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Marathon Oil (NYSE:MRO)
Q2 2020 Earnings Call
Aug 06, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Welcome to the Marathon Oil second-quarter earnings conference call. My name is Rebecca, and I will be your operator for today's call. [Operator instructions] Please note that this conference is being recorded. I will now turn the call over to Guy Baber, vice president of investor relations.

You may begin, sir.

Guy Baber -- Vice President of Investor Relations

Thanks, Rebecca. 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 second-quarter 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 and strategy; Mitch Little, executive vice president, advisor to the CEO; and Mike Henderson, SVP of operations. As always, 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 our presentation materials, as well as to the risk factors described in our SEC filings. With that, I'll turn the call over to Lee who will provide us his opening remarks.

We will then open the call to Q&A.

Lee Tillman -- Chairman, President, and Chief Executive Officer

Thanks, Guy, and good morning to everyone on the call today. I want to start out by again extending my thanks to our resilient and dedicated employees and contractors. Since the very beginning of the COVID-19 pandemic, our field staff has remained hard at work as essential critical infrastructure providers, expertly doing their job to keep the U.S. supplied with made-in-America Energy.

Our industry has been a powerful engine of U.S. economic growth for the last decade. And the clean affordable energy we provide will unquestionably be critical empowering our nations and the world's ongoing economic recovery. At Marathon Oil, our business continuity and emergency response plans have facilitated uninterrupted field operations and work-from-home practices that have protected our productivity, and execution excellence in a very dynamic period.

I am extremely proud of the Marathon Oil family. And over the last five months, have been impressed by their commitment and dedication. They have truly risen to the challenge. It goes without saying that the health and safety of our people remains my top priority.

We will continue to manage COVID-19 risk diligently, and I'm happy to report that our year-to-date safety performance as measured by total recordable incident rate is the best in our company's history. Further, amid these uncertain and challenging times, we remain dedicated to partnering with and investing in the communities where we live and operate. Whether that is through donating laptops and helping our community partners here in Houston to transition education programs to distance learning, distributing N95 masks to emergency management and healthcare organizations in our local communities or through the testing of more than 35,000 people in Equatorial Guinea for COVID-19. However, the only real solution for society and our business is to get the world healthy and back to work.

Regarding the macro environment. Commodity prices are clearly in a better place today than they were at the time of our last earnings call. In all honesty, that is not a very high bar. But the recent stability in energy markets is a welcome respite from the extreme volatility we had experienced in the second quarter.

Market forces have been at work and global oil demand has improved from the depths of the crisis and supply actions have taken barrels out of a saturated market. Yet despite this improvement, global macro uncertainty remains high. And the range of potential outcomes for future oil prices remains very wide and difficult to predict. In the face of this uncertainty, the E&P industry must remain disciplined.

Today, the world simply does not need more of our product, but demand will recover and production decline from lack of investment will exert itself. It is all too easy to become distracted by external forces, but we can't control the macro. We can control how we allocate capital, how we manage our cost structure and how we execute. Actions we are taking in these controllable areas strongly support our financial goals of protecting liquidity, improving our balance sheet and reducing our enterprise free cash flow breakevens.

That is our focus. And second-quarter results are evidence that our focus is paying off. During second quarter, we limited our capex to $137 million with successful and efficient ramp down of our drilling and completion activity in response to a rapid downward correction in commodity prices, fully consistent with our focus on protecting returns and exercising discipline. We delivered total company oil production of 197,000 barrels of oil per day, a strong result despite 11,000 barrels of oil per day of voluntary curtailments.

We drove U.S. unit production costs down to $4.09 per barrel, the lowest level since we became an independent E&P, and a reduction of almost 20% in comparison to the 2019 average. And we drove average completed well cost per lateral foot down 10% relative to 2019 with line of sight to further reductions in coming quarters. On the back of this differentiated execution, we are reducing our full-year 2020 capital budget and raising our full-year oil production guidance.

We have taken decisive action in response to this year's macro challenges. Our response has been thoughtful but swift, reducing and high-grading our capital expenditure program, lowering our cost structure and protecting our balance sheet and liquidity. The result has been a substantial reduction in our corporate breakevens. We have successfully repositioned our company for significant free cash flow generation at the forward curve, while protecting our operational momentum as we look ahead to 2021.

Next, a few words on how we are allocating capital on our updated 2020 program and revised guidance. As I noted, we have reduced our full-year 2020 capital spending guidance from a ceiling of $1.3 billion, down to $1.2 billion. This reduction is the result of tremendous innovation and execution from our teams and continued reductions to our completed well costs. Building on these impressive capital efficiency trends, we expect to drive further improvement over the second half of the year.

Case in point, second-half 2020 well cost per lateral foot are expected to be down by more than 20% in comparison to 2019, the results of concentrated capital allocation to the Eagle Ford and Bakken and targeted efforts to continue reducing our costs. These reductions are due to a combination of specific well design improvements, execution efficiency, supply chain optimization and commercial leverage. We expect the majority of these gains to prove durable through the cycle. While reducing our full-year capital spending guidance, we are also raising our full-year total company oil production outlook to 190,000 barrels of oil per day at the midpoint of guidance, the result of both strong base and new well performance.

This revised guidance is inclusive of all year-to-date curtailments, which totaled again approximately 11,000 barrels of oil per day and 17,000 BOE per day during second quarter. As a reminder, the production outlook we provided last quarter was on an underlying basis, exclusive of all production curtailments. After a pause in completion and drilling activity during second quarter, in July, we successfully transitioned back-to-work and are currently running three rigs and two frack crews, across the Eagle Ford and Bakken with no loss in execution efficiency. Our capex has been high-graded to our most capital-efficient, cash flow generative opportunities that offer some of the strongest returns across the entire Lower 48 landscape.

