Marathon Oil Corp (NYSE: MRO) Q2 2022 earnings call dated Aug. 04, 2022
Corporate Participants:
Guy Allen Baber — Vice President of Investor Relations
Lee M. Tillman — Chairman, President & Chief Executive Officer
Dane E. Whitehead — Executive Vice President & Chief Financial Officer
Mike Henderson — Executive Vice President of Operations
Analysts:
Arun Jayaram — JPMorgan — Analyst
Phillips Johnston — Capital One Securities — Analyst
Doug Leggate — BofA Securities — Analyst
Neal Dingmann — Truist Securities — Analyst
Scott Hanold — RBC Capital Markets — Analyst
Presentation:
Operator
Welcome to the Marathon Oil Corporation MRO2Q 2022 Earnings Conference Call. My name is Richard, and I’ll be your operator for today’s call. [Operator Instructions]
I’ll now turn the call over to Guy Baber, Vice President, Investor Relations. Mr. Baber, you may begin.
Guy Allen Baber — Vice President of Investor Relations
Thanks, Richard, and thank you to everyone for joining us this morning. Yesterday, after the close, we issued a press release, a slide presentation and investor packet that addressed our second quarter 2022 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 Chief Executive Officer; Dane Whitehead, Executive Vice President and Chief Financial Officer; Pat Wagner, Executive Vice President of Corporate Development and Strategy; and Mike Henderson, Executive Vice President 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’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. We will also reference non-GAAP terms in today’s discussion, which have been reconciled and defined in our earnings materials, including reinvestment rate, adjusted cash flow and adjusted free cash flow.
With that said, I’ll turn the call over to Lee, who will provide his opening remarks. We’ll also hear from Dane and from Mike today before we move to our question-and-answer session.
Lee?
Lee M. Tillman — Chairman, President & Chief Executive Officer
Thank you, Guy, and good morning to everyone listening to our call today. To start, I want to once again thank all of 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 results-driven but equally focused on how we achieve those results. While both equity and commodity markets remain characterized by significant day-to-day volatility, a few underlying trends remain well entrenched.
Global demand for oil and gas continues to recover from the depths of the pandemic, while supply of oil and gas remains constrained by multiple years of underinvestment, strained supply chain, labor shortages and inconsistent, if not outright hostile regulatory policy on a global scale. Physical commodity markets are tight, global inventories are well below historic norms, and global spare capacity is limited at best. The ongoing Russian invasion of the Ukraine and the associated humanitarian crisis has only exacerbated these underlying trends.
And even in the unlikely event of a near-term resolution, the dying has been cast in actions, particularly by European countries, are already well underway to move away from Russian oil, natural gas and refined products. Here at home, the U.S. consumer is facing inflationary pressures across the board, including energy. The potential for recession looms and American families are suffering, but the U.S. Energy Renaissance led by the Shell revolution has provided a measure of protection from the forced and more austere measures now being considered in Europe.
We are experiencing firsthand the value of energy security and Made in America oil and gas, while witnessing the fallout of failed energy policies that have put much of Europe at risk. We must ensure that the U.S. economy does not fall victim to the same four choices. So while we are fully aware, we are price takers and remain steadfastly committed to capital discipline, we could be in for an extended period of elevated commodity prices globally, both for oil and natural gas.
All of this underscores the need for an orderly energy transition or more accurately and energy expansion as part of an all-of-the-above strategy to meet the world’s growing demand for reliable, affordable and responsible energy. And it highlights the critical role the U.S. oil and gas sector must play on a global scale, especially as one of the world’s lowest GHG emissions intensity producers. As I’ve said before, our mandate is clear, and it is a statement of Marathon Oil’s corporate purpose to help responsibly meet global energy demand by operating with the highest standards, prioritizing all elements of safety, environmental, social and governance performance while delivering strong financial returns to our shareholders.
We have conviction we are pursuing the right strategy for our shareholders and stakeholders alike. It’s best summarized by our framework for success on slide four of our deck. Strong corporate returns, sustainable free cash flow generation and meaningful return of capital to our shareholders through the commodity price cycle, all underpinned by a high-quality portfolio of U.S. unconventional resources complemented by global LNG exposure via our EG Integrated Gas business. A bullet through balance sheet and a transparent commitment to comprehensive ESG excellence.
Importantly, second quarter once again represented another quarter of comprehensive delivery against this differentiated framework highlighted by record quarterly financial performance. I would like to focus on a few key takeaways this morning. First, we are building a market-leading track record of returning capital to our shareholders. returning a significant amount of capital to our shareholders through the commodity price cycle is foundational to our value proposition in the marketplace. Our return of capital framework is uniquely calibrated to operating cash flow, not free cash flow, prioritizing our shareholders as the first call on capital instead of the drill bit.
