Marathon Oil's oil and gas production facility in Northern Delaware

speechCEO Lee Tillman Addresses
New Mexico Oil & Gas Association’s
Annual Meeting

OCTOBER 2017 – SANTA FE, NEW MEXICO

 

I’m pleased to be here at this year’s 89th NMOGA Annual Conference, and able to share a few thoughts on Marathon Oil and the bright future we see in New Mexico.

In less than decade, our country has moved from a position of energy scarcity to one of energy abundance. This transformation has been driven by the innovation of independent E&P companies and the powerful collaboration with producing state’s governments, regulators, stakeholders and royalty owners. The U.S. resource plays have forever changed the energy landscape here at home and around the world—the U.S. has achieved energy security.  And just like New Mexico, Marathon Oil is proud to be part of this amazing U.S. energy renaissance. 

We’ve undergone our own transformation as a company since becoming an independent E&P in 2011. 

We’ve pivoted our portfolio to focus on the world class U.S. resource plays right here at home--in the Eagle Ford, STACK and SCOOP and the Bakken. And it was only natural for us to find ourselves back in this great state of New Mexico given the high quality, high return opportunities in the Northern Delaware basin. My only regret is that I wish I had gotten back here sooner! But we’re here now and are getting right to work. The addition of our Northern Delaware acreage in Eddy and Lea Counties differentiates Marathon Oil as the only independent E&P with a material footprint in all four of the best oil rich resource plays in the United States. 

We have a long history in New Mexico. Marathon Oil has operated across the state from the Four Corners area to Hobbs in southeast New Mexico. For those who know our history, you know our connection to the Permian Basin dates all the way back to our discovery of the Yates field in west Texas in the 1920s. We know this region and appreciate the history and the people of New Mexico.

So how did Marathon Oil’s journey bring us back to New Mexico in 2017?  

When we separated from our downstream business, and became an Independent Upstream E&P it also came with a new strategic direction – a focus on U.S. unconventional resource plays. We’ve made considerable progress over the last five years to shift toward these lower-cost, higher-margin opportunities.  I joined Marathon Oil in 2013 and at that point in time only about two-thirds of our capital was allocated to the U.S. resources plays, with a large portion still directed to international, conventional exploration and oil sands mining.  And the resource plays accounted for only about 30% of our production mix. 

“The U.S. resource plays have forever changed the energy landscape here at home and around the world—the U.S. has achieved energy security. And just like New Mexico, Marathon Oil is proud to be part of this amazing U.S. energy renaissance.”

Lee Tillman, Marathon Oil CEO

 

We saw the profitability and the growth potential here in the U.S. and started the heavy lifting to get our portfolio aligned with where we would like to invest our capital. We divested of non-core assets that didn’t compete for capital allocation, nearly $4 billion worth in just the last year alone. And we played offense by strategically enhancing our STACK position in Oklahoma and, most recently, completing two Permian Basin acquisitions for over 90,000 net surface acres here in New Mexico. 

And our progress has been dramatic. We now allocate over 95% of our capital to the U.S. resource plays, and that’s our new norm going forward. We expect to double the volumes mix contribution from the resource plays in 2017 to about 60%... and we expect this figure to keep trending higher in the years ahead, enhancing our margins while driving returns and increasing cash flow.

Our playbook for success is simple—a strong balance sheet, a low cost structure, a concentrated portfolio – all  designed to deliver profitable and sustainable oil and BOE production growth, within the overarching objective of living within our cash flows.

To demonstrate the quality, depth and return potential of our four-basin business model, our 2017 to 2021 benchmark case generates compound annual resource play production growth of 18-22%, within cashflow, at a WTI price in the low $50s. 

And New Mexico features prominently in that longer term growth outlook. The evolving Northern Delaware basin is one of the best unconventional oil reservoirs in the U.S., with one of the fastest rates of change. And as an industry, we are just in the early innings of technical advancements in drilling and completions, with further optimization to be realized as we prepare for the development phase.

New Mexico features prominently in that longer term growth outlook.  The evolving Northern Delaware basin is one of the best unconventional oil reservoirs in the U.S., with one of the fastest rates of change. And as an industry, we are just in the early innings of technical advancements in drilling and completions, with further optimization to be realized as we prepare for the development phase.

So why was the entry into New Mexico and the Northern Delaware such a compelling fit for Marathon Oil?  To put it simply, the two acquisitions we announced in March checked all the boxes we look for when evaluating potential deals: quality, scale, value, and with upside potential.