Though capex will be generally ratable over the second half of 2020, we do expect wells to sales concentrated in 4Q. With the 2Q pause in activity and timing of our wells to sales, 3Q will be the trough for our 2020 production profile, consistent with what we messaged previously. However, our volumes will be on an improving trend by the fourth quarter with expected 4Q '20 total company oil production in the low 170 kbd range. We will thus exit 2020 with strong momentum from a core of capital efficient, high-margin production that will provide us with a solid foundation for success as we enter 2021.

And while we are hitting the pause button on capital investment in the Northern Delaware, Oklahoma and our resource play exploration program, those opportunities provide us with important capital allocation optionality and associated returns in an improving commodity price environment. Specifically, we have completed all planned D&C activity for our reduced 2020 resource play exploration or REx program, which was primarily focused on the delineation of our contiguous 60,000 acre position in the Texas Delaware oil play. We have now successfully brought online four Woodford and two Meramec wells since entering the play, which have confirmed our reservoir productivity and gas oil ratio expectations while also validating high oil cut, shallow decline profiles and lower water oil ratios. Cumulative production per lateral foot at 90 and 180 days from these wells compares favorably to industry Delaware basin benchmarks in the Wolfcamp and Bone Spring.

Our attention is now focused on analysis of longer-dated production trends and continuous improvement in our D&C cost. Along with resetting and high-grading our capital investment, we have also successfully reset our cost structure. Our objective in managing our cost is to further enhance our competitiveness, reduce our cash flow breakevens and position our company for success in a lower, more volatile commodity price environment. For 2020, we have implemented cash cost reduction efforts early in this cycle, as previously discussed, including employee and contractor workforce reductions.

And consistent with our first-quarter disclosure, we still expect to realize $260 million of total cash cost savings this year inclusive of severance payments that we made during second quarter. We are driving run rate G&A down 17% from the 2019 average and down 25% from the 2018 average, continuing a multiyear trend. During 2Q, we reduced U.S. unit production costs down to all-time record low levels, down approximately 20% versus the 2019 average.

With the obvious commodity price challenges during second quarter, we pulled all levers to reduce production cost as quickly and aggressively as possible. Looking ahead with improved commodity prices, we expect to add back high-return workover activity and associated expense work. With higher workover activity and lower volumes during 3Q, unit production costs are expected to increase sequentially. Importantly, however, our full-year 2020 unit production cost guidance remains consistent with our original guidance entering the year despite lower production impacting the denominator, a strong accomplishment.

To put our overall cash cost efforts into perspective, total annualized reductions taken straight to the bottom line are contributing to about a $5 per barrel improvement in our cash flow breakeven, enhancing our resilience to lower prices and our ability to generate free cash flow in any recovery scenario. The low-cost producer wins in any commodity price environment. Underpinning all of the actions we have taken, we are, first and foremost, prioritizing the financial strength of the enterprise, protecting our balance sheet, our liquidity and our cash flow generation. Total liquidity remains substantial at over $3.5 billion at quarter end, and we remain investment-grade at all three credit rating agencies.

Overall, the combination of our high-graded capital allocation, significant cost reductions, and solid execution have successfully repositioned the company for free cash flow generation at prices well below the current forward curve, while also protecting our operational momentum into 2021. For the second half of 2020, our corporate free cash flow breakeven is in the low $30 per barrel range, implying strong free cash flow generation over the back half of the year at current pricing. And though premature to discuss a specific 2021 business plan, we have defined a benchmark maintenance case that holds 2021 total company oil production in line with 4Q '20 exit levels and the low 170 kbd range. This scenario delivers a free cash flow breakeven of approximately $35 per barrel on an unhedged basis, and highlights our differentiated capital efficiency and significant free cash flow potential.

With our significant leverage to oil prices, a $1 per barrel change in WTI translates to about $55 million of annual cash flow generation. This benchmark maintenance case highlights the significant and improved free cash flow potential of our company. To reiterate, this is not our 2021 business plan. Rather, it is a benchmark scenario that illustrates how we have repositioned the company while also affording a more direct comparison of capital efficiency to our peers.

It highlights both our resilience and free cash flow potential. That said, it is worth spending some time on how we are thinking about strategy, key priorities and capital allocation, our framework for success as we come out of this historic downturn and turn our attention to the new normal for our company and for our sector going forward. Entering 2020, I believe our company had established a hard-earned track record of delivering on a well-defined framework for capital discipline. Corporate returns improvement, multiple years of sustainable free cash flow generation, significant return of capital back to shareholders.

More specifically, over 2018 and 2019, we returned over 20% of our cash flow from operations back to shareholders, all fully funded with free cash flow, corresponding to an average reinvestment rate of just under 80%. Looking ahead, our core priorities won't change, but the environment has. Therefore, we must deliver these same outcomes, corporate returns improvement, sustainable free cash flow and return of capital to shareholders in a lower and more volatile commodity price world. This will demand an even greater focus on free cash flow generation through more moderate reinvestment rates and a relentless focus on capital efficiency, balance sheet strength, cost reduction and base production optimization.

While 2020 is clearly a transitional year, a year in which we have leveraged the supply demand crisis to further reposition the company for success, we expect our forward capital reinvestment to trend below 80% of our cash flow generation at much lower mid-cycle oil pricing. Even in a $40 per barrel oil case, our reinvestment rate would likely trend no higher than 80%. At prices north of $40 per barrel, our reinvestment rates would be well below 80%, and that incremental free cash flow would be taken to the bottom line. This reinvestment framework will pave the way for clear line of sight to significant free cash flow that can be used for shareholder-friendly purposes, prioritizing debt reduction and distributions back to our shareholders.

