Marathon Oil (MRO) Q4 2020 Earnings Call Transcript

Marathon Oil (MRO 0.49%)
Q4 2020 Earnings Call
Feb 23, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Marathon Oil Q4 Earnings Call. My name is Vanessa, 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.

Sir, you may begin.

Guy Baber -- President of Investor Relations

Thank you, Vanessa, and thanks to everyone for joining us this morning on the call. Yesterday, after the close, we issued a press release, a slide presentation, and investor packet that address our fourth-quarter and our full-year results, as well as our 2021 capital budget. Those documents can be found on our website at marathonoil.com. Joining me on today's call, as always, are Lee Tillman, our chairman, president, and CEO; Dane Whitehead, executive VP and CFO; Pat Wagner, executive VP of corporate development and strategy; and Mike Henderson, senior VP of operations.

Today's call will contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. I'll refer everyone to the cautionary language included in the press release and presentation materials, as well as to the risk factors described in our SEC filings. With that, I'll turn the call over to Lee, who will provide his opening remarks. We'll also hear from Dane, Pat, and Mike today before we get to our question-and-answer session.

Lee?

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

Thank you, Guy, and good morning to everyone listening to our call today. I want to start by once again thanking our employees and contractors for their resilience and dedication as we continue to manage through the COVID-19 pandemic as critical essential infrastructure providers. The safety and health of our people remains front and center to everything we do. Just this past week, many of our team, particularly here in Texas, also navigated multiple days without power or running water amid a generational winter storm and did so without incident.

I'm truly proud of our people and their perseverance. They have risen to the challenge again and again. The execution excellence I have the privilege of discussing today is the product of their outstanding work. While 2020 was a challenging and unprecedented year for our industry, we focused on those elements of our business within our control and delivered results that speak for themselves.

But for Marathon, it is not just about results, but how we achieve those results. First and foremost, I'm especially proud of our second consecutive year of record safety performance as measured by total recordable incident rate despite the challenges associated with the pandemic and the dramatic shifts in our activity levels throughout the year in response to commodity price volatility. The safety of our people will always be my top priority. During 2020, the company also made significant progress in improving its environmental performance, achieving an estimated 20% reduction to its GHG emissions intensity relative to 2019 and improving total company gas capture to approximately 98.5% for the fourth quarter of 2020.

Beyond maintaining safe and environmentally sound operations, our primary focus in 2020 was threefold: reduce and optimize our capital program in response to commodity price volatility, continue to lower our cost structure, and protect our investment-grade balance sheet and generate free cash flow. Today, I'm pleased to highlight comprehensive success across all elements of our 2020 playbook. First, we reduced and optimized our capital program to navigate unprecedented commodity price volatility. Our 2020 capital expenditures totaled $1.16 billion, below our most recent guidance of $1.2 billion on tremendous execution and more than 50% below our original capital budget for the year.

We dramatically reduced our well costs during 2020, the continuation of a long-standing trend due to a combination of optimized well design, execution efficiency, supply chain optimization, and commercial leverage. Average completed well cost per lateral foot was down 20% year on year in 2020 with fourth quarter down approximately 35% from the 2019 average. We expect the vast majority of these well-cost reductions to prove durable. Second, we continued our multi-year trend of successful lowering our cost structure.

Early in 2020, we took aggressive and decisive action in response to the challenging environment. The end result was a year-on-year reduction of over 20% to both our production costs and our general and administrative costs, exceeding the initial cost reduction targets we set last year. Both our U.S. and international segments achieved record-low unit production cost in 2020.

Finally, we protected our investment-grade balance sheet and maintained our focus on free cash flow. Our collective actions in 2020 culminated in just under $280 million of free cash flow generation for the full year, including about $160 million during the fourth quarter with oil production flat sequentially and with WTI averaging only $42 per barrel. Funded entirely by free cash flow, we returned around $250 million back to our investors in 2020, consistent with our multi-year return of capital track record. This included $150 million of share buybacks and dividends, including our reinstated base dividend during fourth quarter, as well as $100 million of gross debt reduction, consistent with our objective to continue improving our balance sheet.

We also proactively reduced our November 2022 debt maturity by half or $500 million. Ultimately, we successfully responded to the supply demand crisis in 2020 and further optimized and enhanced our business model. In addition to pulling all the necessary levers to manage through the crisis, we dramatically improved our resilience and our ability to generate robust financial outcomes in a lower and more volatile commodity price environment in the future. We have, therefore, entered 2021 on firm footing.

And while commodity prices have surprised to the upside to start this year, we have no doubt that oil and gas prices will remain volatile. We fully understand that this is a cyclical business, that we are price takers and not price predictors, and that the range of potential outcomes for supply demand balances remains wide. The market remains well supplied with nascent demand recovery just emerging from the pandemic crisis. As I often remind our team, we can't control the macro, and we certainly can't predict the oil price.

Regardless of these external forces, we must remain focused on our core priorities: corporate returns and free cash flow, returning capital to our investors, strengthening our balance sheet, and ESG excellence. Additionally, we will stay focused on executing on our transparent framework for capital allocation. More specifically, we will continue to optimize our cost structure and reduce our corporate free cash flow breakeven, further improving our downside resilience and enabling us to generate free cash flow across the widest possible range of commodity prices. We will stick to our disciplined reinvestment rate capital allocation framework to provide clear visibility to free cash flow generation and the use of a meaningful percentage of our operating cash flow for investor-friendly purposes, prioritizing balance sheet enhancement and return of capital to shareholders.