Basing our return on capital framework on a percentage of operating cash flow instead of free cash flow has been an intentional decision. It reflects the confidence we have in our high-quality asset base and the strength of our commitment to shareholders. This is an especially important distinction in an inflationary environment, where capital inflation will necessarily reduce the cash available for peer companies to return to investors based on the inherent design of their frameworks. It won’t for us. While frameworks and commitments are important, we continue to believe that establishing a consistent track record of delivery quarter in and quarter out is key to building and maintaining trust and credibility in the market.
We are in the process of building one of the strongest return of capital track records in the entire S&P 500. Since achieving our leverage objective in October of 2021 through significant gross debt reduction, we have returned $2.5 billion of capital to our shareholders. Over the trailing three quarters, we’ve returned approximately 55% of our CFO, equating to approximately 75% of our free cash flow. This includes $2.3 billion of share repurchases driving a 15% reduction to our outstanding share count in just 10 months and contributing to significant underlying growth in all of the per share financial metrics that matter most to our equity valuation.
My second key point. We are delivering financial outcomes that are not only at the top of our E&P peer group, but at the very top of the S&P 500. We must compete with investment alternatives across the broader market. As I already mentioned, second quarter represented a record financial quarter for our company in many respects, an all-time high for adjusted earnings, free cash flow and shareholder distributions. The full year outlook is just as strong. We expect to generate around $4.5 billion of free cash flow for the full year, assuming $100 WTI and $6 Henry Hub, consistent with guidance provided last quarter.
That’s good for a free cash flow yield north of 25%, not only one of the best yields in the large key space, but the second highest free cash flow yield in the entire S&P 500. For full year 2022, we expect to continue returning at least 50% of our operating cash flow to our shareholders, significantly outperforming the minimum 40% of CFO commitment per our framework. That translates to an annualized shareholder distribution yield of around 20%, one of the strongest return of capital profiles in the S&P 500. Market-leading free cash flow yield and return on capital all at an attractive valuation with our shares trading at an EV to EBITDA multiple among the most attractive in the entire S&P.
My third key point is perhaps the most important. It is that these market-leading financial results I just highlighted are all sustainable. Our continued financial delivery is supported by a high-quality U.S. unconventional portfolio with over a decade of high return inventory and a track record of superior capital efficiency and execution excellence, a world-class integrated gas business in EG with differentiated exposure to the global LNG market, a transparent, disciplined reinvestment rate capital allocation business model and a unique operating cash flow linked return of capital framework.
Our five and 10-year benchmark maintenance scenarios that highlight our confidence in continuing to deliver peer-leading financial outcomes. And finally, by our commitment to comprehensive ESG excellence, including our objectives to deliver top quartile safety performance while driving peer-leading GHG and methane intensity reductions by 2030 and that are consistent with the trajectory called for by the Paris Climate Agreement.
I will now pass it off to Dane, who will provide a financial update.
Dane E. Whitehead — Executive Vice President & Chief Financial Officer
Thank you, Lee, and good morning all. As Lee mentioned, second quarter was highlighted by record financial results for our company since becoming an independent E&P company. This includes adjusted net income of $934 million or $1.32 per share and adjusted free cash flow of more than $1.2 billion and a 24% reinvestment rate. Such strong financial delivery is enabling us to deliver market-leading return of capital to our shareholders.
Turning to slide eight and nine. I’ll briefly cover our return on capital track record and outlook. Our cash flow driven return on capital framework remains unchanged. And in these uncertain times, we believe the market will reward that commitment, clarity and consistent delivery. We’ve built a hard-earned reputation for execution excellence, and we’re just as focused on establishing the same credibility when it comes to consistently returning capital to our shareholders. The overall objectives of our framework are to maintain capital return leadership versus peers and the S&P 500 and to maximize our equity valuation and reduce downside equity volatility providing clear capital return commitments tied to specific commodity price environments.
As a reminder, our framework calls for delivering a minimum of 40% of cash flow from operations to our equity holders when WTI is at or above $60 a barrel. During 2Q, we returned $816 million of capital to equity holders, including $760 million of share repurchases. That represents 51% of our adjusted CFO and an annualized shareholder distribution yield of almost 20%, one of the strongest capital return profiles in the entire S&P 500. In addition, we further enhanced our financial position by adding around $500 million cash to the balance sheet.
As long as we’re conformably meeting our shareholder return objectives, we like the idea of modestly building some cash on the balance sheet in the current volatile commodity price environment to provide optionality for future debt maturities and small opportunistic bolt-on acquisitions that are accretive long term. But rest assured that returning cash to shareholders at levels that meet or exceed our framework remains our top priority for use of cash and our track record of back stand out. Since achieving our leverage object in last October, we’ve consistently outperformed our minimum commitment, returning approximately 55% of our CFO back to equity holders over the trailing three quarters.