With the governor or reinvestment rate, production volumes will remain an outcome, not an input. In summary, second quarter was another remarkable execution story for our company, while navigating a very challenging macro environment. With the backdrop of an unprecedented demand shock, our underlying business model and framework for success remain intact, but we must now deliver in a more volatile and lower commodity price reality. Our reinvestment rate approach so successfully deployed in 2018 and 2019 will enhance our transparency and resilience going forward.

Our focus on those elements of the business we control has delivered dramatic and lasting results. We further reduced our full-year 2020 capital spending budget, and we raised our 2020 oil production guidance. We have high-graded our capital program, successfully managed our cost structure and protected our liquidity and balance sheet strength. And our 2021 benchmark maintenance scenario with a corporate breakeven of $35 per barrel serves as a compelling proof point for our differentiated capital efficiency.

Collectively, these actions have repositioned our company for success in the current environment and for the uncertainty of the new normal ahead. Thank you, and I will now hand over to the operator to begin our Q&A session.

Questions & Answers:


Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] And our first question is from Arun from J.P. Morgan Chase.

Your line is open.

Arun Jayaram -- J.P. Morgan -- Analyst

Yeah. Good morning, Lee, to you and your team.

Lee Tillman -- Chairman, President, and Chief Executive Officer

Good morning.

Arun Jayaram -- J.P. Morgan -- Analyst

Yeah. I wanted to start regarding '21, on 2021. You left us some breadcrumbs on how to think about next year under a maintenance capex scenario. Under our math, if you're going to sustain the 4Q '20 oil exit rate in the low 270s that translate into about 63 million barrels of oil.

The current strip, Lee, for '21 is just under $45, $44.70. You talked about a cash flow breakeven of $35 million. So that would suggest to us well north of $500 million in free cash flow. So my first question is I'm wondering if you could give us some thoughts on the area code that we are estimating for free cash flow under this maintenance scenario? And what would be the priorities for using that free cash flow if that, call it, that $44, $45 strip proves correct?

Lee Tillman -- Chairman, President, and Chief Executive Officer

Yeah, thank you, Arun, for the question. And I'll maybe take the first part of that, and then I might enlist some support from Dane in terms of priorities. But first and foremost, I want to confirm that your number is absolutely in the right ZIP code for the current strip. As I said in my opening remarks, Arun, it's a little premature to talk about a 2021 business plan.

But for this very well-defined benchmark case that we have laid out that it, in fact, holds production in line with 4Q '20 exit levels, that does have a very differentiated breakeven at $35. And when you do the math, and certainly, this, again, as a reminder, is kind of an unhedged basis, your number is pretty much in the correct ZIP code. I would also just remind everyone, as I said in my opening remarks, that we also have an extreme amount of leverage to oil pricing. And obviously, that is evident in your number.

But just as a reminder, for every dollar per barrel change in WTI, we are looking at an incremental $55 million-or-so in operating cash flow. So with that as a little bit of a scene set for 2021, I think our biggest challenge is just recognizing when do we see that stability in the market and we can count on those free cash flows coming in the door because we certainly have built a model that can deliver that. But assuming that we're successful and that the macro cooperates, we are left with the challenge of how do we prioritize the uses of that free cash flow going forward. And so maybe I'll let Dane just share a few thoughts on our priorities there.

Dane Whitehead -- Executive Vice President and Chief Financial Officer

Yeah, thanks, Lee. Arun, I'd say our top priorities for using free cash flow right now are reducing debt and returning capital back to shareholders. I'd say in the very near term, the first call on free cash flow will probably be to further strengthen the balance sheet. We've talked about for a while, a leverage target in the medium-term of sort of one to 1.5 times net debt to EBITDA in a mid-cycle price environment.

I don't think we need to get there all at once, but tacking in that direction is something that makes sense to us. And as Lee referenced, certainly, compared to where we were in Q2, commodity prices look great. And actually getting contango in the forward curve is kind of nice to dream about, but we'd like to have some confidence in the stability of that before we return to a programmatic return of capital to shareholders. That's super important to us.

As you know, we have done that over the past couple of years to the tune of about $1.3 billion, a return of free cash flow that we've generated to shareholders, and we're committed to getting back to that. I think the most likely way to start that would be to reestablish a competitive yield base dividend. And then, look at other alternatives beyond that. Some of our peers are talking about things like variable dividends.

That's certainly on the table for a discussion point for us. We're thinking about that. But first things first, just return to sort of a base case dividend makes sense. And then, if we do get into a sort of a consistent mid-cycle pricing environment, I think, it's important to know, we don't view deleveraging or returning capital to shareholders as an either/or proposition.

I think there's enough room and have flexibility to do both of those things in a more mid-cycle price environment, and that's what we'd be focused on.

Arun Jayaram -- J.P. Morgan -- Analyst

Great. Thanks for that answer. And my follow-up, Lee, it's been, obviously, a bit of a tougher year in E.G., just given weaker LNG prices, global gas prices, methanol prices. I was wondering if you could maybe help us look forward to 2021.

Thinking about strip, you're going to get some incremental volumes from Alen, from Noble, but help us think about E.G. next year, which is honestly a bit of a black box to the investment community because there's a lot of moving pieces on that in E.G.

Lee Tillman -- Chairman, President, and Chief Executive Officer

Yeah, maybe I'll start off and then ask Mitch to perhaps jump in as well. You're right in the sense that we did experience, obviously, some downtime earlier in the year that was impactful to E.G. But I just want to remind everyone about the value proposition in E.G. This is a long-life, low decline asset.

Clearly, just like all assets, it's exposed to the vagaries of commodity pricing, and you went through those, Arun, both on the LNG side, the methanol side, condensate side, etc. But it is a strong free cash flow generative asset from the sense that it really requires de minimis reinvestment. And then, of course, as we look to further leverage and utilize this world-class infrastructure that we have there, the gas plant, the methanol plant, the LNG plant, and all the associated kit there. There is an opportunity, certainly, even with a declining equity production to protect and stabilize our cash flows going forward.