As a reminder, assuming $45 per barrel WTI or higher, our reinvestment rate will be 70% or less, and we will make at least 30% of our cash flow from operations available for investor-friendly purposes. Finally, if commodity prices surprise to the upside, we will remain disciplined and won't chase growth. Even if the recent commodity price strength persists, we will not raise our capital spending. Our $1 billion maintenance capital budget will remain our budget.

With higher pricing, we will simply generate even more free cash flow. We will accelerate our balance sheet improvement and the realization of our targeted leverage metrics, and we will evaluate incremental return of capital to our investors beyond our base dividend and a minimum $500 million gross debt reduction target for 2021. With this brief overview of our capital allocation framework, I will now turn it over to Mike Henderson, who will walk us through the highlights of our 2021 capital program.

Mike Henderson -- Senior Vice President of Operations

Thanks, Lee. As Lee mentioned, our 2021 $1 billion maintenance capital program is fully consistent with our capital allocation framework, prioritizing the financial and operational results that matter most. A few of the highlights I summarized on Page 6 of our earnings deck. Our $1 billion maintenance program is expected to deliver $1 billion of free cash flow at $50 WTI with a reinvestment rate of just 50%.

You'll note this is an improvement of about $100 million relative to the maintenance scenario-free cash flow outlook we provided last quarter at the same price deck due to a combination of further capital efficiency improvements and ongoing cash cost reductions. Our 2021 corporate free cash flow breakeven is comfortably below $35 WTI, underscoring the resilience of our program. We are targeting $500 million of gross debt reduction this year, consistent with our objective to continue improving our balance sheet. We will drive further GHG emissions intensity improvement, targeting a 30% reduction relative to our 2019 baseline.

And we expect to deliver flat total company oil production relative to fourth-quarter 2020 exit rate. Regarding the operational details, approximately 90% of our capital will be dedicated to the Bakken and Eagle Ford, the industry's most capital-efficient basins. We will operate around five to six rigs and will average about two frac crews for the year. Additionally, I'd like to address two other topics of interest regarding our 2021 outlook.

First, last week was obviously a challenging one from a weather perspective, uniquely impacting all of our primary basins. Each of our asset teams has demonstrated an ability to respond successfully to significant weather events, be it hurricane, floods, or extreme winter weather. However, the broad nature of this extreme winter storm tested all of our asset teams simultaneously. I would like to recognize all of the efforts of our field teams across the U.S.

who have gone above and beyond over the past week, getting much-needed volumes back into the market in an effective and safe manner. Like many operators, our volumes have been impacted by the extreme freeze. We, therefore, expect first-quarter total company oil production to be down slightly relative to the fourth quarter. However, these challenges are fully reflected in our annual production guidance, and we have no concerns about delivering on our full-year commitment.

Second, while I have highlighted the free cash flow potential of our program at $50 WTI, clearly, the current forward curve is much stronger than that. As we mentioned, should stronger prices hold, we will maintain our discipline and prioritize our free cash flow generation. Assuming just $55 WTI, a price still below the current strip, we would expect our free cash flow generation in 2021 to increase to over $1.3 billion with a reinvestment rate below 45%. With that, I will turn over to Dane Whitehead, who will cover our ongoing efforts to continue optimizing our cost structure.

Dane Whitehead -- Executive Vice President and Chief Financial Officer

Thank you, Mike, and good morning to everyone on the call. On Slide 7 of our earnings deck shows we've successfully established a multiyear track record, cost structure optimization that's been critical to reducing our free cash flow breakeven, improving our free cash flow generation potential, and positioning our company for success in a lower, more volatile commodity price environment. During 2020, in the early innings of the COVID-19 pandemic, we took decisive action to materially reduce our cost base. This action was comprehensive, including temporary base salary reductions for our executive officers and board of directors, a meaningful reduction in both our U.S.

employee and contractor base, and a dramatic reduction in project expenses, among other initiatives. The end result was year-over-year reduction to both our production costs and general and administrative costs of over 20%, outperforming the initial targets we set last year. G&A alone was down 23%. And we also consistently outperformed on unit production expense throughout the year, establishing new record lows for both our U.S.

and international segments in 2020. We're building on this momentum and have already taken significant action again in 2021 to continue our cost reduction trend. These latest actions are again broad-based, including a 25% reduction to CEO and board of director compensation; 10% to 20% compensation reduction for other corporate officers; a further employee and contractor workforce reduction to better align our organizational capacity with our expected future activity levels; and a reduction to aviation, real estate, project, and various other costs. While our first-quarter 2021 earnings will include an uptick in our reported G&A, largely reflecting one-time costs associated with our recently implemented workforce reduction, we expect to realize the majority of projected cost savings across both G&A and production expense categories by the end of this year on a run-rate basis.

Ultimately, we're driving toward a cumulative production cost and G&A cost reduction of approximately 30% relative to 2019 and 40% relative to 2018. I'll now turn it over to Pat to cover our newly disclosed five-year benchmark maintenance case. Pat?