In total, since last October, we returned $2.5 billion of capital. We’ve repurchased $2.3 billion worth of our stock at an average price of $20.51 per share, producing outstanding share count by 15%, driving truly differentiated per share growth, as shown on the graph at the bottom right of slide eight. We’ve also raised our base dividend by 167% since the beginning of last year. While we believe our base dividend is competitive with the S&P 500 and similarly sized industrial companies and certainly sustainable at conservative commodity pricing, there is still a clear opportunity to drive further base dividend growth over time, especially considering the important synergies between the base dividend and our share repurchase program.
Turning to the full year ’22 outlook, 2022 outlook on slide nine. We expect to continue to outperform our 40% minimum CFO commitment. We’re targeting to return at least 50% of our adjusted CFO for total shareholder return of at least $3 billion with upside potential to that number. We’re trading at a free cash flow yield more than 25%, one of the lowest trading multiples in the entire S&P 500. We continue to believe that our equity is fundamentally mispriced. And as long as that’s the case, we’ll aggressively repurchase around stock. As I’ve said before, it’s the best acquisition we can make.
Now I’ll pass it over to Mike for a brief operational overview.
Mike Henderson — Executive Vice President of Operations
Thanks, Dane. Similar to last quarter, my key message today is that the priorities for our capital program remain unchanged. We are staying disciplined. We are prioritizing free cash flow generation, and we are protecting our execution excellence. And we still expect to deliver free cash flow, capital efficiency and operating efficiency at the very top of our peer group. More specifically, our free cash flow guidance of $4.5 billion at a reinvestment rate, approximately 20% remains unchanged as to our full year capital and production guidance ranges.
While we’ve increased our U.S. production expense guidance by $0.25 per barrel. The impact to our earnings and cash flow is more than offset by a $0.25 per barrel reduction to our U.S. DD&A guidance and a $40 million increase to our EG equity income guidance. With respect to the near-term outlook for production capital, we expect third quarter oil production to increase sequentially from 167,000 barrels per day to over 172,000 barrels a day driven by the timing of our Wells to Sales program. Total oil equivalent production is expected to be relatively flat quarter-on-quarter due to a modest decline in EG. Year-to-date, capital spending has been fully consistent with our expectations and with our guidance for first half weighted program. We spent 56% of our full year budget versus prior guidance of 55% to 60%.
Third quarter capex is expected to be similar to the second quarter level reflecting some shift in capital spend from second quarter to third quarter and a working interest uptick. While it’s premature to provide detailed 2023 guidance, we are part of work optimizing our 2023 execution plans. A little earlier than normal, we are taking a disciplined and thoughtful approach to our contracting strategy. Our top priority is to continue protecting our execution confidence and access to high-quality service providers and equipment in order to continue delivering peer-leading free cash flow generation and return of capital.
With that, I will turn it back over to Lee to close this out.
Lee M. Tillman — Chairman, President & Chief Executive Officer
Thanks, Mike. Before we move to our question-and-answer session, I want to provide a few preliminary comments on the 2023 outlook and then put the financial results we are currently delivering into context. Consistent with Mike’s remarks, it’s far too early to offer up any detailed 2023 capital spending guidance, largely due to macro uncertainties that could materially impact the outlook for inflation. But I can give you confidence that Marathon Oil’s key priorities will remain unchanged. Regardless of the environment, our objective will be to continue delivering peer-leading and market-leading free cash flow generation and return of capital to shareholders.
This durability is supported by our peer-leading capital efficiency, balanced portfolio, investment-grade balance sheet and low free cash flow breakeven of less than $35 per barrel. Our case to be for 2023 will be a maintenance program that holds production flat in order to deliver maximum free cash flow, peer-leading return of capital and significant per share growth. For years now, I have reiterated my view that for our company and for our sector to attract increased investor sponsorship, we must deliver competitive financial performance with other investment opportunities in the market as measured by free cash flow generation and return of capital, more S&P less E&P.
This is especially true when commodity prices are much lower than they are today. We believe we have built that type of resilience into our business. And when we do experience a constructive commodity price environment, as is currently the case in which could continue to be the case for some time, we must deliver truly outsized free cash flow and return of capital versus the S&P 500. slide 12 of our earnings deck illustrates just how strongly we are delivering on this more S&P less E&P mandate. According to consensus estimates, we are delivering the number two free cash flow yield in the entire S&P 500 this year, driven by our high-quality capital-efficient U.S. conventional portfolio, our world-class integrated gas business in EG, featuring unique global LNG exposure and our disciplined approach to capital investment.
Due to the strength of our financial delivery and despite solid year-to-date equity performance, we are trading at one of the most attractive valuations in the S&P 500 with 2022 consensus EV to EBITDA multiple among the 10 most attractive in the S&P 500. And we are returning the majority of the cash flow we generate right back to our shareholders, building one of the strongest return of capital track records in the entire market while driving significant per share growth. Though others are now transitioning to a focus on per share growth, no peer has delivered more strongly or consistently than us or matched our 15% reduction in outstanding shares in just 10 months.