Marathon Oil’s entry into the Northern Delaware meaningfully expands the quality and scale of our existing portfolio with over 5,000 feet of oil-saturated stacked pay, outstanding productivity from world-class Wolfcamp and Bone Spring targets and industry well results that are improving at a rapid rate. The quality of this acreage represents an accretive addition to our already robust portfolio.

And since closing on these acquisitions in May and June of this year, in short order, we built an outstanding asset team and ramped to three rigs as planned.

We brought 2 wells to sales in Eddy County in the second quarter -- the Cypress and Black River wells. The Cypress well was a western delineation well that employed our team's first operated completion design. While we'll customize the completion design based on a variety of factors, this will be the basis for our first-generation design in the Northern Delaware.

We expect to bring 15 to 20 wells to sales in this second half of the year, and will begin drilling our first major infill spacing pilot around the Cypress 1H. More broadly, our activity for the remainder of the year entails delineation and leasehold protection across both Eddy and Lea Counties, focused primarily on the Bone Spring and Wolfcamp targets.

We’re bullish on the Northern Delaware in the Permian Basin. And optimistic about how our industry and Marathon Oil will continue to develop technologies to boost profitability and grow production.

At Marathon Oil, we look at technology and innovation as necessary elements for how we’ll compete to be the premier E&P. Being able to think differently … and act differently … is what we believe will drive our performance. 

We are a results driven company but it is equally important as to how we achieve those results.  Our employees place safety and integrity first in all we do—they are bold, they take ownership and we are one team.

What’s vitally important for our industry today is leveraging technology to make our business more efficient … to find more oil and gas … and to produce it safely and at a low cost.

We must take advantage of the linkage between innovation and operational excellence. The two are intertwined. I’m talking about the drive to find creative solutions that can really make a step change in our business. To ask and answer those questions that look forward.

 

"At Marathon Oil, we look at technology and innovation as necessary elements for how we’ll compete to be the premier E&P. Being able to think differently … and act differently … is what we believe will drive our performance."

 

Let’s face it: Innovation has been a driving force behind our industry for more than 150 years.

But we’re at a crossroads right now, where the traditional, incremental approach to innovation that we’ve been using, isn’t enough.

Our innovation has been heavily focused on the subsurface, where it should be.  The subsurface is what makes our industry so unique AND so challenging.  And the industry has greatly improved our capabilities around seismic; 2D, 3D, 4D, micro. New ways for geologists to interpret what’s going on below the surface. As well as new and higher intensity completions techniques.

That’s all very necessary. But we also have to think about innovation in the digital space in concert with our traditional subsurface focus.

What do I mean by this? It’s about more creatively leveraging the large data sets we all have in our companies to solve new -- or old -- problems.

It’s common and comfortable to use data for historical purposes, right? Asking: What was our production? What were our economics for this well?  That is all backward looking . . .    

But, we should also be using that data for making reliable predictions. Asking: Where’s the best place to drill? How far apart should these wells be? What’s the right landing zone? What will be the ultimate recovery for the well?

We can start answering these questions with more precision and accuracy with the data we have today, by looking at data differently.

Other industries have already seen the value in this approach—aerospace, medicine, retail—they are well ahead of the the oil and gas industry but we are closing the gap.

We do not suffer from a lack of data.  It’s a question of how can we take all this data that we’ve accumulated and learn from it?  Not just react to it … but, be able to do something differently with it in the future. 

Think about the on-line tech companies, like Google … Amazon … Netflix. These companies employ digital technologies and machine learning to predict consumer behaviors, and see emerging trends in near real time.

Think about how much enterprise value these companies have generated based on how they leverage data.

Why can’t the oil and gas industry leverage our data in the same way?

We can, and we should. 

Some companies are already starting to figure this out … and we’re starting to leverage it more and more at Marathon.

It’s the idea that we can use this data – coupled with our understanding of the science and the physics – and be much more accurate and efficient in finding and producing oil and gas. Especially in unconventional resource plays.  Data driven decision making and predictive capabilities will be essential across the life cycle of our unconventional assets--from delineation and appraisal through to full field development.

  • Already, field operations are being monitored in real time, with a frequency and accuracy unimaginable even a few years ago. Machines are learning to automatically manage individual wells and entire facilities, 
  • Algorithms are being developed to predict events creating actionable alerts,
  • User-based views or dashboards will support multiple work processes. That’s the digital oil field.

 

At Marathon, we’ve made a very deliberate and conscious effort to consider exactly what technology we apply, and what we apply it to. And if it doesn’t have a grounding in the business … if it doesn’t support finding oil and gas, and producing it cheaply and safely … it doesn’t have a high spot on our priority list.

