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Marathon Oil (NYSE:MRO)
Q3 2021 Earnings Call
Nov 04, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Welcome to the Marathon Oil third quarter earnings conference call. My name is Cheryl and I will be your operator for today's call. [Operator instructions] I will now turn the call over to Guy Baber, vice president, investor relations. You can begin, sir.

Guy Baber -- Vice President of Investor Relations

Thank you, Cheryl, and thank you as well 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 third quarter 2021 results. These 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; and Mike Henderson, executive VP 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 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 Mike, Dane and Pat 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 continued dedication and hard work for their commitment to safety and environmental excellence and for their contributions to another quarter of outstanding execution and financial delivery. While I get the privilege of talking about our company's impressive results and outlook today, it is their hard work that makes all of this possible. Through our commitment to capital discipline and our differentiated execution, we are successfully delivering outsized financial outcomes for our shareholders, highlighted by more than $1.3 billion of free cash flow year to date.

For our $1 billion full year 2021 capital budget, at forward curve commodity pricing, we now expect to generate well over $2 billion of free cash flow this year, at a reinvestment rate below 35% and a free cash flow breakeven below $35 per barrel WTI. We are successfully delivering on all of our financial and operational objectives and achieving bottom line results that we will put head-to-head against any other energy company and against any other sector in the S&P 500. This strong financial performance has enabled us to pull forward our balance sheet targets. And this further improvement to our already investment-grade balance sheet has given us the confidence to dramatically accelerate the return of capital to equity holders.

Under our unique return of capital framework, our shareholders get the first call on cash flow, a minimum of 40% of our total cash flow from operations in the current price environment. Consistent with our commitment to shareholder returns and our objective to pay a competitive and sustainable base dividend, we have raised our base dividend by 20% this quarter. This is the third quarter in a row that we have increased our base dividend, representing a cumulative 100% increase since the end of 2020, a sign of the increased confidence we have in our business. We are also targeting approximately $500 million of share repurchases during the fourth quarter with $200 million already executed.

At a free cash flow yield north of 20%, we believe our equity offers tremendous value. Additionally, there remains a dislocation between our equity and strengthening commodity prices coupled with a more mature business model that underwrites repurchases through the cycle. Further, buying back our stock for good value provides the added potential of significantly reducing our share count, meaningfully improving all of our per-share metrics even under a maintenance scenario and increasing our longer-term capacity for continued per share base dividend increase. Looking ahead to fourth quarter, including our base dividend and planned share repurchases, we expect to return approximately 50% of our total cash flow from operations to equity holders, fully consistent with our return of capital framework that prioritizes the shareholder first.

Our financial flexibility and the power of our portfolio in the current commodity price environment provided the confidence for our board to also increase our total share repurchase authorization to $2.5 billion, to ensure we can continue executing on our return of capital plans as we progress through 2022. And perhaps most importantly, everything that we are doing is sustainable, backed by our five-year benchmark maintenance scenario and our ongoing pursuit of ESG excellence through top quartile safety performance, significant reductions to our GHG intensity and best-in-class corporate governance. With that brief overview, I will turn it over to Mike Henderson, our executive VP of operations, who will provide an update on our execution relative to our 2021 business plan.

Mike Henderson -- Executive Vice President of Operations

Thanks, Lee. Third quarter operations were again solid, demonstrating that we remain on track to achieve or outperform all of the key 2021 financial, operational and ESG-related objectives that we established at the beginning of the year. First and foremost, our consistent execution is translating to outsized financial outcomes, highlighted by over $2 billion of expected free cash flow, with a material sequential increase expected in the fourth quarter, a full year 2021, reinvestment rate below 35% and full year corporate free cash flow breakeven $35 per barrel WTI. Our gas capture during third quarter also exceeded 99%, as we continue to reduce our GHG emissions intensity.

There is no change to our $1 billion full year 2021 capital budget. Raising our spending levels this year has never been a consideration, consistent with our commitment to capital discipline. There is also no change to the midpoint of our full year total company oil or total company oil equivalent production guidance. We're also raising our full year 2021 EG equity method income guidance for the second consecutive quarter to a new range of $235 million to $255 million due to stronger commodity prices.

This is a 30% increase from the guidance we provided last quarter and a 120% increase relative to our initial guidance at the beginning of the year. Our full year production and EG equity method income guidance truly contemplate an unplanned outage we experienced in EG late in the third quarter. Looking ahead to fourth quarter, we expect to finish the year strong with our total company oil production increasing to between 176,000 and 180,000 barrels of oil per day in comparison to 168,000 barrels of oil per day during the third quarter. Our quarterly production volumes are all subject to some normal variability associated with well timing.