To close, I am proud of how we have positioned our company. We are delivering financial outcomes that are at the very top of the S&P 500. And just as important, we are supporting the continued responsible development of much needed oil and gas that is absolutely fundamental to furthering global economic progress lifting billions globally out of energy poverty and protecting the standard of living we have all come to enjoy.
With that, we can open the line for Q&A.
Questions and Answers:
Lee M. Tillman — Chairman, President & Chief Executive Officer
[Operator Instructions]. Okay, and our first question online comes from Arun Jayaram. Please go ahead.
Arun Jayaram — JPMorgan — Analyst
Good morning, Lee and team. Lee, I did want to maybe start with kind of your thoughts on — you’ve released a five-year and 10-year kind of maintenance scenario. I know it’s preliminary to talk about 2023, but I did want to just get your preliminary thoughts on how you’re thinking about allocating capital next year. On slide 20, you highlight kind of your well activity this year between the four different U.S. basins.
And I guess, effectively, what we’re thinking about is you’re doing $1.3 billion in capital this year. We’ve seen less inflation in terms of your numbers than your peers. And as you think about rigs, Frac services and tubulars, are you, call it, hedged below market rates today? And as we think about 2023, would you expect if the industry is — capex trends are up 10% to 15% to be within that range?
Lee M. Tillman — Chairman, President & Chief Executive Officer
Yes. Yes. Thanks, Arun, for the question. Maybe I’ll take a bit of that and then maybe let Mike expand a bit on the inflation question. As you stated, around, we did put out a five- and 10-year view that is a maintenance view. And then that, of course, the capital programs are all calibrated to the actual commodity price decks there so that those two are really linked to one another. From a capital allocation standpoint, as you know, there was a pretty material shift from 2021 to 2022.
We moved from kind of 90% Eagle Ford and Bakken to about 75% Eagle Ford and Bakken this year. It’s still a bit too early to get into specifics around capital allocation. But needless to say, we see all basins contributing as we get prepared to go through that exercise and prepare our 2023 program. We did experience like others inflation this year. In fact, we did raise our capital program budget a bit last quarter from the kind of the $1.2 billion to the $1.3 billion.
We have been very, I would say, deliberate about ensuring first and foremost, that we have the execution capability and capacity to not only execute our 2022 program, but to have us in very good stead as we look ahead, at least to the first half of 2023, that there’s maybe a bit of a difference this year, and I think Mike mentioned this in his opening comments is that we are getting a much earlier start on how we want to secure those services and materials looking ahead to 2023. To the specific question though around inflation, maybe I’ll let Mike talk a bit about, obviously, the service side as well as kind of the goods and commodity size, everything from steel to Frac sand.
So with that, Mike, I’ll turn it over to you.
Mike Henderson — Executive Vice President of Operations
Thanks, Lee. Morning, Arun. Let me maybe start with 2022 and then I’ll swing over to ’23. Market is still tied across the board. We think it’s going to stay that way, particularly, we assume current prices are sustained activity levels, particularly the privates have increased, access to labor continues to be a challenge, a high degree of volatility, particularly anything commodities related.
So we’re seeing it in diesel, we’re seeing it in steel. I think as a result of that, ourselves and others, we’re just continuing to see that tight market for most categories of spend. I think you then throw in maybe the macro backdrop, things are tight there, economy quite supply chain labor market. And as Lee mentioned, as I mentioned, — our focus, our priority really is about securing established and trusted service providers. Execution excellence is everything for us this year and as we get ready for next year. And I think maybe just looking at the major execution-related elements of the business plan through the remainder of ’22 for us.
Start with rigs, I would say the majority of our remaining rig lines in 2022 have been secured in long-term contracts that, in a lot of cases, run into ’23. We’ve also had quite a bit of success farming out some of our operational rigs. So maybe rather than lose the arm and crews that we like working with. That’s allowed us to take a bit of a break in our program and then get them back to us when we need them. Similar type story in the pressure pumping remaining — sorry, the majority of the remaining scope for the year is tied down and when I think about the rig based — pressure pumping space, I do think it’s worth mentioning that we are termed up longer term that the companies that we’re working with at the moment.
It really is taking steps to ensure that we can deliver on that program. One of the things that we’ve done is how to look at our execution plans, we’re trying to minimize spot work wherever we can. So being able to offer that consistent extended program, obviously, safety benefits, execution benefits and commercial benefits. Maybe just a little bit more on the contracting strategy. I’d described it in the comments there. We’re taking a disciplined and thoughtful approach. Working in the first half of 2023 as a priority. I’d say we’ve secured much of our rig pressure pumping sand and steel needs. Some of the pricing remains open.