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

Thanks, Dane. Slide 8 of our deck covers the highlights of our new disclosure around the five-year benchmark maintenance capital scenario. First, I want to be clear that this is not five-year guidance, nor is it a five-year business plan. Rather, this is simply a benchmark scenario designed to hold our fourth-quarter 2020 total company oil production flat through 2025.

And it is supported by a bottoms-up, well-by-well execution model. It should be evident that our '21 capital program is among the most capital-efficient of any E&P company. $1 billion of all-in capital to deliver $1 billion of free cash flow at $50 WTI, with a 50% reinvestment rate and over 170,000 barrels of oil per day of production is impressive by any measure. The intent of this five-year benchmark maintenance scenario is to showcase the sustainability of our capital efficiency advantage and outsized free cash flow potential over a longer time horizon that is still underpinned by defensible execution assumptions.

Though one might argue for an even longer-term scenario, such forecasts ultimately lack the line of sight of a bottoms-up execution model and the accountability that a five-year scenario provides. So even though we consume well below half of our high-quality inventory in this maintenance scenario, we felt the five-year view is the most relevant and credible. The financial outcomes of our maintenance scenario are clearly compelling. Assuming flat $50 per barrel WTI, we can deliver approximately $5 billion of free cash flow over the next five years with an average reinvestment rate of around 50%.

Our corporate free cash flow breakeven remains below $35 per barrel WTI throughout the period, evidence of the strength of our capital efficiency and high-quality inventory. To hold our fourth-quarter 2020 total company oil production flat over the five-year period, we would spend between $1 billion and $1.1 billion annually of all-in maintenance capital. Importantly, this all-in capital spending estimate fully contemplates our previously disclosed greenhouse gas intensity reduction initiatives, including approximately $100 million of cumulative funding for the five-year period. Finally, it's worth noting that our five-year benchmark maintenance scenario includes capital allocation across our multi-basin portfolio.

While we leaned heavily on the Bakken and Eagle Ford in 2020 and will do so again in 2021, under this scenario, we begin to introduce a measured and disciplined level of activity back into the Permian and Oklahoma beginning in 2022. The Permian and Oklahoma comprise between 20% and 30% of resource play capital each year from 2022 to 2025 in this scenario. Both assets are expected to deliver accretive corporate returns and contribute to corporate free cash flow from a high-graded opportunity set. Now, I'll turn it back to Lee, who will wrap up by highlighting our ESG excellence initiatives.

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

Thank you, Pat. It's our belief that continuously improving all ESG performance is essential to successfully executing our long-term strategy. And we recently issued a comprehensive press release on January 27 outlining both executive compensation changes, as well as GHG intensity reduction initiatives. Corporate governance is foundational.

And with this in mind, we have modified our executive and board compensation frameworks to enhance our alignment with investors, to incentivize the achievement of our core strategic objectives, and to encourage the behaviors we believe are most likely to maximize long-term shareholder value. We believe these changes are appropriate and progressive and deliver much-needed leadership when it comes to corporate government in our peer space. For our sector to compete for investor capital and against the broader market, it will take more than just strong financial outcomes. Companies must improve all elements of their ESG performance, and it starts with corporate governance and how management teams are compensated.

As highlighted on Slide 10 of our deck, the first step we took was to reduce our overall compensation. Compensation for our board of directors has been reduced by 25% with our compensation mix shifted more toward equity. My total direct compensation has similarly been reduced by 25%, including a 35% reduction to long-term incentive awards, reflecting both improved alignment with broader industry, as well as the current business environment. Other senior officers will also participate through 10% to 20% total direct compensation reductions.

Secondly, we restructured our short-term incentive annual cash bonus scorecard to better reflect our financial and ESG framework and to simplify our scorecard to the five factors most important to long-term value creation: safety, as measured by TRIR; environmental performance, as measured by GHG emissions intensity; capital efficiency, as measured by corporate free cash flow breakeven; capital discipline and free cash flow, as measured by our reinvestment rate; and financial and balance sheet strength, as measured by cash flow per debt-adjusted share. Note that all production and growth metrics have been completely eliminated from our compensation scorecard. Finally, we have also meaningfully revised our long-term incentive compensation framework. Most notably, we have diversified LTI to three vehicles, all of which are denominated in shares.

Our revised framework will mitigate overreliance on relative total shareholder return against our direct E&P peer group, adding the S&P 500 and S&P 500 Energy Indices as peer comparators. This should also encourage improved performance versus the broader market. Additionally, we have introduced free cash flow performance stock units into the LTI mix, underscoring our commitment to sustainable free cash flow throughout the commodity price cycle. Turning to Slide 11 and our efforts to continue to raise the bar on safety and environmental performance.

We view safety as a core value and a key component of our ESG performance. Keeping our workforce safe, both employees and contractors, is and always will be a top priority. We have already highlighted that during 2020, we successfully managed through the ongoing COVID-19 pandemic with record-setting safety performance. This was our second consecutive year of record TRIR performance.

