over 40% of our cash flow back to investors this year. First, we accelerated our 2021 gross debt reduction objective of $500 million, fully retiring our next significant maturity and we’re now targeting at least another $500 million of gross debt reduction, bringing our total 2021 debt reduction target to $1 billion. Reducing our gross debt is entirely consistent with our goal to further enhance our balance sheet, our investment-grade credit rating. More specifically, our goal has been to reduce our net debt-to-EBITDA to below 1.5 times, assuming more of a mid-cycle $45 to $50 per barrel WTI environment. We’re making rapid progress toward achieving this milestone by the end of the year. And in parallel, our aim is to significantly reduce our gross debt moving toward a $4 billion gross debt level.

Beyond the obvious benefit to our financial flexibility, the interest expense reductions associated with the structural gross debt reduction have the added potential to fund future dividend increases at no incremental cost to the company, thereby preserving our very competitive post-dividend corporate free cash flow breakeven. Along with reducing our gross debt, we also raised our quarterly base dividend by 33%. Our objective is to pay a base dividend that is both competitive relative to our peer group in the S&P 500 and sustainable throughout commodity price cycles. Our decision to raise our dividend is a sign of our confidence in the strength and sustainability of our financial performance, and we see potential for disciplined, sustainable and competitive base dividend growth over time.

We’re targeting up to 10% of our cash flow from operations toward the base dividend, assuming $45 to $50 price environment, and we currently have ample headroom to progress under this framework. And to ensure sustainability through the price cycle, we’re focused on maintaining our post-dividend breakeven well below $40 a barrel WTI. In fact, even with the recent dividend increase, our post-dividend free cash flow breakeven currently sits around $35 per barrel of WTI. In summary, we are well positioned this year to return over 40% of our cash flow to investors through gross debt reduction and our base dividend, our top near-term priorities.

As we make significant progress toward our $4 billion gross debt objective, we will likely take the balance of 2021 to accomplish. And as we continue to advance further base dividend growth in line with our framework, we’ll look to transition towards simply retiring debt as it matures and focusing more on alternative shareholder return mechanisms, including share buybacks or variable dividends, all funded through sustainable free cash flow generation. Before I turn the call over to Mike Henderson, who will provide an update on our 2021 operational performance and capital program, I’d like to address an issue that has been topical recently, and that is cash taxes.

We are not a cash taxpayer in the U.S. this year. And at prevailing commodity prices, we don’t expect to be paying U.S. cash federal income taxes until the latter part of this decade. This holds true even if the tax rules for intangible drilling costs or IDCs are changed or if the corporate tax rate has increased. We have significant tax attributes in the form of net operating losses, approximately $8.4 billion on a gross basis, in addition to foreign tax credits of over $600 million. These attributes will be used to offset future taxes. Neither of these items is energy sector specific, so we don’t expect any new tax legislation to threaten them.

The bottom line is we don’t expect to be a U.S. cash taxpayer until the latter part of this decade. Now I’ll turn it over to Mike Henderson, our EVP of Operations.

Mike Henderson — Executive Vice President of Operations

Thanks, Dane. My key message today is that we’re on track to achieve all of our 2021 operational objectives that we set at the beginning of the year, including our $1 billion capital program, and that we are on track to exceed the free cash flow objectives. Our strong performance is due to tremendous execution from our asset teams during first quarter, despite the significant challenges associated with Winter Storm Uri. Flat quarter-on-quarter, total oil production of 172,000 barrels per day was quite an accomplishment in light of the operational challenges we experienced and the impact to production you’ve seen reported by peer companies.

Our teams did an exceptional job keeping our volumes online and delivering much needed production at a time when utilities and households were in critical need. Our success began with extensive preplanning efforts and continued with a hands-on approach to managing our operations throughout the storm. We did not proactively shut in our volumes as a preventative measure, rather we fully leveraged our digital infrastructure to prioritize protecting our highest volume, highest rate wells, intelligently routing operators to our highest priority locations. All the while, we kept the safety of our people as our top priority. Our hands-on approach clearly paid off, and our operational and financial results speak for themselves.