And that's where opportunities like Alen really come into play. The good news is that Alen is on schedule, and we are looking forward to that. But maybe I'll just ask Mitch to chime in with any other thoughts from his perspective.

Mitch Little -- Executive Vice President, Adviser to the Chief Executive Officer

Yeah, sure. Arun, just to add a little bit, I guess, to your question comments and Lee's, beyond the 2Q trough in commodity prices really across the board, we also had a very significant turnaround at the AMPCO methanol facility this year, which impacted equity earnings. As we head into third quarter here, we're, obviously, seeing good recovery in prices on all fronts across all commodities. Case in point, there's some really strong tailwinds at the beginning of Q3 with U.S.

Gulf Coast, spot price is up about 60% on methanol over the lows in Q2. So we look forward at the commodity curves. The full year of 2021 without major turnaround expenditures and the Alen volumes coming on, a lot of signals pointing to positive. We expect, as we've said before, on a normalized-price basis, equity earnings in '21 to be more comparable to what they were in 2019.

With the current forward curve, if those prices hold, we would expect to see a return to dividends from some of the equity companies before the end of this year. And then, of course, with the current forward curve, that's just strengthening into 2021.

Arun Jayaram -- J.P. Morgan -- Analyst

That's helpful. Thanks, gents.

Lee Tillman -- Chairman, President, and Chief Executive Officer

Thank you, Arun.

Operator

And our next question is from Jeanine from Barclays. Your line is open.

Jeanine Wai -- Barclays -- Analyst

Hi, good morning, everyone.

Lee Tillman -- Chairman, President, and Chief Executive Officer

Good morning, Jeanine.

Dane Whitehead -- Executive Vice President and Chief Financial Officer

Good morning.

Jeanine Wai -- Barclays -- Analyst

Good morning. My first question is on the updated 2021 maintenance commentary. The breakeven of $35, I think the prior commentary was less than $40. So we just wanted to check if the updated number is more of a refinement? Or we suspect that there's something else going on that maybe you can more specifically talk about what the primary driver is for the new improvement in the capital efficiency outlook compared to what you thought last quarter?

Lee Tillman -- Chairman, President, and Chief Executive Officer

Yeah, Jeanine. Well, certainly, it does reflect a refinement. I mean, each day, we learn more and more about our capital efficiency trends across all basins. And I think that, first and foremost, that less than 40 number really reflected the level of definition that we had on that scenario at the time.

Since then, we have, obviously, gained more confidence in our delivery against our capital efficiency expectations, coupled with a lot more certainty around what that maintenance scenario might look like. And all of those things have contributed to giving us a high level of confidence now and talking about a $35 kind of all-in unhedged number for 2021.

Jeanine Wai -- Barclays -- Analyst

OK, great. My second question is on the portfolio. Lee, you've talked in the past about a portfolio approach to enhancing the resource base, and I guess, just given Marathon significant improvement in capital efficiency that you're now discussing, is there a case to be made in the current oil price environment that Marathon is now in a better position to add scale to the existing assets? Or is the focus really going to be more on balance sheet, restoring the dividend and focusing on this 80% reinvestment rate to enhance shareholder return? Thank you.

Lee Tillman -- Chairman, President, and Chief Executive Officer

Yeah, yeah, thanks, Jeanine. First of all, as I've said in the past, Jeanine, our business model is not predicated on M&A or large-scale consolidation. And as you rightly said, Jeanine, our primary focus, certainly, in this kind of transitional period of 2020, during this downturn, has been really on aspects of our business that we can control. And it was very important for us to aggressively pull the appropriate levers and really get us prepared for being able to deliver that differentiated capital efficiency that you now see highlighted in this maintenance scenario for 2021.

Having said that, we have to be aware of the market and the environment and the opportunities around us, and we certainly fully acknowledge and recognize the value of scale. We see the power of that already in our portfolio today. But when it comes to thinking about M&A or consolidation, whether that's large or small, we have a very specific and well-defined criteria. And we don't intend to budge from that criteria.

Any type of opportunity that we would consider in that context would, obviously, have to be accretive to our financial metrics, including free cash flow. It would not, obviously, harm our balance sheet. It would have to present some semblance of industrial logic and, of course, bring some hard credit synergies along with it. So I think as we look through that lens, clearly, as we compare that to our organic portfolio, the bar is very high, and that criteria is very exacting.

But we're certainly aware of the market and aware of the impact that scale can have.

Jeanine Wai -- Barclays -- Analyst

Great. Thank you very much, gentlemen.

Operator

Our next question is from Neal Dingmann from Truist Securities. Your line is open.

Neal Dingmann -- Truist Securities -- Analyst

Good morning, Lee. My question is, Lee, does the recent positive DAPL decision leads you to consider any near-term changes or strategies or activity in the play, given how solid your economics are in the Bakken?

Lee Tillman -- Chairman, President, and Chief Executive Officer

Well, first of all, Neal, I want to acknowledge that you're exactly right. The Bakken economics are extremely resilient from an economic standpoint. They're offering some of the top returns in our portfolio. The ruling that was just released yesterday, we see as a net-net positive.

We're still, obviously, digesting that completely. But in essence, the circuit court there vacated the district court's order for an immediate shutdown or a relatively quick shutdown of DAPL. So we view that as a positive. Maybe just as a reminder, though, that in the Bakken, we have always had a diversity of marketing outlets there.

And direct barrels riding on DAPL for us are right around 10,000 net BOPD -- barrels of oil per day. So from a direct impact standpoint, even if that had progressed to that more challenging scenario, our direct exposure was relatively limited. Now indirect, clearly, the impact across the basin and on-basin differentials when you take that level of capacity out of the system would have forced everyone to be looking for alternatives, including rail, which likely then would set kind of the marginal barrel out of the Bakken. So we view the ruling, again, is net-net positive.