But this more significant sequential increase is due largely to deferred Bakken production associated with third-party midstream outages, strongly well performance and solid base production management. We also expect our fourth quarter total company oil equivalent production to be similar to the third quarter at 345,000 barrels of oil equivalent per day, with a sequential increase in the U.S. offsetting a sequential decrease in Equatorial Guinea associated with the previously referenced outage. I will now turn it over to Dane Whitehead, EVP and CFO and who will discuss how our strong operations are contributing to an improved balance sheet and an acceleration in return of capital to equity holders.

Dane Whitehead -- Executive Vice President and Chief Financial Officer

Thank you, Mike. As I noted last quarter, our financial priorities are clear and unchanged, generate strong corporate returns with significant sustainable free cash flow, all prove our already investment-grade balance sheet and return significant capital to shareholders. Early in the third quarter, we retired $900 million in debt, bringing total 2021 gross debt reduction to $1.4 billion and achieving our targeted $4 billion gross debt level. With this milestone, we no longer feel the need to accelerate additional debt reduction.

And going forward, we plan to simply retire debt as it matures. And please note that we have no significant maturities in 2022. This balance sheet repositioning was achieved well ahead of our original schedule, which opened the door to begin returning a significant amount of capital to equity holders. To be clear, these are returns beyond our base dividend which we just increased for the third consecutive quarter.

Our base dividend is actually up 100% over that time period, now at $0.06 a share per quarter and the $50 million of annual interest savings were realized due to lower gross debt will help fund a significant portion of this base dividend increase. Our equity return framework calls for delivering a minimum of 40% of cash from operations to shareholders when WTI is at or above $60 a barrel. This is a peer-leading return of capital commitment. It is also competitive with any sector in the S&P 500.

Our fourth quarter is shaping up to be an exceptionally strong free cash flow quarter due to a combination of higher commodity prices and oil volumes quite a bit stronger than the third quarter. At recent strip pricing, this could take our operating cash flow to approximately $1.1 billion or about a 25% sequential increase versus the third quarter. Add to that an expected increase in dividend distributions from EG and lower capex relative to the third quarter peak and fourth quarter free cash flow could almost double to north of $850 million. So in Q4, we expect to have lots of flexibility to exceed our 40% of operating cash flow, a minimum threshold for equity returns.

In fact, through our base dividend and approximately $500 million of share repurchases, we expect to return approximately 50% of our operating cash flow to investors during the fourth quarter while further improving our cash balance and net debt position. As we also mentioned, we believe that buying back our stock in a disciplined fashion makes tremendous sense. There are many opportunities in the market right now that provide a sustainable free cash flow yield north of 20%. Stepping back, the full year 2021 financial delivery is exceptional, $140 million in base dividends, $1.4 billion in debt reduction and $500 million of share repurchases representing a total return to investors combined debt and equity of over $2 billion or over 60% of our expected full year operating cash flow at strip commodity prices.

Our actions in 2021 have successfully repositioned the balance sheet and kicked off a strong track record of equity returns. Going forward, we're going to stay laser-focused on our financial priorities and our return of capital framework, taking into account our cash flow outlook when making return decisions. Because our framework is based on a minimum percentage of cash flow from operations and not free cash flow, the equity investor will have the first call on cash, not to drill a bit. I'll now turn the call over to Pat Wagner, EVP of corporate development strategy for an update on the resource play exploration program.

Pat Wagner -- Executive Vice President and Chief Financial Officer Executive Vice President of Corporate Development and Strategy

Thanks, Dane. We recently completed our 2021 REx drilling program, which was focused on the continued delineation of our contiguous 50,000 net acre position in our Texas Delaware oil plant. As a reminder, this is a new play concept for both the Woodford and Meramec that was secured through grassroots leasing at a very low cost of entry and with 100% working interest. This is essentially an exploration bolt-on that is complementary to our already established position in the Northern Delaware.

We brought online our first multi-well pad during the third quarter. And while it is still very early, initial production rates in both Woodford and Meramec are exceeding our predrill expectations. More specifically, one of the Woodford wells achieved an IP30 of almost 2,100 barrels of oil per day at an oil cut of 66%. This appears to be the strongest Woodford oil well ever drilled in any basin.