We’ve had a little bit of success with index link pricing mechanisms. We’ve used that in the pressure pumping sand, rig and chemical space. And then on the second half of ’23, I’d say we’re being a little bit more patient there. We feel good about our ability to maybe access to providers and equipment we need, but just given the uncertainty around the macro environment. We’re probably just taking our time when it comes to locking in prices and just being a little bit more thoughtful in that set of things.
Arun Jayaram — JPMorgan — Analyst
My follow-up is maybe for Dane. Dane, I was wondering if you could give us a little bit of a teach-in of your understanding of the AMT or mansion tax proposal. Obviously, you guys had earned a favorable U.S. cash tax position kind of today. I do know that there is a three-year average book income provision of $1 billion. I don’t think it would affect you until 2024. But I was wondering if you could maybe provide some thoughts on what this means for your U.S. cash tax position? And how does your EEG earnings — how could those be taxed under the new proposal, which is in law, of course?
Lee M. Tillman — Chairman, President & Chief Executive Officer
Arun, before maybe flipping it over to Dane on that specific item, it’s probably worth just a little bit of commentary around the Inflation Reduction Act of 2022. I want to stress that, first and foremost, this proposed legislation is just that it’s proposed and that we’re continuing to really digest the potential impacts and a lot of the details that come along with it. Second, I would just say the purported legislative objective is to reduce inflation. But as validated by non — Bipartisan Policy Center, Non-partisan Internal Congressional Agency. As far as we can tell, it will have no measurable effect on inflation.
So from a legislative standpoint, it does seem to be a little poorly conceived from the get go. And certainly, the proposed actions look like they’re going to add some costs and complexity to businesses specifically manufacturing in oil and gas in the form of taxes and regulation that ultimately are going to be passed on to the U.S. consumer and negatively, I think, impact future investment. So beyond some of those fundamental flaws and the fact that it has zero impact on inflation, there are a couple of provisions, and you mentioned one of them that caused this particular concern.
One is kind of the approach to methane fees and taxes and then, of course, this corporate AMT issue as well. On the methane tax, I think we need clarification around certain elements, including measurement methodology. There still remains a high degree of uncertainty around the proposal. But the bottom line is we don’t need legislation to incentivize us to reduce our methane footprint. We’re already doing exactly that, and we’ve got a great track record of significant reductions in some of the most aggressive targets in the industry that, as I mentioned earlier, fully consistent with the trajectory of the Paris Climate Agreement.
So even though we support reasonable regulation, regulation of methane is already happening. And so anything that this act does is going to be somewhat duplicative and certainly without any discernible policy benefit. So with that little bit of an overview, let me flip it over to Dane to share a few thoughts on your specific question around the tax provision.
Dane E. Whitehead — Executive Vice President & Chief Financial Officer
Yes. Good morning, Arun. First of all, let me say that under current tax law, not this proposed change but current tax law, we have substantial NOL and foreign tax credit positions that we are highly confident will shield us from cash taxes, U.S. cash taxes until the second half of the decade, even at high prevailing commodity prices. So there’s no change in that outlook at this time. With the mansion tax proposal, proposing to implement an alternative minimum tax based on 15% of GAAP pretax income. The legislative process, I’ll say it’s ongoing and contentious to say the least.
And the timeline for getting something done before midterms really ramp-up is extremely tight. So I think the outcome of this proposal remains uncertain whether it gets done at all or what shape it gets done in. And I think that’s an important point to keep in mind at this juncture. There are a couple of major issues with the alternative — the AMT proposal that I think are pretty significant, two of them stand out to me. One, it significantly reduces the investment incentives for capital-intensive industries that where those incentives currently reside in the tax code, and this goes around those. Second, by using GAAP pretax income as the basis for taxes, it allows accounting rules to drive tax policy, which effectively puts taxation authority in the hands of the likes of the — and the SEC. And I think we’ve learned recently that Congress shouldn’t be delegating the powered attacks to those bodies.
There are a number of counterproposals emerging that could potentially address these and other shortcomings but, most — if you look at the stats, most of the companies that are going to be impacted by this are industrial manufacturers essentially. And so I expect a very spirited challenge to be mounted. It actually has been mounted by that constituency, and we’ll see how that plays out. We’ll say a straight up minimum tax like the one proposed could accelerate our cash taxability is really too much uncertainty on how the rule is going to play out for us to really be super definitive for you right now, Arun.
But even in the scenario of a straight minimum tax on book earnings, our historical tax attributes, our NOLs and for tax credit positions remain very valuable. And we’ll realize the value of those. Also important to note that about the proposal in its current form, and exposure Marathon might have due to the proposed AMT is limited to domestic income. EG income will largely be offset by foreign tax credits. So we wouldn’t expect the AMT proposal to impact taxes in EG.
Lee M. Tillman — Chairman, President & Chief Executive Officer
Maybe just — Yes. Maybe just to wrap up, Arun. It’s definitely clear to us that kind of the bad idea factory in Washington D.C. is in overdrive. And in essence, this proposed legislation will elevate taxes and costs at a time of high inflation. And as Dave said, it’s going to negatively impact much needed investment in both the manufacturing and oil and gas sectors. So thanks for the question, Arun.