Peer-leading safety performance will remain a component of our executive compensation scorecard. Reducing greenhouse gas emissions intensity is central to our strategic goals of minimizing our environmental impact, addressing the risk of climate change, and delivering strong, long-term financial performance. Some perspective is useful here. Our industry has done more to power human progress than any other, and that mandate will not change.

Though it is all too easy to get caught up in the many headwinds that we face, oil and gas will be part of any future energy transition, and our products will be required to support the world's economy and to elevate the standard of living for many decades to come. We absolutely acknowledge the part we play in progressing the dual challenge of meeting the world's growing energy demand while also addressing global climate goals. And we believe our role requires a strategic and a pragmatic commitment to innovative solutions for environmental progress. During 2020, we made tremendous strides, leveraging the reset in our capital program and activity combined with targeted reduction efforts, to drive a step-change improvement in our GHG intensity and gas capture.

As a result, we expect that we'll reduce our GHG intensity by approximately 20% in 2020 relative to 2019, and we also achieved 98.5% gas capture for the total company during the fourth quarter. We have established quantitative objectives, highlighting our commitment to significant ongoing improvement. We have announced the GHG intensity reduction target for 2021 of approximately 30% relative to the 2019 baseline. This target has been incorporated into our annual compensation scorecard.

We have also disclosed a new medium-term goal. By 2025, we expect to reduce our GHG intensity by at least 50% relative to 2019. We have already identified concrete actions to assist in achieving our goal and have incorporated approximately $100 million of cumulative funding within our five-year benchmark scenario to ensure our progress. Specific initiatives include continued replacement of natural gas pneumatic equipment with lower-emitting technologies, connecting additional sites to utility power, tankless facilities, and investing in soil carbon sequestration to offset emissions.

I wholeheartedly believe that the oil and gas industry is instrumental in creating and maintaining the enhanced quality of life we have all come to expect and enjoy, and I'm confident that our products will continue to make up a significant portion of the energy mix even as we transition to a lower carbon future. We believe our combined actions will position Marathon Oil to be one of the elite companies that will continue to deliver the energy the world needs while also addressing the risk of climate change. These stated emissions intensity reduction goals and specific GHG-reducing activities signify our commitment to provide sustainable energy to the world on a long-term basis. I know that we have covered a lot of material in our slide deck and in our prepared comments today, so let me briefly summarize today's key messages.

While 2020 was a challenging year in many respects, it was also another year of differentiated execution for our company. We were successful across all elements of our 2020 playbook, ultimately generating about $280 million of free cash flow. As a result, we are a stronger and a more resilient company today than we were just a year ago. We announced a 2021 capital program fully consistent with our capital allocation framework that prioritizes free cash flow generation, balance sheet strength, and return of capital.

Our program is competitive against not only our E&P peer group but against the broader S&P 500 as well. $1 billion of free cash flow for $1 billion of capital at $50 WTI, significant free cash flow upside if commodity price outperformance persists, at least $500 million of gross debt reduction to continue improving our balance sheet, and further reductions to our GHG emissions intensity. We have already taken specific action this year to continue our multi-year cost reduction track record. More specifically, the company has taken additional action in 2021 to achieve an approximate 30% reduction to its combined production and general and administrative costs relative to 2019.

The company expects to realize the majority of these savings on a run-rate basis by the end of 2021. We have disclosed a five-year benchmark maintenance scenario that underscores the sustainability of the peer-leading capital efficiency and free cash flow we are already delivering. At flat $50 WTI, we could deliver $5 billion of free cash flow through 2025. And last but certainly not the least, we have taken a leadership position in driving reductions and design changes in executive compensation and GHG emissions intensity reduction initiatives our sector needs to pursue more broadly.

Our industry was in transition well before the global pandemic, and our company was among the first to recognize the need to move to a business model that prioritizes returns and sustainable free cash flow as opposed to growth. In this more disciplined model, capital and operating efficiency are paramount and, in fact, represent our competitive differentiators. We must deliver financial outcomes and ESG excellence that are competitive not only with our direct E&P peers but with the broader market as well. With that, I will turn it over to the operator to begin our Q&A session.

Questions & Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator instructions] We have our first question from Jeanine Wait with Barclays.

Jeanine Wai -- Barclays -- Analyst

Hi. Good morning everyone. Thanks for taking our questions.

Dane Whitehead -- Executive Vice President and Chief Financial Officer

Hey, Jeanine, hi. Good morning.

Jeanine Wai -- Barclays -- Analyst

Hi, good morning. Our first question is on just the buyback, variable dividends, current capital subject. On the amount of free cash flow set aside for investor-friendly purposes, is getting to the top end of your 1 to 1.5 times leverage target, is that good enough such that you'll start allocating some free cash flow toward buyback or variable dividend? I know some of it depends on your cash balances that you're targeting as a minimum. Some of it depends on the macro.

But is that 1.5 times enough?

Dane Whitehead -- Executive Vice President and Chief Financial Officer

Yeah. There's quite a bit in there, Jeanine, but let me go ahead and take a cut at it. This is Dane. We tried to be really clear about our intentions around the balance sheet and other return of capital to shareholders.

There's sort of a gross debt discussion and a net debt discussion in there, so let me talk about those first. As Lee and Mike noted, we have a 2021 target of $500 million gross debt reduction. I would consider that a minimum. But that's our near-term goal and probably happened early in the year.