And while we don't yet have 30-day rates for the other two wells, early indicators, including IP24s are all very positive. A primary objective of this three-well pad was to execute our first spacing test in the playing. To date, we are seeing no evidence of interference between the Woodford and Meramec, consistent with our expectations due to over 700 feet of vertical separation between the two zones. As I stated, it's still early and we need more production history to draw stronger conclusions, but we are certainly encouraged by the initial results from this first spacing test, including the record Woodford productivity.

The second objective was to continue to progress our learnings and cost improvements and completed well costs. We expect to ultimately deliver well costs comparable to those achieved in the SCOOP and are aggressively leveraging our substantial experience in Oklahoma to that end. In total, we have now brought online nine wells since play entry that have successfully delineated our position. The six wells with longer dated production have collectively demonstrated strong long-term oil productivity.

Oil cuts greater than 60%, low oil ratios below one and shallow declines. Looking ahead to 2022, you should expect us to continue to integrate our learnings and progress our understanding of this promising play. However, we will do so in a disciplined manner and within our strict reinvestment rate capital allocation framework. I will now turn the call over to Lee, who will wrap this up.

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

Thank you, Pat. I will close with a quick summary of how we have positioned our company for success and a preview of what to expect from us in 2022. Spoiler alert, there will be no surprises in 2022 and no compromise with respect to our capital return framework. If we focus on the financial benchmarks that matter, we are delivering top-tier capital efficiency, free cash flow yield and balance sheet strength.

Our 2021 capital rate of sub-35% and capital intensity as measured by capex per barrel of production are both the lowest in our independent E&P peer group, a strong validation of our leading capital and operating efficiency. We are also one of the few E&Ps expecting to deliver a 2021 reinvestment rate at or below the S&P 500 average. We're also delivering top quartile free cash flow yield this year among our peer group and well above the S&P 500 average. And we are doing all of this with an investment-grade balance sheet at sub-onetime net debt to EBITDA, a 2021 leverage profile also well below both our peer group and the S&P 500 average.

In short, we are successfully delivering outsized financial performance versus our peer group and the broader market with the commodity price support we are experiencing this year. Yet perhaps more importantly, we are well positioned to deliver competitive free cash flow and financial performance versus the broader market at much lower prices than we see today, all the way down to the $40 per barrel WTI range. This is the power of our sustainable cost structure reductions, our capital and operating efficiency improvements and our commitment to capital discipline, all contributing to a sub-$35 per barrel breakeven. Looking ahead to 2022, our differentiated capital allocation framework that prioritizes the shareholder at the first call on cash flow generation will not change.

Our commitment to capital discipline will not waver with maintenance oil production, the case to beat, as we finalize our 2022 budget. We believe the right business model for a mature industry prioritizes sustainable free cash flow, a low reinvestment rate and meaningful returns to equity investors, not growth capital. Recall that we introduced a unique five-year maintenance scenario earlier this year that featured $1 billion to $1.1 billion of annual spending, $1 billion of annual free cash flow at $50 WTI and a 50% reinvestment rate. Given we are no longer living in a $50 per barrel environment and that prices are currently north of $80 per barrel, it is both prudent and reasonable to consider some level of limited inflation up to about 10% that would yield modest pressure on the maintenance scenario capital range.

Yet importantly, this modest level of inflation pales in comparison to the uplift to our financial performance in the current environment, with a 2022 maintenance scenario free cash flow potentially on the order of $3 billion at recent strip pricing or nominally three times the $50 benchmark outcome. And under such a maintenance scenario, we are positioned to lead the peers once again with a 2022 free cash flow yield above 20%, far in excess of the S&P 500 free cash flow yield of approximately 4%. Our minimum 40% of cash flow target translates to about $1.6 billion of equity holder returns next year. But that is a minimum and we see significant headroom to drive that number higher.

At the expected 4Q run rate of 50% of CFO, 2022 equity holder returns would increase to approximately $2 billion, while still improving our cash balance and net debt position. Even at a more conservative $60 per barrel oil price environment, our minimum 40% of cash flow targets still translates to about $1.1 billion of equity holder returns in 2022. And applying 2022 consensus estimates to the return frameworks disclosed by our peers, only confirms our leading return of capital profile, with a double-digit cash distribution yield to our equity investors in 2022. The confidence in this outsized delivery is further supported by recent board action to increase our share repurchase authorization to $2.5 billion to ensure we have sufficient runway to continue delivering on our return of capital commitment next year.