Our capital spending during 1Q came in slightly below expectations, reflecting solid well cost execution, but also the shift in timing of some capital from first to second quarter, largely due to storm-driven delays. Looking ahead to 2Q, we expect a slight sequential decline in our oil production, the result of fewer wells to sales in the first quarter, particularly in the Bakken. This is simply a function of the timing of our wells to sales, reflecting a natural level of quarter-to-quarter variability. We will continue to prioritize maximizing our capital efficiency and free cash flow generation sustainably over time, not the production output of any individual quarter.

We do expect the significant increase in our second quarter wells to sales to translate to an improving production trend as we move into third quarter. With the increase in wells to sales and shifting capital from 1Q to 2Q, we expect 2Q capex to rise to the $300 million range, likely representing the peak capex quarter for the year. Still, our capital program is fairly well balanced and ratable, split almost 50-50 between the first half and second half of the year.

More importantly, our full year capital spending and production guidance remain unchanged. As the most capital-efficient basins across the Lower 48, the Bakken and Eagle Ford will still receive approximately 90% of our capital this year. However, both our Oklahoma and Permian assets have high-return opportunities that can effectively compete for capital today. Both assets provide capital allocation optionality, commodity diversification and incremental high-quality inventory. Consistent with what we previously disclosed in our five-year maintenance case and our plan entering the year, our objective is to reintroduce a disciplined level of steady-state activity back into Oklahoma and the Permian by 2022 at 20% to 30% of the total capital budget.

When we do, our expectation is that both assets will support accretive corporate returns and incremental free cash flow to the enterprise. I will now pass it back to Lee, who will provide a few more comments before we move to Q&A.

Lee Tillman — Chairman, President and Chief Executive Officer

Thanks, Mike. I would like to briefly put the 2021 capital program, Mike just discussed, into context by comparing our capital efficiency, our cost structure and our free cash flow generation to peer disclosures from the fourth quarter earnings season. As highlighted by slide 10 in our earnings deck, our 2021 capital program is among the most capital-efficient and free cash flow generative of any company in our peer space. The top two graphics summarize peer reinvestment rate normalized to a $50 and $60 WTI price environment. As you can see, our reinvestment rate, which is a reasonable proxy for both operating and capital efficiency in a maintenance or flat production scenario is among the lowest in our peer group. For every dollar of capital we are spending, we are delivering more cash flow than virtually any of our peers.

Similarly, our 2021 capex per barrel of production on either an oil or oil equivalent basis is among the lowest in our space. In the current more disciplined environment, operating and capital efficiency are paramount and, in fact, represent our competitive differentiators. Most importantly, as shown by the bottom right graphic, our free cash flow generation relative to our current valuation remains compelling and outsized against our peers and the broader market with a free cash flow yield approaching 20%. We continue to believe that we must deliver outsized free cash flow generation relative to the S&P 500 to effectively compete for investor capital.

This is why we remain so focused on sustainably reducing our corporate free cash flow breakeven, now an integral part of our compensation scorecard, and continuing to optimize our cost structure. With a free cash flow breakeven comfortably below $35 per barrel, we can generate free cash flow yield competitive with the S&P 500, assuming an annual oil price down to approximately $40 per barrel WTI. We never rest when it comes to our structure. In a commodity business, the low-cost producer wins, and slide 11 provides additional details around our ongoing efforts and reinforces our multiyear track record of cash cost reductions. We have opted to use an all-in cost basis that normalizes peer-reported data and avoids the challenges of how each operator categorizes their respective cost.

As you can see from the data, our all-in 2020 unit cash costs are well below the peer average. On a more apples-to-apples comparison basis, our all-in unit cost are top quartile among our direct multi-basin peers. Specific cost reduction actions already taken this year are broad-based, including a 25% reduction to CEO and Board compensation, a 10% to 20% reduction to other corporate officer compensation, a workforce reduction to more appropriately align our headcount with a lower level of future activity, a full exit from corporate-owned and leased aircraft and various other cost reduction initiatives. Finally, I would like to again underscore the sustainability of all that we are doing.