So that's gross debt reduction. And in my view, that's kind of the most durable structural form of deleveraging. It also carries the added benefits of reducing cash, interest costs, and derisking future maturities. We've done about $2 billion worth of that over the past few years, and it's helped our cash cost structure mildly.

And we'll continue to do that. We've also, as you referenced, been clear that we're looking to reduce our net debt-to-EBITDA number, commonly used leverage term to a 1 to 1.5 times range. And the math we think about there is to get to 1.5 times in, say, a $50 mid-cycle oil market, that's a reduction of net debt by about $1.3 billion. So with commodity prices where we are today, we're probably going to get to that point much more quickly than we had anticipated coming into the year.

But we certainly are focused on getting there. And as we -- as net debt comes down, and you can do that just by accumulating cash on the balance sheet, we'll probably go ahead and take out further gross debt, but also look in tandem to look at other ways to return cash to shareholders. We have a pretty strong track record of doing these things in parallel, both paying down debt and returning cash to shareholders. And we know that's very important to people.

We happen to be in an environment where we are going to be generating quite a bit of cash when commodity prices hold, and we're going to pay close attention to our options there.

Jeanine Wai -- Barclays -- Analyst

OK. Great. Thanks for the detail. We appreciate that.

My second question, maybe shifting gears is just on the five-year maintenance scenario and just general capital efficiency. So I guess in terms of general capital efficiency by operating areas and how you kind of see that evolving over time, you mentioned in the slides and in your prepared remarks, the five-year maintenance scenario has 20% to 30% capex for the Permian and Oklahoma. And the total capex is $1 billion to $1.5 billion versus the 2021 plan only has 10% in those areas, and it's $1 billion in capex. So I guess my question is, is the $100 range on the five-year scenario, is that related to folding in the Permian and Oklahoma, and that reflects kind of lower capital efficiency in those areas because there hasn't been a ton of activity in those areas recently.

And so what's kind of driving the Permian and Oklahoma to garnering more capex both this year? And is it purely returns-related, or are there kind of other factors such as wanting to maintain operational capability in all of your basins? Thank you.

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

Yeah. Hi, Jeanine. This is Lee. I think the simple answer to your question is it's returns-driven.

And maybe it's worth just kind of restating a few of the things I pointed out in my opening comments. When we talk about this five-year benchmark case, it really is all about demonstrating sustainability. And as we continue to develop both the Eagle Ford and Bakken, obviously, that's the focus this year, we see this opportunity to blend in a high-graded opportunity set from both the Oklahoma and Permian, while also offsetting things like base decline in Equatorial Guinea. But even across that five-year period, I want to point out that we're still only consuming less than half of our high-return inventory.

And all this is supported, as was described, by a very much a bottoms-up, well-by-well execution model that's very defensible. So the short answer to your question is it's allocating capital on a returns basis. And via the high-graded opportunities in both the Permian and Oklahoma, we believe those can be very accretive across the five-year plan.

Jeanine Wai -- Barclays -- Analyst

Great. Thank you.

Operator

And thank you. We have our next question from Arun Jayaram with JPMorgan.

Arun Jayaram -- JPMorgan Chase -- Analyst

Yeah. Good morning, Lee and team. Lee, I wanted to ask you a little bit more around the five-year benchmark maintenance scenario. $5 billion of free cash flow at $50, on a post-dividend basis, it would be $4.5 billion.

So beyond some of the debt reduction targets that Dane just mentioned, how do you balance returning cash to shareholders versus portfolio renewal?

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

Yeah. I think it's -- you know, as Dane mentioned, you know, in this type of price environment, it's really not an either/or solution any longer. I think with the current prices, we can clearly accelerate the attainment of our desired debt metrics, both net debt as well as gross debt. And I think, somewhat contemporaneously with that, I think we can continue to drive capital back to our shareholders.

We will continue to be opportunistic in the market, as well as internally on our organic enhancement opportunities to continue to add to and enhance our resource base. And that's really just part of the equation. And that will include everything from continued investment in our REx program to say smaller bolt-on opportunities that might present themselves, as well as organic enhancement like some of the redevelopment activities that we have going on in the Eagle Ford currently. So we feel very confident that we can address all those uses of cash, particularly as we look at the current pricing environment that we're facing.

Arun Jayaram -- JPMorgan Chase -- Analyst

Gotcha. And I don't know if Mike could maybe shed some light on some of those opportunities in the Eagle Ford.

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

Yeah. Sure.

Mike Henderson -- Senior Vice President of Operations

Yep, yep. Good morning. I think as we mentioned in the deck, we've got potential for several hundred new locations there. We're undertaking a section-by-section review.

We're thinking about the Upper Eagle Ford and the Lower Eagle Ford as one flow unit. We are going to be targeting some of the older vintage completions and sections with lower recoveries. We have already undertaken a number of tests over the past two or three years. The results were very encouraging.

We do have further tests planned for this year. So I'd anticipate a bit of an update later on in the year.

Arun Jayaram -- JPMorgan Chase -- Analyst

OK. And, Lee, my follow-up is just on EG. It looks like the Chevron, not Noble Alen project, achieved first gas in 2021. Can you talk about the implications of that toward your free cash flow, your financials, and just talk about the longer-term free cash flow outlook that you provided in the deck in EG?