Arun Jayaram — JPMorgan — Analyst
Thank you.
Operator
Thank you. Our next question on line comes from Phillips Johnston. Please go ahead.
Phillips Johnston — Capital One Securities — Analyst
Hi, guys. Thanks. Just a follow-up question for Mike on the capex guidance for the third quarter. It seems to imply a fairly large drop in the fourth quarter from the first three quarters. I think you mentioned some shift in spending from Q2 into Q3, and you expect working interest to tick up. It also looks like you’re turning line well count in both the Bakken and Eagle Ford for the remainder of the year. Is very much weighted to Q3? So I just wanted to confirm that’s also coming into play and just generally see what kind of confidence you guys have in that fourth quarter number coming down.
Mike Henderson — Executive Vice President of Operations
Yes, Phillips, it’s Michael here — it’s Mike. Just as I mentioned on the call, first half capital fully consistent with our guidance where we spent 56% of the full year budget or program that was that in line with the guidance we supplied. We’d also mentioned that the program was front-end weighted. So we do expect third quarter expense to be similar to the second quarter before a bit of a decline into the fourth quarter. As you touched on there, we did have some capital shift from second quarter into the third quarter and the uptick in working interest.
Again, as I mentioned just a minute ago, the 1.3 budget remains the number that we’re looking delever. In terms of maybe the Wells to Sales cadence, what I’d say is third quarter, we’re guiding 50 to 60 Wells to Sales, fourth quarter will be our low quarter from a Well to Sales perspective and also the working interest drops. So maybe that helps explain why we’re seeing the — or capital being the whole point of the year.
Phillips Johnston — Capital One Securities — Analyst
Okay. Great. That’s it. Thank you.
Operator
Thank you. Our next question on line comes from Doug Leggate. Please go ahead.
Doug Leggate — BofA Securities — Analyst
Hi. Good morning, everyone. Dane, I apologize for beating up on the AMT question again, but I just wonder if you could potentially quantify if that minimum tax was put in place, what would it do to the timing in your opinion of when you would expect to become a cash taxpayer, if you can try and frame that with any certainty?
Dane E. Whitehead — Executive Vice President & Chief Financial Officer
Yes. My comments earlier really meant to convey that there’s just so much uncertainty around the final shape of these rules that coming out and giving you some really specific outlook like that, I think it’s just — it’s premature to do that. Certainly, at the AMT construct could accelerate to some extent, some cash taxes quantifying at this point, I think it’s just too early. I did note in my earlier response to a room though that it would be probably less not impactful on EG earnings, which is an interesting important data point as well.
Doug Leggate — BofA Securities — Analyst
Yes. I’m sorry. I just wanted to try and push on it again because it’s about trying to figure this out. So thanks for your thoughts on it. Lee, you have done an extraordinary job on capital discipline. You led the market on your commitment to stable production, not outspending your cash flow and returning cash. It’s left you with a lot of commodity leverage, obviously, and tremendous cash flow potential in an environment where it seems that a lot of assets coming for sale pretty much in your backyard to the list goes from the back end to the Eagle Ford and, of course, the EG with Chevron’s assets. I’m just curious how you see the role of M&A in a framework, which is obviously very disciplined on shareholder returns, but you’ve also got a lot of headroom for potential acquisitions if you choose to. How are you thinking about that?
Lee M. Tillman — Chairman, President & Chief Executive Officer
Yes. Thanks for the question, Doug. Good morning. Obviously, Doug, I can’t comment on any specific or hypothetical M&A transactions. But — what I will say is that we’re always assessing and evaluating bolt-on opportunities in basins where we have a competitive advantage and can generate value for our shareholders. Clearly, as you stated, we have a tremendous amount of confidence in our organic case, which delivers market-leading free cash flow and return of capital.
And that is the lens that we’re going to assess all opportunities. So the bar is quite high. And whatever we do, it’s going to have to be accretive to that organic case. And so the same discipline that we show in our business is the same discipline we’ll show in assessing inorganic opportunities. But to be clear, we like the assets in our core portfolio, and we’re always looking to further improve our core positions.
That’s true for all of our core positions, U.S. resource plays as well as EG. And there are a number of reasons why when we think about EG, we do deem that very much one of our core assets, very free cash flow generative, low level of capital reinvestment, competitively advantaged infrastructure that should be the natural aggregator of gas in a very gas-rich portion of the world, differentiated and direct exposure to the global LNG market, which relative to our peers is quite unique. And then, of course, it does have a geographic and cost advantage as a supplier into the European gas market, which, as you know, is very short on gas. So hopefully, that addressed your question, Doug.