The sustainability of our sector-leading capital efficiency and free cash flow generation is underscored by the financial strength of our previously disclosed 5-year benchmark maintenance capital scenario. And our maintenance scenario is underpinned by well over a decade of high-quality inventory that competes very favorably in the peer group as validated by credible third-party independent analysis shown on slide 13. The quality and depth of our inventory, in combination with our reinvestment rate capital allocation approach, provides us with visibility to continued strong financial performance. Further, we have a demonstrated track record of ongoing organic enhancement and inventory replenishment. Even in our maintenance scenario, we continue to direct capital toward resource play exploration and targeted organic enhancement initiatives, including our redevelopment program in the Eagle Ford.

In conclusion, I truly believe our combined actions have positioned Marathon Oil for success not only relative to our E&P peer group, but relative to the broader S&P 500 as well. And our long-term incentives now reflect that conviction explicitly. Our company was among the first to recognize the need to move to a business model that prioritizes returns, sustainable free cash flow, balance sheet improvement and return of capital. We also led the way in better aligning executive compensation to this new model and with investor expectations. We are positioned to deliver both financial outcomes and ESG excellence that are competitive, not just with our direct E&P peers, but also the broader market.

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

Questions and Answers:

Operator

[Operator Instructions] And from Barclays, we have Jeanine Wai.

Jeanine Wai — Barclays Bank — Analyst

Hi, good morning everyone. Thanks for taking our question.

Dane Whitehead — Executive Vice President and Chief Financial Officer

Good morning.

Lee Tillman — Chairman, President and Chief Executive Officer

Good morning, Jeanine.

Jeanine Wai — Barclays Bank — Analyst

Good morning. Our first question is on return of capital, and Dane, you gave some incremental good commentary there in your prepared remarks. So, the new target is at least $500 million more for the year. Ultimately, you want to get to $4 billion gross versus the $5 billion that you’re at now. So, what determines how much above the new $500 million target that you’re doing specifically for this year? Does the at least part of the $500 million target, does that reflect that you need to do this opportunistically in the open market because you have to go after 2025 or is it more that you’re just going to see whatever you can get done with free cash flow this year? And I guess, what we’re really trying to back into is figuring out whether getting to that $4 billion growth is mutually exclusive to maybe pulling the trigger on the variable distribution to equity holders because, I guess, based on our free cash flow forecast, we think you could get to $4 billion growth by the end of the year, still have good operating cash balance, etc.

Dane Whitehead — Executive Vice President and Chief Financial Officer

Yes. I think at current commodity prices, Jeanine, we are well positioned to meet all the financial objectives I laid out and get to sort of the next leg of visibility to variable returns. If I can just back up a second and kind of frame up where we are, I went through it relatively quickly in my prepared comments. To our goal, 30% of cash flow from operations to investors in a combination of debt reduction and base dividend near term and then variable vehicles maybe longer term. On track from 40%, $1 billion debt reduction this year based on our new goal, plus $120 million of dividends. And paying down debt and looking at the base dividend and make sure it remains competitive or not mutually exclusive, we’ll continue to look at that. Our goal has been to reduce net debt-to-EBITDA to sub 1.5 times in a $45 to $50 world. Clearly, in the current market price world, where they’re already, but we’re looking at a more conservative longer-term price deck and we’re trying to manage, too.

In parallel with that, we laid out a $4 billion gross debt target. And so hence, your question, is it $500 million, or is it more? And how are you going to accomplish it? We definitely will need to tender the 2022 $500 million maturity that we took out earlier this year was pretty near-term maturity. So we could just make whole redemption on that. We’ll be going to a tender process for the next tranche of debt, and it’s more art and science for sure. You’re really trying to balance the quantum of debt, the premium you’re willing to pay and the interest expense reduction, which is a real benefit of the process as well. So, market conditions matter a lot when you go. We’ll certainly want to make sure we’ve got the cash to fund whatever we do. And so probably in the second half of the year, we’ll go, and the answer to your question is, will we stick to $500 million or will we upsize, it’s really going to depend on market conditions at the time. We’ll have to make a market judgment then. But it’s certainly not off the table.

The one other thing I’ll leave you with, just a reminder that we have forward starting interest rate swaps with a notional value of $850 million. They have a mark-to-market value. Today’s pricing of roughly $85 million. And it’s very levered to 10-year treasury rates. So if treasury rates go up, those swaps will continue to go up. And that’s a nice vehicle to help us pay premiums in a tender transaction.