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

Yeah. Yeah, Arun, you're right. We did successfully start up the third-party Alen project. So we're very pleased with that.

That just started up kind of the middle of February. We tried to provide a little bit more transparency and disclosure on both equity income in EG and what that really looks like, particularly over 2021, but also kind of a five-year view of equity plus the income from our PSC as well and more of a free cash flow mindset. And when you look at that on kind of a $50, $3 Henry Hub basis, it accounts for roughly a couple hundred million of combined free cash flow when you look at it relative to that benchmark maintenance scenario, so just about one-fifth, if you will, of the annual kind of impact on free cash flow. So just trying to provide a little bit more transparency.

Clearly, Alen specifically, we haven't broken that out just because of the terms of the agreement are obviously private. But clearly there, we're getting the benefit of both tolling, as well as profit sharing on those molecules.

Arun Jayaram -- JPMorgan Chase -- Analyst

Great. Thanks a lot.

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

Thank you, Arun.

Operator

We have our next question from Neal Dingmann with Truist Securities.

Neal Dingmann -- Truist Securities -- Analyst

Well, thanks for the details. Lee, for you and the team, I'm just wondering, I think on slide -- looking at Slide 6, where you talk about the 60, 80 Bakken wells, 100, 130 Eagle Ford, could you all talk about how you're looking at not only maybe total locations in each kind of on a go forward? Obviously, you have a more conservative plan which certainly helps, but I'm just wondering. Also, you've got the -- when I look at the core areas of Hector and Ajax and the Bakken and Atascosa and Gonzales and Eagle Ford, how do you think about total location? It seems to me you still have just kind of running room there. So just wondering any color you could add either total or in those core areas.

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

Yeah. Neal, I think broadly, the way I would think about the Eagle Ford and the Bakken is that we have a decade or more of very capital-efficient, high-return inventory. And that's at a relatively conservative price deck, kind of consistent with more of a mid-cycle view of the world. So say $45 to $50 gas.

So you're correct, that's a pretty conservative view. I mean, that's an inventory that, clearly, we're leaning on this year. That inventory will be complementary to some of the work that we have out 2022 plus in Oklahoma and Permian as we start exploiting what is a very high-graded opportunity set in those two basins as well. And collectively, we feel very confident in that kind of 10-year-plus, high-return inventory across the portfolio at relatively conservative benchmark WTI prices.

Neal Dingmann -- Truist Securities -- Analyst

Yeah, and it was strong. Thank you for those details. And then, Lee, just one quick follow-on. Can you talk any thoughts or expectations for the Texas Delaware oil play, either this year or the next year?

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

Neal, this is Pat. I'll take that one. Our objective this year is to continue progressing that play. I may remind you that we brought on six wells across the play over the last year-plus.

And the wells have delivered 180-day productivity that exceeds industry average Wolfcamp and Bone Spring performance. In aggregate, that program has met our expectations and improve the viability of the Woodford and Meramec across the position. Our objective has been to prove out that productivity and the reservoir characteristics. And we've seen exactly what we hope to see, which was strong productivity, high oil cut, shale decline, low water-oil ratios, which are much lower than the rest of the Delaware.

As far as '21 goes, we plan to bring on a three-well pad this year, targeting both the Woodford and Meramec to kind of do a spacing test, and we'll see how that works out for us through the year.

Neal Dingmann -- Truist Securities -- Analyst

Thanks for the details.

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

Thank you.

Operator

Our next question is from Scott Hanold with RBC Capital Markets.

Scott Hanold -- RBC Capital Markets -- Analyst

Good morning. Could you give me a little bit of color on -- I know you've got the structure where you're going to remain disciplined this year. But obviously, it looks like we could be moving into a higher oil price scenario. And I know your prior outlook had discussed a 5% limit on growth.

But when you think about that upside case, could you talk about like how you would progress into that? And then what would the relative capital allocation to, say, the Eagle Ford and Bakken in that scenario versus your maintenance baseline?

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

Yes. Scott, I think the keyword for us is going to be discipline. We're obviously going to look at fundamentals of supply and demand, the price outlook. There is absolutely a limiter to what we would even consider in a growth context.

And again, I'll go back and say let's not confuse the five-year benchmark case with a business plan or in terms of setting an expectation. It was really a demonstration of sustainability within the portfolio. But I think you should expect us to lean heavily on the same framework that we have really since 2018. If we see that upside potential, we'll look to support our base dividend first.

We'll look to accelerate the improvement in our balance sheet and our debt reduction. Then we're going to look at incremental means to get capital back to shareholders. And then at that point, depending upon where market fundamentals sit, you can have a discussion about whether or not growth into the market really makes sense. Clearly, as we sit here today and what I believe is still a well-supplied market, even though we're seeing more consistent drawdowns now, we've got, like I said, a very nascent recovery in demand that's occurring.

I still believe that a disciplined approach is going to win the day. And certainly, from a financial outcome standpoint and making sure that we are competitive with alternative investment opportunities within the S&P 500, we have to continue to drive, I believe, outsized free cash flow in order to, if you will, offset the implicit risk and volatility that exists in our sector.