I mean, this is an operating pipeline that's been operating with good environmental performance, strong integrity. We see it as a very dangerous precedent to have an operating pipeline with this type of track record to have that be taken out of service by legal action, particularly after going through the permitting process. So we're encouraged by the ruling. We're watching it closely today.

It has really no impact on our investment direction in the Bakken.

Neal Dingmann -- Truist Securities -- Analyst

Very good. And then, Lee, just my second. As some of your peers have put together but I'd call like a minimal total return that includes production growth and shareholder returns such as dividends. Would you all think about establishing something like this where you have a sort of a minimum base and just, I guess, my second part that if you would, how would you think about sort of the growth versus the shareholder return aspect? Thank you.

Lee Tillman -- Chairman, President, and Chief Executive Officer

Yeah. On that point, Neal, I think what you'll see from us is really looking, first and foremost, to achieve corporate returns and sustainable free cash flow. And I think applying our reinvestment framework that served us so well in '18 and '19 when we returned, as Dane said, $1.3 billion, $1.4 billion back to our shareholders. That's really more of the framework we are looking for is, what percent of our operating cash flow are we really getting back and putting to work for the shareholder.

And we like that a bit better. I mean, with equities moving all over the place right now and the volatility yields to us are interesting, but not particularly informative. I think a framework where you're looking at certainly sub 80% -- 70% to 80% reinvestment rates where you're ensuring that you have the ability to generate that sustainable free cash flow at mid-cycle pricing, that to me is probably a better framework. And then, really, your challenge is deciding how you want to deliver that -- whatever that percent of operating cash flow is back to your shareholder.

And I think Dane already touched upon that is initially, we'd be looking to prioritize a bit of debt reduction as we then look to ease back into a dividend structure. And then, in excess of that, there are a lot of other vehicles that we could consider, the variable dividend is one, but certainly even share repurchases is another. I mean, nothing would be off the table. But that's really the framework that you should expect us to work from, Neal.

Neal Dingmann -- Truist Securities -- Analyst

Very good. Thank you.

Operator

Our next question is from Phillips Johnston from Capital One. Your line is open.

Phillips Johnston -- Capital One Securities -- Analyst

Hey, guys, thanks. Just to clarify on the maintenance program for '21, I'm guessing it assumes some sort of an increase to your current program of three rigs and two crews at some point either later this year or early next year. So any details you can share in terms of what is assumed for activity would be helpful. Thanks.

Lee Tillman -- Chairman, President, and Chief Executive Officer

Yeah, Phillip, again, I want to remind everyone that this is just a benchmark scenario. It's not meant to be our business plan. But in that benchmark scenario, Phillip, activity levels would not be dissimilar to what we're seeing in 4Q, really, where we would have. Multiple rigs running in the Eagle Ford and the Bakken, coupled with likely a couple of frack crews as well to drive that maintenance program.

Similar to this year, we would be leaning, obviously, very heavily in the maintenance scenario on the Eagle Ford and the Bakken. I will just say, too, though, that even that kind of nominal $1 billion of capex, we've talked about for that scenario does also include the somewhat modest commitments that we have in the REx program as well. So all of that is baked into that $1 billion number that we have talked about.

Phillips Johnston -- Capital One Securities -- Analyst

OK, great. And I guess, maybe speaking of the REx program, I know the Louisiana Austin Chalk isn't really front of mind in this environment. But I wanted to see if you guys can share an update on that crawl well that you guys highlighted on the fourth-quarter call. It seems like the monthly numbers have been at least somewhat encouraging.

Lee Tillman -- Chairman, President, and Chief Executive Officer

Yeah. I'll maybe say a few things and then flip over to Pat to address crawl. I think, first of all, I just want to remind everyone that the REx program this year by design was focused on the Texas oil Delaware play. And that work has now run its course.

And I mentioned some highlights from that in my opening comments. So there really hasn't been a new activity generated within the Louisiana Austin Chalk play. But I'll let Pat maybe just provide a bit of an update on the crawl well itself.

Pat Wagner -- Executive Vice President of Corporate Development and Strategy

Sure, Lee. Phillip, as Lee talked about, I think we've been focused on the West Texas play. And because of the downturn in oil prices, we paused any activity in the Louisiana Austin Chalk as we can serve capital through the rest of the year. That well, as we talked about, previously had strong oil deliverability in the early months.

Currently, the well is shut in due to a facilities issue, and we'll be bringing it back on in a month or two.

Phillips Johnston -- Capital One Securities -- Analyst

OK, great. Thank you, guys.

Lee Tillman -- Chairman, President, and Chief Executive Officer

Thanks, Phillip.

Operator

And our next question is from Nitin Kumar from Wells Fargo. Your line is open.

Nitin Kumar -- Wells Fargo Securities -- Analyst

Good morning, Lee, and the team there. Thank you for taking my question.

Lee Tillman -- Chairman, President, and Chief Executive Officer

Good morning.

Nitin Kumar -- Wells Fargo Securities -- Analyst

I guess, first off, I'd want to start off on the hedging philosophy. As we talked earlier in the call, strip for 2021 is a lot better than what it was three months ago. I saw that you really don't have that many hedges right now for 2021. Is that by design? Or is there an opportunity to maybe certify some cash flows?

Lee Tillman -- Chairman, President, and Chief Executive Officer

Yeah. Well, again, I'll invite Pat to chime in, in just a moment, but first of all, we feel that one of our advantages as a company is, obviously, our oil leverage and the impact that oil prices can have on us. That's a huge upside driver for us. The reality is there hasn't been a lot of joy to look at in 2021, and we weren't really all that excited about hedging into kind of a low $40 or $40 kind of hedge program.