Jeanine Wai — Barclays Bank — Analyst

Okay. That’s interesting. Thank you for all that details. Maybe for a second question, just switching to operations here. It’s kind of a philosophical one, little nuance, not sure if it matters that it kind of does to us. But, given good efficiencies and good well performance this year and you’re already at the midpoint of the full year oil guide at 172 and you’ve been at that level for three quarters now. Is the preference for 2021, is it to really hit the full year production guide on the least amount of capex? And I guess I’m just asking because we see inflation on the horizon, we see activity picking up maybe more on the private side of things. And companies seem to be in two camps. And some say that if they can produce more oil in the same capex this year, that’s great. And others are just adamant that there’s going to be no growth period this year, so we’re just wondering what camp you’re in.

Lee Tillman — Chairman, President and Chief Executive Officer

Yes. Good moring, Jeanine, this is Lee. First of all, we are in the camp of prioritizing capital efficiency and free cash flow, not the production output of any given quarter. So there’s going to be some natural variability as we move through the year. But our number one objectives really revolve around delivering financial outcomes, not production outcomes. So perhaps we’re a third camp then based on your description. So that’s where our focus is going to be as we’re going to be really focused on meeting that objective that Dane put out there, which is a minimum of that 30% return of cash back to our investors. We’re already trending well above that, above 40%, even with just the new debt targets and the base dividend increases. And I think again, if prices remain constructive, we still have additional headroom moving through the year. But that’s really our perspective is to maintain that capital and operating efficiency and deliver on that more from a financial lens as opposed to a production lens.

Jeanine Wai — Barclays Bank — Analyst

Great, thank you very much.

Lee Tillman — Chairman, President and Chief Executive Officer

Thanks, Jeanine.

Operator

From JPMorgan Chase, we have Arun Jayaram.

Arun Jayaram — JPMorgan Chase and Co — Analyst

Lee, good morning. I was wondering if you could give us your thought process, the Board’s thought process on variable dividends versus buybacks? And who do you think is a clubhouse leader at this point? Obviously, Devon appears to be getting some credit for its policy. So just wanted to get your thought process and where your head is at today?v

Lee Tillman — Chairman, President and Chief Executive Officer

Yes. I’ll maybe offer a few comments, then I can certainly let Dane jump in. First, I would just say, Arun, everything is on the table. Our near-term priorities, I think, as Dane very clearly laid out, are achieving our gross and net debt reduction targets. The net debt reduction targets really calibrated to more of a mid-cycle pricing environment. Essentially, we’re already there in the current environment, but we’re not going to lean on just the EBITDA performance. We want to structurally improve our balance sheet. Hence, both the combination of both net debt and gross debt targets. Beyond that, as Dane mentioned in his opening remarks, is we still believe that we have room to grow within our base dividend structure. We’ve made one change. We bumped the dividend by a bit over 30% this quarter or at subsequent to this quarter, and we still believe using that kind of 10% of cash from operations as a metric in a mid-cycle environment, that there is still room to maneuver there.

So, we believe in the near term, we have our priorities set correctly. As we transition from that, I think the other opportunities that you’ve highlighted become more in play. And again, we’re not presupposing an answer today. We’re going to look to get the capital back to our investors in the most efficient manner possible. We’re continuing to look at how variable dividends are received in the marketplace. We also, of course, have the lever of still having an outstanding authorization on share repurchases as well. So, that’s a future decision, but clearly, it’s one that is getting discussed today with the Board and internally. And we’re also watching market response as well. But we think the starting point of structural gross debt reduction coupled with a competitive and sustainable base dividend is really the starting point to even have that discussion.

Operator

And from Bank of America, we have Doug Leggate.

Douglas George Blyth Leggate — BofA Securities — Analyst

Thanks. Hi guys, good morning everybody. I wonder, maybe Dane or one of the other guys would like to take this, but Lee, the focus on the balance sheet is always pretty palpable in terms of your capacity to accelerate into a much stronger position relative to your peer group. My question is, what happens next? Because clearly, there’s a lot of assets for sale and the words of Ryan Lance of Conoco, there’s a lot of companies doing the same thing. And I completely agree with the business model that you’ve put together. Question is, can you take that to someone else’s assets? So it’s basically an M&A question. You’ve talked about cash returns, you haven’t talked about M&A. So I wonder if you could just address that.