Scott Hanold -- RBC Capital Markets -- Analyst

No, that's very clear. I appreciate that. And, Lee, if I could ask you this, over the last couple of quarters, it seemed like there was at least a higher level of interest in larger-scale corporate deals given where valuations were the last quarter or two. Can you sort of give us an update on where your thought process is with that? And also, there's been at least a couple of decent-sized transactions in the Williston Basin.

And is that something you all looked at? And are there other opportunities like that still out there?

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

Yeah. I think just maybe addressing maybe some of the asset level deals that have occurred, I think overall, consolidation is healthy and certainly improved. I think the competitive structure of our industry, and really gets the assets in the hands of the most efficient operators, which should ultimately result in more disciplined behavior, which I think raises all boats in the industry. Many of these deals have been very bespoke, very specific deals.

I don't intend to comment on any of them specifically. But certainly, given our size and presence across all four of the key basins, we're well aware of the deals or the transactions that are available in the marketplace. We're going to apply a very well-defined criteria for any consolidation, whether it's small, medium, or large, and we're not going to budge off that criteria. It's going to have to be something that is accretive to our financial returns, accretive to free cash flow.

It certainly can do no harm to our balance sheet, and it's going to need to be something that has clear synergies and industrial logic and then also, ultimately, adds to our longer-term sustainability. So we look at all those opportunities in the market. We have access to all those. But we are going to apply a very disciplined lens to look at all those opportunities regardless of the size.

Scott Hanold -- RBC Capital Markets -- Analyst

Understood. Thanks.

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

Thank you.

Operator

Our next question is from Phillips Johnston with Capital One.

Phillips Johnston -- Capital One Securities -- Analyst

Guys, thanks. Maybe another follow-up on the five-year maintenance scenario. Just wanted to get a sense for what your next 12-month oil PDP decline rate is assumed to be entering this year? And how would you expect that natural decline rate to change over the five-year period?

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

Yeah. I think, you know, first of all, I would just say that within not only this year's business plan for 2021 but also our longer-term five-year benchmark case, base decline is fully contemplated in all those. I mean, I just want to be really clear that U.S. shale decline rates aren't mutually exclusive with delivering strong financial outcomes and sustainable free cash flow, particularly when you have high-quality, very capital-efficient assets.

So I would just say it's in there. We do expect that those portfolio declines will moderate as we see a shift in mix where we have more of that base production and less of, say, that year 1 and year 2 decline that typically represents those wells that you're bringing onstream. So there will be a moderation to that decline over time. But again, all of that is fully baked into not only our '21 plan but the five-year benchmark case as well.

Phillips Johnston -- Capital One Securities -- Analyst

Yes. OK. Makes sense. And then in terms of the quarterly cadence of both production and capex in '21, I noticed you guys are guiding to about 33 wells to be turned in line in the Eagle Ford and Bakken in the first quarter, which is a little bit less than 20% of your full-year plan of about 185 wells in those two areas.

I assume that's also contributing to the slightly down oil volumes in the first quarter versus the fourth quarter. But for the rest of the year, would you expect sort of mild ratable growth from that first-quarter low to sort of achieve the 172 full-year average? Or is there some lumpiness there? And then just on the capex side, would you expect first quarter to be a little bit lower than the rest of the year due to that lower till count for Q1?

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

Yeah. You did point out that we are a little bit probably down in -- potentially in the first quarter. It's really just a question of timing. Generally speaking, we're going to be quite ratable across the year.

There's a little bit of a pause in the Bakken as we recognize the winter weather impacts there. So that's not a time where we want to concentrate necessarily our completion activity. And so you're seeing that effect. But from a capex, as well as a wells-to-sales standpoint, it is going to be generally ratable.

On the volume side, as Mike mentioned in the opening remarks, we do expect to see some impact from the winter weather. But from a wells-to-sales standpoint, that's not a driver of first-quarter volumes. We had strong carry-in performance, and we still expect to kind of be in that low end of our annual guidance range even with the winter weather conditions that persisted across our play. So, yes, in first quarter, notionally, in that kind of 170 range.

And as Mike already stated, that winter impact is already fully baked into our full-year guidance range.

Phillips Johnston -- Capital One Securities -- Analyst

Thank you.

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

Thank you, Philips.

Operator

We have our next question from Scott Gruber with Citigroup.

Scott Gruber -- Citi -- Analyst

Yes, good morning.

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

Good morning.

Scott Gruber -- Citi -- Analyst

Thinking about your activity trend in the second half of last year, I believe you're largely focused on some of your best inventory. Obviously, the right thing to do when oil prices are low. Thinking about the Bakken and your program here, 60 to 80 tills in '21, what's the split between Myrmidon and Hector and Ajax and some color on when a greater mix of Hector and Ajax wells start to layer back in this year?

Mike Henderson -- Senior Vice President of Operations

Scott, it's Mike here. The split in '21 between Hector and Ajax is about 60% -- sorry, 60% Myrmidon and 40% in Hector. No plans for anything in Ajax this year. And then, obviously, looking beyond '21, I would notionally expect Hector to play a more significant part as we progress in the out years.