And even with a $35 breakeven, that wasn't very exciting for us. So we do look to take advantage of market opportunities to put more aspirational hedges on to underpin some element of our cash flow. But it's a much more defensive strategy, one that still seeks to protect that upside leverage to oil. And obviously, with the strength of our balance sheet and low breakevens, that also affords us some opportunity to take a little bit more commodity risk as well going into 2021.

But maybe, Pat, do you want to talk about the most recent hedges and kind of our hedge view in general.

Pat Wagner -- Executive Vice President of Corporate Development and Strategy

Yeah, Lee, thanks. I think you covered a lot of it already. But I would just say, we have a team that looks at this every single day. And we were not anxious to rush into some hedges as we saw the downturn because we did not like what we were seeing, particularly for '21.

So we've been very opportunistic in how we've looked at the market. And when we see an opportunity to lock-in our breakeven on the put and still protect some upside on the call, then we'll do that. So we did that recently, taken a little bit at $35, but $52 ways over the last few days, and we'll continue to look at that. We're just going to be prudent in the way we approach this and not jump into things quickly.

Nitin Kumar -- Wells Fargo Securities -- Analyst

Got it. Great. And then, for my follow-up, I just wanted to do. Within the framework of the 80% of cash flow for the reinvestment, earlier, you had talked about the REx program accounting for about 10% of capital.

Beyond 2021, is that how we should look at -- so what I'm -- I guess, what I'm asking is, is the REx program included in that 80% threshold going forward? Or is that an alternative use of free cash flow?

Lee Tillman -- Chairman, President, and Chief Executive Officer

No, no. Great question, and it's one that we do need to bring some clarity around. That REx program has to compete within that broader capital allocation discussion. So you should think about it being in that reinvestment percentage that we're talking about.

And again, I want to emphasize that that 80% reinvestment is really at the kind of top end of our expectations. That still gives you the ability to essentially have 20% of operating cash flow available for other uses. But the REx program is absolutely part of that reinvestment rate.

Nitin Kumar -- Wells Fargo Securities -- Analyst

Thanks, Lee.

Lee Tillman -- Chairman, President, and Chief Executive Officer

You bet. Thank you, Nitin.

Operator

Our next question is from Paul Cheng from Scotiabank. Your line is open.

Paul Cheng -- Scotiabank -- Analyst

Thank you. Good morning.

Lee Tillman -- Chairman, President, and Chief Executive Officer

Hi, Paul.

Paul Cheng -- Scotiabank -- Analyst

Lee, can I clarify the 80%? I mean, that's based on the mid-cycle. So in theory that when prices are much higher, you have said that it's going to be lower in that percentage. And how you determine what percentage or what reinvestment? Is that some of your peers that will say, OK, I mean, we're going to max out the ceiling of oil production growth at not more than 5%. And so whatever is that capex, it is much lower than 70%, 80%, that would be the percentage.

So can you help us to understand a little bit of the framework and the thought process in much higher commodity prices. How do you determine and set that percent of reinvestment?

Lee Tillman -- Chairman, President, and Chief Executive Officer

Yeah, no, no, great question. You're right. as commodity prices strengthen on the same program, obviously, that reinvestment rate will trend lower, which then gives you optionality to consider reinvestment back into D&C and production volumes. Ultimately, the controlling factor on that will be that we came into the year, if you recall, Paul, talking about already somewhat kind of mid- single-digit growth, 5% was what we had in our original budget.

And I believe that does set a bit of an expectation that even with incremental cash flow as that reinvestment rate comes down with commodity price. We certainly don't see the need to grow in excess kind of those single digits going forward. I mean, it's not a good choice for the macro. And I think for us being focused more on financial outcomes as opposed to volumetric outcomes, we believe that's the right course of action.

So we'd be looking to, obviously, moderate growth even in a higher commodity price scenario.

Paul Cheng -- Scotiabank -- Analyst

Got it. Thank you. And the second question, I think, is for Dane. Your balance sheet targets, say, one, 1.5 times net debt to EBITDA.

That certainly is not a very high multiple. But on the other hand, given things are increasingly high and higher volatility. And we have seen in this downturn even with a reasonably solid balance sheet, you end of that cut your dividend and all that. So I mean, should we target in a mid cycle, a much lower multiple on your debt ratio.

So that to ensure if we get hit by the next downturn, we will have plenty of the balance sheet that survive through the storm without really have to do just drastic measurement like cut to the phone on the capex and cut the dividend all that kind of things?

Dane Whitehead -- Executive Vice President and Chief Financial Officer

Yeah, hi, Paul, thanks for that. Yeah, I agree with your sentiment that lower debt is better at home and at work. And one to 1.5 times, we feel like represents a reasonable near sort of medium-term target for us. Getting below that level, if we have the luxury of those levels of cash flows, and we can kind of take chunks of maturities out over time with cash, certainly is something I support.

And you're right, it does insulate you from the volatility that we've seen. And hopefully, we don't see the kind of volatility that we've had in 2020 anytime soon. But even if you go back a few years, we are in a much more volatile -- feels like longer-term environment and lower leverage is a good thing. So yes, trending toward one to 1.5 times.

And once we get to that milestone, I don't think we necessarily stop.

Paul Cheng -- Scotiabank -- Analyst

Thanks. Can I just sneak in with a -- maybe a last question? On 2021, when you're looking at your capex and cash flow, should we look at you think that you will try and run a positive free cash flow?

Lee Tillman -- Chairman, President, and Chief Executive Officer

I'm sorry, I lost the question just a little bit there. Paul, could you repeat it for me?

Paul Cheng -- Scotiabank -- Analyst

Lee, for next year, should we look at the capex program, yes, such that we are trying to run it so that you will generate positive free cash flow?