Lee Tillman — Chairman, President and Chief Executive Officer

Happy to do so, Douglas. I guess, first of all, Douglas, all opportunities in M&A, we’re going to view through the lens of our very strong organic case, and we’ve already talked about that industry-leading capital efficiency, strong free cash flow yields. In fact, yields approaching 20% on current equity valuation and all that’s supported by well over a decade of very high-quality inventory with extremely low breakeven. So, I say all that and couple that with the five-year benchmark scenario because that really does, in many ways, set the bar that we have to clear for any M&A, large or small. And we have been very disciplined, we have a very clear criteria around any inorganic opportunities. We’re not going to move away from that criteria, we operate in four of the key basins in the U.S. and not surprisingly, we’re engaged in the evaluation and assessment that really anything that comes available.

But what we’re not going to do is we’re not going to indulge in expensive M&A. That is something that is just not required in our model. Our model is very strong organically. And great rock is necessary but not sufficient for M&A, you must also capture value, you must also generate returns. And so, the same discipline that we exert in our organic business is the discipline that you’re going to see on the inorganic side as well. We’re engaged in the market, we see everything across those four core basins. But you should expect us to continue to say no to any expensive M&A that does not meet our criteria.

Douglas George Blyth Leggate — BofA Securities — Analyst

I appreciate the color. My follow-up is, I hate to do this, but it’s also an M&A question. And it’s because I look at some of the things are for sale, look like they’re right in your backyard. So a few, for example, overseas, Chesapeake’s Eagle Ford in Texas, obviously. So, that’s why I asked the question, but the other side of that question, however, is if your balance sheet and free cash flow outlook is so strong, some of the assets that have generated free cash, I wonder where they rank in terms of the other side of the equation, which is potential asset sales? I’m thinking specifically about EG. You’ve got a big LNG plant there. Those other resource holders around you, potentially a lot of value there that you’re not getting recognition for. So how do you think about in a better balance sheet environment is EG a core asset for the business?

Lee Tillman — Chairman, President and Chief Executive Officer

Yes. I think, Douglas, we’re always looking at our own internal portfolio and ensuring that we have the right mix. I think we’ve demonstrated a history of challenging and concentrating and simplifying our portfolio over time. EG is a very unique, but very complementary asset. We’ve actually provided a five-year view of EG, which showed that even on a $50, $3 gas kind of view of the world across those five years, it generates about $1 billion of free cash flow, a couple of hundred million dollars a year. We continue to see opportunities there in the form of gas, like the Alen project that just came online earlier this year.

We think there are other opportunities like that, particularly as we look further afield to cross-border opportunities. In fact, EG and Nigeria just signed an HOA for cross-border cooperation. We have this extremely unique integrated gas infrastructure, as you mentioned, with an LNG plant, methanol plant, gas plant storage and offloading. And we’re sitting in one of the most gas-prone areas of West Africa. So, we believe the value proposition for EG remains exceptionally strong. And certainly, when we look at it in the balance of our 5-year benchmark case, it remains a very strong contributor.

Douglas George Blyth Leggate — BofA Securities — Analyst

Appreciate the answers. Thanks, Lee.

Lee Tillman — Chairman, President and Chief Executive Officer

Thank you, Douglas.

Operator

From Wells Fargo, we have Nitin Kumar.

Nitin Kumar — Wells Fargo Securities — Analyst

Hi. Good morning, Lee and team. Thanks for taking my questions.

Lee Tillman — Chairman, President and Chief Executive Officer

Good morning.

Nitin Kumar — Wells Fargo Securities — Analyst

My first one, Lee, is for you, and it might be a bit of an unfair question, but you’ve talked quite a bit about more S&P and less E&P and you’ve talked about how your metrics come with the S&P 500. But obviously, there is a view out there that just E&P business or oil and gas business is not great. You’ve talked about your ESG credentials, but beyond that, are there opportunities for you to improve your sort of green metrics, if I may?

Lee Tillman — Chairman, President and Chief Executive Officer

Yes, absolutely. Well, first of all, I think when we talk about the investment case, for E&P or for Marathon specifically, you have financial performance and you have nonfinancial performance. You obviously must have the financial performance. You have to be able to in a commodity business with high volatility to generate free cash flow yields that are going to be outsized relative to the S&P 500. And I believe certainly, Marathon is delivering on that commitment.