Doug Leggate — BofA Securities — Analyst
It does. I guess I was kind of curious if you had an opinion on Chesapeake’s announcement, and you need to go forward if that fits with your portfolio or prefer not to comment, I guess.
Lee M. Tillman — Chairman, President & Chief Executive Officer
Yes. I mean, I think, again, I don’t want to get into specific assets in the marketplace. But rest assured, I think, Doug, that to the extent that there are sound opportunities within our core basins that Pat and his team are actively evaluating and assessing those against that criteria that I described.
Doug Leggate — BofA Securities — Analyst
Okay. Thanks. Appreciate for taking my questions.
Lee M. Tillman — Chairman, President & Chief Executive Officer
Thank you, Doug.
Operator
Thank you. Our next question on line comes from Neal Dingmann. Please go ahead.
Neal Dingmann — Truist Securities — Analyst
Good morning, Lee, maybe I could just do a follow-up on Doug’s just to maybe M&A one different way. I’m just wondering, have your — I guess what I’m curious on is your requirements for deals have that those requirements change in the recent year or two, you guys continue to have some fabulous acreage. You do a good job of laying this out in the slides. I’m just where now when you continue to look at deals out there and I guess, given the environment we’re in, I’m just wondering if the requirements have changed. And if you can maybe discuss maybe some of those key requirements.
Lee M. Tillman — Chairman, President & Chief Executive Officer
Certainly, Neal. Fundamentally, the criteria on which we evaluate any inorganic opportunity has remained constant — as I mentioned, the bar is high. I mean it’s going to have to deliver financial accretion. It’s going to have to be leverage neutral to positive. It’s going to have to offer industrial logic and clear synergies. And so we look across all those dimensions to make an assessment and trying to determine as well as does it play into the sustainability of our model also. We’re not looking to necessarily buy someone’s decline curve.
We’re looking for things that can amplify the already strong sustainability of our portfolio. So fundamentally, Neal, no, we’re — it’s not different — is the market different, absolutely. I think in a high price environment in a volatile environment like we are, I do think you’re going to run into instances where the bid ad spread is going to be difficult to reconcile. And given that, we just have to be that much more committed to our criteria and ensuring that we’re bringing any type of opportunity is bringing true value, lasting value into the portfolio.
Neal Dingmann — Truist Securities — Analyst
Great details. And then my second is just on capital allocation. Specifically, you’ve all been pretty clear about suggesting that the shareholder return will continue to be predominantly buybacks given the intrinsic value. I’m just wondering how do you think about the relative comparisons, I guess, in today’s market, even given where oil and given where your share price is, when you think about the comparative comparison between buybacks and dividends?
Dane E. Whitehead — Executive Vice President & Chief Financial Officer
Yes, Neal, it’s Dane. I’ll just take a quick cut at that. I mean I think we’ve been pretty strong in our view that returning capital to shareholders through the share buybacks structurally changes the company drives per share growth and is synergistic with our ability then to increase our base dividend over time without increasing our cash — total cash distributions on the dividend. And so we like that, especially in light of the fact that the free cash flow yield that our stock is generating right now is in the 25%. It’s even got closer to 30% recently.
So it’s just an unquestionable value to do that. And so it’s been very easy for us to allocate capital that way. We still do think the base dividend is a very important part of the return equation. We have raised the base dividends through the first quarter of this year, five consecutive quarters, total of 167% over that period of time. We paused this quarter I will say, though, that with the consistent and large share repurchase activity that we’re doing, we’ll definitely be in a position likely this year to reassess that because we’re just absorbing so much of that outstanding stock.
So I think they’re synergistic there. We like them both. And the variable dividend idea is something we — it’s a tool in the toolkit. But given what I have said about how compelling share repurchases are to us right now, it’s going to just be on the back bench.
Neal Dingmann — Truist Securities — Analyst
Glad to hear it. Thanks, Dane.
Operator
Thank you. Our next question on line comes from Scott Hanold. Please go ahead.
Scott Hanold — RBC Capital Markets — Analyst
Yes. Thanks. If I could ask a question is you — I think Lee had mentioned that your — the equity — Marathon’s equity is mispriced, and that’s why buybacks makes more sense. And I think largely, most people agree with that. And fundamentally, your discussion also talked about you’re fine with building some cash on the balance sheet. And I’m just kind of wondering, when you look at that sort of cash build, do you think a way to bridge the valuation gap would be to further lean in hard with the buybacks and kind of force the issue? Or are there other things you can do with that sort of incremental cash that you think could help bridge the gap with Marathon to some of the peers?
Lee M. Tillman — Chairman, President & Chief Executive Officer
Yes. Maybe I’ll offer a comment or two and then maybe flip over to Dane. I want to be really clear, Scott. When we talk about the 50% of CFO as a target, that’s a minimum. We still have optionality to go beyond. And then from time to time, we have already gone beyond that mark. But I’m not going to be apologetic about the fact that we’re delivering still a 20% distribution yield, which leads not only our peers, but the S&P 500. And you can even look at this quarter and just the absolute shareholder distribution was a record for the company. So I do believe that we’re delivering strongly against that shareholder commitment and the efficiency of the share repurchase program the facts kind of speak for themselves.