Scott Gruber -- Citi -- Analyst

Gotcha. And I have a question about the five-year study as well, especially given the rigor behind the study. Really thinking about capital efficiency, which, as I think about, it's really the intersection of well productivity, the operational efficiency and how fast you drill and complete the wells, and then trends in D&C service rates. How did you think about each of these items when you work through the study over the next five years? How did you guys incorporate the assumptions around well productivity trends, around operational efficiency, and around the service rate trend over the five years?

Mike Henderson -- Senior Vice President of Operations

Scott, it's Mike here again. You've probably a lot in there, and you might need to help me out here as I get through this. As we think about cost, specifically well cost, we are assuming some level of savings over that five-year, albeit, I think Pat mentioned, we did look at it from a risk bottoms-up perspective and maybe putting those cost savings into a little bit of perspective. If you take the Eagle Ford and Bakken, for example, our pacesetter wells, so wells that we already have in the ground, we drilled and completed those wells for less than what we're assuming in the five-year maintenance case.

So on the capital side, we are assuming some improvement, but nothing that we haven't delivered on already. From an inflation perspective, I think you may have asked that. We are assuming some modest inflation in that five-year plan, which I think is reasonable. And then from a well productivity perspective, what I would say is well productivity over the five-year period is pretty comparable to what we're seeing in 2020 and 2021.

Is there anything that I missed on your list?

Scott Gruber -- Citi -- Analyst

No, it's just something that we've thought about over time and it sounds like the operational efficiency improvement can offset the service rate inflation. Is that kind of broadly how you guys thought about it?

Mike Henderson -- Senior Vice President of Operations

I think that's a fair way to think about it.

Scott Gruber -- Citi -- Analyst

OK. Great. Yes, it's a complex question, so I'm just curious on how you guys talk through it. Appreciate the color.

Thanks.

Mike Henderson -- Senior Vice President of Operations

Thank you.

Operator

Our next question is from Paul Cheng with Scotiabank.

Paul Cheng -- Scotiabank -- Analyst

Thank you. Good morning. A couple of questions. Actually, the first one is related to cost.

One of your competitors have mentioned they have seen some cost inflation in some small area in the Permian surface. Just curious that have you guys seen cost inflation sort of spiking up the dynamic part of your operation? That's the first question. Secondly, that when we're looking at -- I don't know if I missed it. Have you mentioned what is the winter impact in your first quarter and whether that you are fully returned to the normal operation at this point?

Mike Henderson -- Senior Vice President of Operations

Hey, Paul, it's Mike here again. I'll answer your second question first. I think Lee just touched on the Q1 winter impact. It is obviously impacting it.

And I think the number that we're looking at is somewhere around 169, 170 for the quarter. But then obviously, getting back up for the full year, still looking at the guidance range that we've included in the deck. And then you had a question on --

Paul Cheng -- Scotiabank -- Analyst

Actually, I know that you gave a guidance for the production in the first quarter. Do you have a number you can share what is the actual impact from the winter storm? Is it down, say, 10,000 barrels per day, 20,000 barrel per day for you? Is there any number you can share?

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

Paul, I would just say we're still kind of in recovery mode in terms of getting the wells back online. And we would anticipate clearly having that period of downtime, but we'd also anticipate having an element of some plus production as we bring wells back online as well. And so we're going to have to wait until we can kind of net most of those things out. So we're trying to provide you kind of our best view of that right now.

So we don't have specific actuals because we haven't fully recovered all of our wells to see exactly how they will perform post shut-in.

Mike Henderson -- Senior Vice President of Operations

And, Paul, I'll take a run at your first question here. You were asking about inflation. What I'd say there, if we look at it from a macro perspective, capital activity has not returned to a level that we would expect to drive a substantial uptick in current costs. And it's capital activity that drives inflation.

So what I'd say there, so long as there's discipline in the E&P space, inflation feels very manageable. Specifically to Marathon, we do have our frac crews and 50% of our rig fleet secured through the middle of this year. We are seeing some inflationary pressure in the casing and shipping space. But that's really due to non-E&P demand on raw material and mill space, we project that to flatten out in the year.

So I'd probably characterize it as we're seeing some mild inflation. But if there's discipline within the industry, we think that inflation is manageable.

Paul Cheng -- Scotiabank -- Analyst

Thank you.

Operator

And thank you. That is all the time we have for questions today. I will now turn the call over to CEO, Lee Tillman, for closing remarks.

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

Well, thank you for your interest in Marathon Oil. And I'd like to close by, again, thanking all of our dedicated employees and contractors for their commitment and their perseverance in these most challenging times. That concludes our call.

Operator

[Operator signoff]

Duration: 60 minutes

Call participants:

Guy Baber -- President of Investor Relations

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

Mike Henderson -- Senior Vice President of Operations

Dane Whitehead -- Executive Vice President and Chief Financial Officer

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

Jeanine Wai -- Barclays -- Analyst

Arun Jayaram -- JPMorgan Chase -- Analyst

Neal Dingmann -- Truist Securities -- Analyst

Scott Hanold -- RBC Capital Markets -- Analyst

Phillips Johnston -- Capital One Securities -- Analyst

Scott Gruber -- Citi -- Analyst

Paul Cheng -- Scotiabank -- Analyst

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