On the nonfinancial performance side, which really, to me, is wrapped around our license to operate. I think you have to address all dimensions of performance there from safety to emissions, to good governance. And I believe there, we have placed ourselves in a very leadership position, whether you want to talk about executive comp, Board composition and refreshment and diversity, all of those things we have driven. Specifically to the E in ESG, which generally means emissions, we have set very aggressive, but in our view, practical targets to achieve reductions in our emissions intensity footprint.

We’ve set a single-year target that is integrated in with our compensation structure, which is a 30% improvement relative to the 2019 baseline. And then we’ve also set more of a midterm goal, and a goal that’s not so aspirational and out in time that the current management doesn’t feel the accountability for it, and for that one, it’s a 50% reduction. And when you look at achieving that ultimate goal, that places us, I believe, in a very competitive position relative to other sources of oil and gas both here in the U.S. and internationally.

So, I believe those green credentials are, in fact, improving in time. There’s still much to do. I believe there is still a lot of opportunity. We believe that we’re still in the phase of elimination and reduction first as opposed to offsets, I mean, offsets and things like CCS will certainly play a role in the future, but the industry has a great opportunity just around flaring and gas pneumatics and moving to line power, all of these things that will help us move our emissions intensity footprint in the right direction. So, I believe that the answer is that we have to deliver the financial performance. We also have to protect our license to operate through our nonfinancial performance, and the way you do that is by setting aggressive but pragmatic goals that are really within the purview of the current leadership team.

Nitin Kumar — Wells Fargo Securities — Analyst

Great. I really appreciate that. I guess my next follow-up is around capital allocation. As we’ve talked a little bit about what you would do with excess free cash. But in your five-year plan, today, you’re focused on the Bakken and the Eagle Ford, you’re seeing strength in gas and NGL pricing. So as you go forward, how does the Permian and Oklahoma and I’ll put REx in there as well, how do those start competing for capital?

Lee Tillman — Chairman, President and Chief Executive Officer

Yes. Just maybe as a bit of a reminder, and I think Mike probably referenced this in his opening remarks, is that as we move to 2022 and beyond and the five-year kind of benchmark case, 20% to 30% of our capital allocation will be going to the Permian and Oklahoma. In fact, even in this year, as you know, we’ll be completing some DUCs in Oklahoma that we’ll be taking advantage of the secondary product pricing, gas and NGLs that you just discussed. So, we still have extremely high-quality inventory, and in a combination play like Oklahoma, we certainly have the optionality to take advantage of what the gas market and NGL market delivers. But we fully expect to be blending in more in consistent capital allocation to both Oklahoma and Permian as we step into 2022.

Nitin Kumar — Wells Fargo Securities — Analyst

And what about REx?

Lee Tillman — Chairman, President and Chief Executive Officer

Yes. I’ll just maybe let Pat talk a little bit about where we are on REx, both near-term and as we look a little bit out toward the future.

Pat Wagner — Executive Vice President of Corporate Development and Strategy

Nitin, this is Pat. We have continued to progress our West Texas oil play. I think I might have mentioned this last quarter, but we are in the midst right now of drilling a three-well pad with both Woodford and Meramec targets, testing kind of a spacing test on that project. I may remind you that we’ve drilled six wells to date on that project in the Woodford and Meramec, and they continue to perform very well, good oil cut, low decline, low water cut, stable GOR. So we’re really encouraged, and now we’re in more of a maturing part of the project to try to get our well costs down and test spacing and progress that project. So we’ve allocated capital to it this year, and we will continue to allocate capital to it to bring it to development.

Nitin Kumar — Wells Fargo Securities — Analyst

Okay, thanks, Pat. Thanks, Lee.

Lee Tillman — Chairman, President and Chief Executive Officer

Thank you. Appreciate it.

Operator

From Goldman Sachs, we have Neil Mehta.

Neil Singhvi Mehta — Goldman Sachs Group — Analyst

Good morning, guys. The first question is just, Lee, building on your comments on costs, are you seeing on the ground any signs of inflation, whether it’s on the steel side, chemicals, we’re certainly seeing higher commodity prices, or on the service side? And how do you offset that? And is that through the good efficiencies and the supply chain mechanisms that you put in place?