Lee Tillman -- Chairman, President, and Chief Executive Officer

Yeah, absolutely. Yeah, in fact, the view is that that is the focus and priority of the program is one, to generate corporate level returns; and two, to get us back on a sustainable free cash flow path, very similar to where we were in '18 and '19 before we had the kind of correction this year. Our intent and our design is to get right back on to that trajectory. And that's why we've been so focused on capital efficiency.

Because our view is in a no-growth to low growth environment, capital efficiency is going to be the differentiator. That, along with operating cost. And so that's why you see us so heavily focused on really driving that capital efficiency to ensure across a broad range of pricing, including -- we've used the term mid-cycle pricing quite a bit today. And we have to think about it.

Our view of mid-cycle pricing is very different today than it was in 2018, 2019. That certainly has moved lower from the $50 to $55 kind of viewpoint. And as we start thinking about our planning basis for 2021, my expectation is that mid-cycle pricing will look somewhat consistent with what we're currently seeing in the forward strip for '21. So I do believe that bringing that mid-cycle-planning basis down also affords us some of that flexibility that you are just challenging us on relative to the balance sheet.

Paul Cheng -- Scotiabank -- Analyst

Thank you.

Operator

Our next question is from Doug Leggate from Bank of America. Your line is open.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Thanks. Good morning, everyone. I hope everyone is doing well out there. Lee, I've got two questions, if I may, one on consolidation and one on your -- the value proposition you've laid out this morning.

Look, I'm a relatively simple guy. So I want to play back to you what you basically just told us. Your sensitivity is $55 million per dollar. You're flat at $35 WTI, and you're spending $1 billion with $160 million dividend.

What that means is that a $50 WTI, you generate $1 billion of free cash flow. You put that in a 10% annuity discount rate, assuming you can hold it flat forever and drop off the debt and your stock is trading where it's right at today at $50 oil. So my question is, what is the value proposition? It sounds like it's really about costs because for all the other folks to look at your valuation, that's how I think about it. How do you address that because all of the above is doing what you said, but it's also assuming $50 oil?

Lee Tillman -- Chairman, President, and Chief Executive Officer

Yeah. Well, I think, first of all, Doug, of course, obviously, none of us can predict if oil is going to be flat, up or down. And so there -- we would expect that that oil prices will continue to move constructively, which I think implies some upside to that. I do think, though, the model that that generates material free cash flow.

And whether you want to measure that as a percentage of OCF, I mean, at 20% of your OCF, you're basically returning a full year's cash flow in a five-year period back to your shareholders in some shape or form. And we believe that's still a value-accretive model, even in a low growth kind of scenario. And certainly, if you wanted to even translate that into yields, I think it becomes -- certainly, it's competitive at mid-cycle pricing and would be, I would say, outperforming from a, say, an S&P standpoint at higher pricing. So we believe that that is an investable thesis from that standpoint.

So anywhere I'll just stop there.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

No, I think, I mean, my follow-up is related, but I do want to reaffirm your absolutely right, because if I was completely balanced about this, at $60 oil, your stock doubles. So it really gets to the point that you made about preserving oil leverage. And that's why I want to ask you about your cost plans. But you've talked about -- you've done a great job controlling costs and protecting that oil leverage.

But if the story in energy is about lowering the cost base, consolidation has to be part of the discussion. So I'd just love to get your thoughts on that. And if I may be very specific, I asked this question to Conoco as well. Did you look at mobile through the process because you've arguably got more overlap there than just about anybody else in the industry?

Lee Tillman -- Chairman, President, and Chief Executive Officer

Yeah. Maybe I'll take the last part of your question first. And obviously, I don't want to comment specifically on the Chevron Noble combination, but I will reference you back to my comments about our criteria and what we look for in consolidation or M&A regardless of the size, whether it would be an MOE or a smaller acquisition. And under that set of scenario or under that set of criteria, obviously, Noble for us struggled to meet some of that, particularly with respect to the quantum of debt, as well as to the concentration risk in their portfolio.

And so from that standpoint, that would be how we would have viewed Noble would have been through that lens. I do agree with you that as we move more toward a capital efficiency, operational and execution efficiency model as opposed to a high-growth NAV model, scale is going to be exceptionally important. I do think today that through our multi-basin model, we do have that scale, it's more of a elective scale in that sense. And we're going to clearly stay in tune with what's occurring within the market.

We recognize that consolidation could, in fact, be a factor. But we also equally recognize that we want to have a business that is resilient from an organic standpoint as well. And to the extent that we deliver on that, if consolidation were to occur, we would be in a very strong position for our shareholder.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Appreciate you taking my questions. Thanks a lot, Lee.

Lee Tillman -- Chairman, President, and Chief Executive Officer

Thank you, Doug.

Operator

Our next question is from Brian Singer from Goldman Sachs. Your line is open.

Brian Singer -- Goldman Sachs -- Analyst

Thank you. Good morning. One follow-up on just the discussion that you were just speaking here about with regards to consolidation, and you mentioned scale. And I wondered if we exclude the potential benefits of G&A synergies.

Do you see the potential that consolidation or adding additional acreage in your existing plays could lower your supply cost of your base businesses? Or do you think the scale you have achieved in your major plays is sufficient or unlikely to be impacted SG&A by consolidation?

Lee Tillman -- Chairman, President, and Chief Executive Officer

Yeah, I think ex G&A consolidation, there's still industrial logic and synergies at a basin level that can be taking advantage of. I would just argue, Brian, there would have to be acreage, though, that makes sense from a value standpoint and actually competes with the portfolio we have today, which, as you stated in our core basins, is a relatively high bar. Certainly, what we don't want to do is get larger just to gain scale. I mean, it would have to compete also on a quality and returns basis.