One thing we’re doing is bringing in more people who can marry data and mathematics with geoscience and reservoir engineering. People who can integrate data and develop models that see trends or anomalies that simply wouldn’t have been seen with traditional interpretation methods. 

That’s the future of the industry. It’s the future of New Mexico oil and gas. The popular paradigm of the oil and gas business being low tech is being rapidly displaced by a new vision, the digital oil field.

That’s the future of the industry. It’s the future of New Mexico oil and gas.  The popular paradigm of the oil and gas business being low tech is being rapidly displaced by a new vision, the digital oil field.

These are all exciting innovations but none of this possible, it we lose focus on our license to operate—a license that we earn each and every day. 

When concerns arise, we must address these topics in the right way, and with a sense of urgency. We must put them into context, engage openly and honestly with those who are voicing concerns, demonstrate our ongoing commitment to safe and responsible operations and be solution driven.

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At Marathon Oil, responsible operations tie directly to what we call “Living our Values.”

What does that mean?

It means that we are ever mindful of the communities in which we operate … of the people who allow us into their cities and towns, who work in our fields and who share in our success.

We must be responsible corporate neighbors and never lose sight of the fact that we’re guests in these communities — and that we’ll be judged by our individual and collective behaviors.

This goes hand-in-hand with our commitment to safety and environmental protection and is essential if we are to protect our license to operate. Compliance with regulations and laws is not negotiable.

Let’s take the topic of water management as an example. Cooperation among all the stakeholders is important to preserve this resource. We all want and need a sustainable approach for the future.

 

 

At Marathon Oil, we’re leveraging what we’ve learned across all of our U.S. resource plays and employing best practices to be good stewards of water resources.

For instance, not too far away in our Eagle Ford operations, we reduced water use per well and actively sought non-freshwater sources. Marathon Oil currently uses brackish water to cover around 85 percent of our water needs for fracking in the Eagle Ford, even though brackish water wells are typically deeper and more expensive to drill than freshwater wells. This is part of our commitment to conserve and protect freshwater resources.

Additionally, by yearend, we expect about 80 percent of our produced water transportion to be moved via pipeline insteady of by truck, which reduces truck traffic and is ultimately a safer way to handle produced water. On an annual basis, this takes approximately 115,000 truck loads off the roads in the Eagle Ford. 

Here in New Mexico, in the Northern Delaware, although it’s only been a few months since we closed on our acquistions, we’re already pursuing proactive solutions around water management. Finding solutions that make sense for the geology and operations in this area.

In the Northern Delaware, we’re looking to convert what has traditionally been a waste product into a sustainable source of frac water for our operations. We’ve already performed a pilot project to recycle water, and expect to be regularly recycling water in our more active areas in the fourth quarter. We’re also challenging the status quo approach to how much water is needed on our frac jobs. We’re now designing our fracs differently so that we can recycle water more easily.

It all comes down to the ingenuity and drive that people in our industry bring to the table every day, finding solutions to real life challenges. We’re constantly evolving and improving. 

As we look forward, Marathon Oil is bringing together innovation and operational excellence. We’re investing in projects with the highest returns and we are in this business for the long haul—we have been creating value for our shareholders for well over a century.

We don't pretend to predict pricing,  but rather, we want to prepare our business to be successful across a broad, and a more moderate, range of pricing.

In this market, our game plan has been to prioritize those aspects of our business within our control -- making every dollar count by focusing on the lowest-cost, highest-margin opportunities. We’ve reset our cost structure, and continue to put downward pressure on production costs, G&A costs, and capital costs across all parts of our business. 

We’re looking for the best ways to continue managing costs while preparing for future growth and living within our means. We’re doing that by operating more efficiently and effectively, and working with our partners to create savings—thereby lowering our enterprise break-even price and delivering profitable growth within cash flows at more moderate oil pricing.

We’ve had a very exciting first half of 2017--resumed growth in the resource plays, strengthened the portfolio and the balance sheet, and have posted positive results across our portfolio.  And we are back in New Mexico.  Our capital allocation is a dynamic, real time effort as we continually optimize across our four unconventional basins, leverage learnings and respond to performance trends as well as the macro environment. 

At the heart of it all are our dedicated employees whose commitment and innovation has only been sharpened by these dynamic times.

Talent and innovation will continue to drive, direct and shape the future of the energy business. There’s no doubt we’re optimistic, bullish, about this great state, about our business and the potential for growth.

 

Thank you very much.

 

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