Mike Henderson — Executive Vice President of Operations

Hey, Neil, it’s Mike here. I’ll take first cut at that, and certainly, if any other guys want to chime in, they can. What I’d say is, overall, our costs we experienced, they’re aligned with what we had in the budget, both in the capital and the expense space. We are seeing a bit of pressure in the OCTG area and to a lesser extent, in chemicals and fuels. OCTG, the driver there, simply down to raw material availability and then some capacity constraints in the mills. Obviously, things like diesel fuel, chemicals, just tied into the rise that we’ve seen in WTI. In terms of what we’re doing to mitigate that, we are seeing some success through some competitive tendering exercises and managed competition in other areas of the business.

I’ll provide a little bit of color in the two largest areas of our spend. So, if I look at the rig space, for example, at the moment, we’ve got a mix of term contracts and pad-to-pad commitments. That provides us with a bit of flexibility, but also some insight into the prevailing market conditions, and that certainly allows us to be opportunistic, particularly maybe as we think about getting ready for next year. In the pressure pumping space, we’ve recently tendered our Bakken scope. We had no commercial surprises there. A crew is now on contract through the end of the year and operating well. In the Eagle Ford, the main crew that we’ve got there, they’re on contract through into the beginning of the fourth quarter, so all of those costs are tied down.

Interestingly, we’ve also gone out with some tenders for some spot crews. We’re seeing very competitive rates there. Again, all in line with the forecast that we had for the year. So, I’d probably wrap it up by saying that we are on track to deliver, certainly our completed well cost per footage targets that we laid out in the Eagle Ford and Bakken. And as I mentioned earlier, our full year capital budget of $1 billion.

Lee Tillman — Chairman, President and Chief Executive Officer

I guess, Neil, one thing I would maybe add to Mike’s comments, you mentioned, well, how do you offset even a little bit of movement, say, on things like OCTG. And I want to remind everyone, there are some very durable savings that the teams continue to work each and every day. It starts kind of with the way we optimize our well designs, the execution efficiency that we generate in the field, whether stages per day, rate of penetration, all those things. There’s supply chain optimization and vertical integration, how we actually secure our services. And then finally, there’s that commercial leverage side, which obviously is still one that we try to pull, just given our size and scale. But three of those four are very durable. They’re not cyclical. And those are the levers that we pull on to ensure that we can continue to keep our well cost trends heading downward.

Neil Singhvi Mehta — Goldman Sachs Group — Analyst

Thanks, guys. And the follow-up here, in the slide, you talk about Dakota access risks and you contained the impact of plus/minus $50 million here. Just how are you thinking about takeaway out of the Bakken? It does look like, by all indications, the pipe will flow, but what are you hearing on the ground? And then just kind of walk through the maths behind that data point. Thank you.

Pat Wagner — Executive Vice President of Corporate Development and Strategy

Neil, this is Pat. I’ll take that. Could you just clarify, are you focused on takeaway or the impact to us from a cash flow perspective?

Neil Singhvi Mehta — Goldman Sachs Group — Analyst

Yes, both. What are your thoughts on the Dakota access pipeline, and then how would any decision there either way impact the cash flow?

Pat Wagner — Executive Vice President of Corporate Development and Strategy

Okay. All right. Well, obviously, it’s a complex case that we’re following very closely. There’s a lot of motions pending now, but there’s one pending with the district court to enjoin the continued operation of DAPL, and DAPL is preparing to file an appeal of the DC circuit court’s decision with the Supreme Court. So we’ll just continue to monitor that. We won’t speculate on the outcome. We do believe that if DAPL is ordered to shut down, there’s a variety of stakeholders in the communities where we do business, which include the state of North Dakota itself and the three affiliated tribes, the MHA Nation, which will be significantly impacted.

In fact, MHA Nation has recently disclosed that estimates losses of more than $160 million over a one-year period and more than $250 million over a two-year period, which is why they’ve come out in support of DAPL’s continued operation. In terms of our impact, we’ve talked about that we really only have direct exposure to DAPL of about 10,000 barrels a day net. We have no flow assurance concerns. We made that disclosure to try to give some clarity on what the overall impact could be for us on cash flow, that $50 million to $60 million that we disclosed last quarter would assume a June one shutdown.