Or in fact, all you're really doing is, yes, you're gaining scale, but you're also diluting your overall corporate returns. And so there is a balance there, right? We certainly want to see that scale synergy in our core basins. But we also want to be mindful of doing something that would be dilutive to the overall value proposition and the corporate returns we are generating.

Brian Singer -- Goldman Sachs -- Analyst

Great, thank you. And then, my follow-up, and this may have been discussed earlier, in which case, my apologies. But if there is down the road in the Bakken unfavorable news with regards to pipeline that would make the differentials or the realized prices, less returns enhancing. How would you react to that philosophically? Would that be just potentially lower the capital budget? And allocate capital to -- don't allocate capital elsewhere? Or what basins would receive greater capital allocation if that were a situation?

Lee Tillman -- Chairman, President, and Chief Executive Officer

Yeah, well, maybe I'll start, and then I'll flip over to Pat if he wants to make some comments on the marketing and transportation side. But in general, Brian, I would say, first and foremost, we have very few barrels that would be directly impacted. It would have to be a broader, as you state, differential challenge that would manifest itself before we would start seeing concerns there. The bottom line, though, is our Bakken inventory remains very resilient, and it's very much a top-tier performer for us.

So barring some very egregious blowout in differentials, we would still see those opportunities competing very strongly for capital. I think the likelihood of that, given the diversity of outlets for Bakken crude is likely low. I also think with the ruling yesterday, which I think is net a positive for the continuing operation of DAPL. I think that risk is fading a little bit.

But maybe I'll let Pat just jump in and talk a little bit about our marketing strategy and how we protect our current barrels because that's exactly how we would basically protect our future barrels.

Pat Wagner -- Executive Vice President of Corporate Development and Strategy

Hi, Brian, I think, Lee covered some of this earlier. But right now, we move about 10,000 barrels a day net on DAPL. So those barrels would be directly impacted, and we'd have to swing them to a different market. But from a big picture perspective, we have a diversified approach in the Bakken.

In addition to DAPL, we ship on rail at Brent pricing. We ship on Pony Express to Cushing, and then we sell into the Clearbook market. So in the event of a shutdown, we believe the majority of our barrels wouldn't be that affected. Obviously, you'll see a little bit of softening maybe in the Clearbook market, but it's not directly tied to in-basin.

And then, we'd see a little bit of softening, of course, in the basin itself, and we'd see a few dollars there on the dips. But we don't see it as a big impact on us at this point.

Lee Tillman -- Chairman, President, and Chief Executive Officer

Maybe just to maybe close this one out. Luckily today, we have a little bit more perspective on the likelihood of that event, at least, in the near term. But I do want to stress that in the Bakken, we really do have some industry-leading capital efficiency there. I know kind of throughout the deck and even within the earnings release, we talked a lot about the completed well cost now are headed down toward $450 per lateral foot.

I mean, these are some extremely capital-efficient investment opportunities. And I think we would have to see pretty dramatic shift there before those would lose their ability to compete for capital allocation.

Brian Singer -- Goldman Sachs -- Analyst

Thank you.

Operator

And our last question is from Pavel from Raymond James. Your line is open.

Muhammed Ghulam -- Raymond James -- Analyst

Thanks. This is Muhammed Ghulam on behalf of Pavel Molchanov. So only one from me. Can you talk about how your E.G.

operations have changed in response to pandemic? Specifically, whether the lockdowns imposed by the government there have had an impact and how is companies implementing those distancing at their assets there? Thank you.

Mitch Little -- Executive Vice President, Adviser to the Chief Executive Officer

Yeah. Hey, Muhammed, this is Mitch. I lost a little bit of your question, but I think I got most of it. I think it's fair to say we've worked really closely with the E.G.

government in ensuring that they've got the capability to do adequate testing. They've been very proactive in sort of limiting flow of people in and out of the country, requiring negative tests for those coming in, etc. We have a compound called Punta Europa where all of our expat employees stay, and we've got on-site and medical facilities. We're doing active testing.

We have modified our rotational schedule a little bit in response to kind of the changes to the travel patterns and flight patterns, etc. But operations have run very steady, and the workforce has adapted to the change there. And really, the team has done an outstanding job along with the government in ensuring kind of minimal impact. Last comment I would make is, Lee touched on this early on in his comments.

The Alen project, which is expected to bring third-party gas to the E.G. LNG facility next year remains on track. They've been able to work through all those same issues very effectively. And so a little bit of change to the sort of rotational pattern, but business as usual due to the outstanding response from the team there.

Muhammed Ghulam -- Raymond James -- Analyst

That's awesome. Thank you.

Operator

We have no further questions at this time. Turning the call back over to Lee Tillman for closing remarks.

Lee Tillman -- Chairman, President, and Chief Executive Officer

I could not be more proud of the dedication of our people that have adapted to these largely uncharted waters we are navigating. They continue to fulfill our mission of delivering affordable, reliable, accessible energy the world needs today and that it will need when the economy gets back to work. Thank you for your interest in Marathon Oil, and stay healthy.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Guy Baber -- Vice President of Investor Relations

Lee Tillman -- Chairman, President, and Chief Executive Officer

Arun Jayaram -- J.P. Morgan -- Analyst

Dane Whitehead -- Executive Vice President and Chief Financial Officer

Mitch Little -- Executive Vice President, Adviser to the Chief Executive Officer

Jeanine Wai -- Barclays -- Analyst

Neal Dingmann -- Truist Securities -- Analyst

Phillips Johnston -- Capital One Securities -- Analyst

Pat Wagner -- Executive Vice President of Corporate Development and Strategy

Nitin Kumar -- Wells Fargo Securities -- Analyst

Paul Cheng -- Scotiabank -- Analyst

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Brian Singer -- Goldman Sachs -- Analyst

Muhammed Ghulam -- Raymond James -- Analyst

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