I mean, 15% reduction in dilution over a 10-month period, and that really is unrivaled in our peer group. So although I agree that we have optionality there going forward relative to that 50% minimum, I think we’re putting a pretty strong case out there today when you look at the relative comparison, not only to the peers, but also to the broader market. And maybe, Dane, do you want to say a little bit about our thinking about just cash on hand and how we consider that.
Dane E. Whitehead — Executive Vice President & Chief Financial Officer
Yes. So to your point, Lee, I think our commitment to significant returns is there. We have almost a 20% annualized distribution yield. The quarter was so strong with realized pricing with the operational and financial execution that even with those returns, we built about $500 million of cash. My perspective as long as our return objectives are being met, modestly building some cash on the balance sheet is a positive thing. We’re obviously in a highly volatile commodity price environment.
One thing to keep in mind. But there really aren’t any bright lines around the amount of cash in my mind. Some buckets that I sort of think of as we manage our cash balance. The first, I’d like to have a minimum of $500 million on the balance sheet just to handle intra-month working capital swings. We do have a couple of debt maturities coming up in ’23 and ’24, $400 million in each year. We intend to retire that debt with cash on hand. So preparing for that time when prices are strong, is a good thing. And then also, it provides us the flexibility quickly on accretive bolt-on acquisitions that can improve our portfolio, the kind of things that Lee referenced earlier.
And then holding a little more cash in a — it’s pretty prudent, I think, given the macro uncertainties, the volatility, recession risks all the stuff we’re met with every day when we turn our TV on and even regulatory change, which we’re seeing potential for that. So having a very robust company with strong liquidity, I think is a plus I say that. And then I’ll also say our return to shareholder commitment is top priority, but also keeping a bulletproof balance sheet and ample liquidity is right alongside that in our conservative financial model.
Lee M. Tillman — Chairman, President & Chief Executive Officer
Yes. And I would even just add to that the work on the balance sheet and liquidity is never ending. And recently, Dane and his team also extended our credit facility as well at favorable terms. And again, it gives us that runway out to 2027 on that instrument as well. So we look at all that holistically, but again, we believe we’re leading the field on shareholder distributions, but we’re going to continue to challenge ourselves as we go forward. And we’re going to have optionality against that minimum commitment.
Scott Hanold — RBC Capital Markets — Analyst
Great. Thanks for that. And just as a follow-up, the Permian, it’s I think it’s been about a year since you’ve been active with completions. And I know this quarter or the third quarter we’re going to be, I think, 10 to 15 wells and maybe another dozen in the fourth quarter. if you all could provide a little bit of color and context on some of the activity there and what to expect in terms of types of formation and are these multi-well pads? And how we’re going to kind of progress with sort of that buildup in the Permian in the second half of this year?
Mike Henderson — Executive Vice President of Operations
Yes, it’s Mike here. I’ll take that one. So, Permian, as you mentioned 10 to 15 Wells to Sales in the third quarter, we’ve actually got another four — sorry five coming online in the fourth quarter, but that excludes the Texas Delaware wells. So four those that will come online probably late in the fourth quarter or maybe early first quarter next year. With the extension of the first five wells that we’ve brought to sales this year, the majority of the remaining program, they’re all going to be two-mile laterals. And then by 2023, we pretty much tend to only bringing on two-mile laterals. I say that because these two-mile laterals what we’re seeing is on a kind of normalized complete CWC per foot basis, they’re 30% cheaper than the single mile lateral.
So team has done an exceptional job there on the trade front moving away from these SLs to these XLs actually, we’re active at the moment, looking to potentially get into some three-milers as well. Maybe coming back to 2022, I would describe the balance for the year. We’re going to be bringing on wells in some of the high confidence here. So Red Hills Upper Wolfcamp and then followed by Malaga Upper Wolfcamp. Probably 60% in Red Hills, 40% in Malaga, the Wells to Sales. Just quite a bit of commentary on the wells that we have brought to sales.
They’ve only been online a few weeks. So still early, but I think we’re encouraged by the performance thus far and maybe I’d just highlight the team have definitely taken advantage of the break in activity. And I know I’m pretty excited about potentially what we’re going to deliver not only this year, but also next year in the Permian.
Scott Hanold — RBC Capital Markets — Analyst
Thanks for that.
Mike Henderson — Executive Vice President of Operations
Thanks, Scott.
Operator
We have no further questions at this time. I will now turn the call over to Lee Tillman for closing remarks.
Lee M. Tillman — Chairman, President & 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 to safely and responsibly deliver the energy the world needs now more than ever. Thank you very much.
Operator
[Operator Closing Remarks]