Obviously, as this plays out, that’s probably a conservative estimate. It probably would flow a little longer than that. On a full year, we’d expect an initial sort of blowout in the in-basin diffs, but then we think things would settle down to the marginal cost to transport barrels. And there’s plenty of capacity from a rail standpoint to clear the basin. So from a full year perspective, we think it’d just be slightly above the $50 million to $60 million if it lingered for a long period of time.

Lee Tillman — Chairman, President and Chief Executive Officer

And I would maybe just also add, Neil, that the Army Corps of Engineers has been very consistent in their position of supporting continued operations through the EIS process, which is now, I think, scheduled to complete in March of 2022. So although we can’t predict how the courts will act, certainly, from a Corps of Engineers perspective, they have been supportive. The line has been operating safely and reliably for some time. So and as Pat mentioned, we have very strong support within North Dakota, both the state government there as well as the three affiliated tribes. So we want to be prepared, and I believe we are. But certainly, our view today is that DAPL will continue to operate safely just as it is today.

Neil Singhvi Mehta — Goldman Sachs Group — Analyst

Thanks, guys. Appreciate it.

Operator

[Operator Instructions] And from Truist Securities, we have Neal Dingmann.

Neal David Dingmann — Truist Securities — Analyst

Good morning, everyone. So, my first question is really just on efficiencies. I can’t help but notice, especially pertaining to the Bakken, I can’t help but notice very limited number of wells needed to keep production flat. So I guess two questions around that. One, when it comes to efficiencies, are you still seeing improvements? I guess I can’t get over it was it like three wells or so that kept production essentially flat there. Number one, if you’re still seeing that kind of improvement? And number two, if you are given that you are getting that kind of efficiencies there, why not potentially even lent a little bit and potentially take some of that capex from somewhere else?

Lee Tillman — Chairman, President and Chief Executive Officer

Yes. Just on the Bakken performance, first of all, we did benefit in first quarter from obviously the Bakken completions that were done in Q4. So we carried a bit of that momentum. So even though we only had three formal wells to sales in the quarter, it was really also that carry-in effect from fourth quarter, I think that certainly gave us the ability to keep Bakken flowing strongly. The other thing, and this is kudos to the asset team. They’ve done an exceptional job of high uptime performance and ensuring that if we have a well go offline for, say, something like ESP performance, that we’re able to get a workover rig on location and get that taken care of. So we will see some impact, though, of that reduced wells to sales in the Bakken as we move into second quarter. But it’s a phasing impact more than anything.

Neal David Dingmann — Truist Securities — Analyst

And let me just add, I guess, one more follow-up just in that same area. Is it again because of your kind of proprietary infrastructure because it does seem like still when I kind of hone in on the efficiencies that you all have, I’m just wondering, it seems like you are having a bit better returns and if that’s the case, kind of back to Doug’s question, there has been some M&A in the Bakken, if you have that kind of competitive advantage, is this kind of a focus area when looking for particular deals?

Lee Tillman — Chairman, President and Chief Executive Officer

Well, certainly, when we benchmark from an operating and capital execution standpoint, we feel very good about our position in the Bakken. That team is very strong performing top quartile, if not top of basin kind of team. So you’re right. In terms of our ability to drive value in our core basins, there’s very few teams that can do that better than us. But each of these opportunities are unique, and again, we’re going to be very disciplined. Even applying our operating advantage, we have to be able to demonstrate that it meets our criteria around financial accretion, certainly no harm to the balance sheet, synergies and industrial logic. So again, good rock is necessary, but not sufficient. We have to see both value and return from anything inorganic that we might look at.

Neal David Dingmann — Truist Securities — Analyst

Perfect. Thanks, Lee. Appreciate it.

Lee Tillman — Chairman, President and Chief Executive Officer

Thank you. Appreciate it, too.

Operator

And we’ll now turn it back to Lee Tillman for closing remarks.

Lee Tillman — Chairman, President and Chief Executive Officer

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 and perseverance, particularly during Winter Storm Uri. That concludes our call.

Operator

[Operator Closing Remarks]