To close, our company was among the first to recognize the need to move to a business model that prioritizes returns, sustainable free cash flow, balance sheet improvement and return of capital. We have also led the way in better aligning executive compensation to this new model and with investor expectations. We are successfully executing on our model today, delivering both financial outcomes and ESG excellence that are competitive not just with our direct E&P peers but also the broader market. With that, we can open up the line for Q&A.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Jeanine Wai from Barclays. Your line is now open.

Jeanine Wai -- Barclays -- Analyst

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

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

Good morning.

Dane Whitehead -- Executive Vice President and Chief Financial Officer

Good morning.

Jeanine Wai -- Barclays -- Analyst

Our first question maybe for Dane. Can you walk us through the mechanics of how you're determining the buyback tranches? It looks like it could be on a concurrent quarterly basis, but we just wanted to kind of get some more detail on that. And how did you decide on the 50% level of returns for 4Q '21 other than it meets the criteria of more than 40%? And I guess what would make you change that number quarter to quarter?

Dane Whitehead -- Executive Vice President and Chief Financial Officer

Yeah. Great question, Jeanine. I think there's kind of a couple of different aspects to it. One is a little more tactical about how we execute the share repurchase.

So briefly on that, we execute under short sort of 30- to 60-day 10b51 program. So we've kind of set those in motion and execute them over a short period of time. And because of that short duration, it allows us to really calibrate return percentages more on a real-time basis, based on what we're seeing in the business, whether it's capital spend levels, commodity prices, other aspects of what's going on. It also gives you the advantage in the 10b51 writing through blackout periods.

And so we do that, sort of, stepping back a little more context for the decision process about when do you exceed the minimum. Our decisions are always grounded in our financial priorities, which we talked about on a regular basis, generate corporate returns, significant sustainable free cash flow, bulletproof balance sheet and then return significant capital to shareholders. We just talked about what we've done, year-to-date generated significant operating and free cash flow. Q4 looks like by far the best quarter yet from a financial perspective.

The balance sheet is really strong and we've retired $900 million of debt in September, $1.4 billion year to date. So we're at our $4 billion gross debt target ahead of schedule. And that really opens the door for much more substantial returns to equity holders if the conditions warrant. We also bumped the base dividend for the third time this year.

It's up 100% over that period. And it feels competitively positioned right now and also very sustainable through cycles at the current level. So we turn to the capital return framework that calls for returning a minimum of 40% of operating cash flow to shareholders when WTI is above $60. When we look at Q4, not only is WTI well above $60, all the commodity complexes are high.

Oil volumes should be quite a bit stronger than they were in Q3. We expect an uptick in dividend distributions from EG and lower capex versus Q3, which was sort of the high point of our burn rate for the year on the capital side. So we expect to have lots of flexibility to exceed 40%. We also have a desire to continue to add some level of cash to the balance sheet, as we go through the year.

Ultimately, our plans are to pay off debt, future debt maturities as they mature. And they aren't significant in the future, but it's nice to have that level of flexibility and in the process reduce our net debt. So all of this, I think it's a great example of our shareholder return framework in action. It's based on a minimum percentage of operating cash flow, but we have the ability and latitude to make real-time decisions to exceed those minimums when conditions are right, they sure appear to be in Q4.

So there's a little bit of judgment involved. Is it 50%, 55% or whatever that is, but we just need to make a call. And over time, we'll have the ability to modulate that accordingly.

Jeanine Wai -- Barclays -- Analyst

OK. Great. Thank you for the detailed answer. We appreciate it.

Maybe my second question maybe for Mike. The well cost per foot, it decreased quarter over quarter in the Eagle Ford and the Bakken. And would you characterize those decreases as sustainable for '22? And any color just on current inflation and your outlook for '22 would be helpful. For example, one of your peers mentioned earlier this week that they would adjust 22 activity if inflation warranted it.

And I believe we said just now in his prepared remarks that 10% cost inflation would put pressure on the maintenance scenario. And I didn't catch whether that meant on the $1.1 billion capex or if that meant on activity. Thank you.

Mike Henderson -- Executive Vice President of Operations

Yeah, Jeanine. I'll start with the expectation on the well cost for 2022. What I'd say is we're still working up our bottoms-up planning. And obviously, as we noted, the macro environment is pretty dynamic at the moment.

We kind of highlighted third quarter being the lowest quarter of the year in terms of CWC per foot costs in both the Eagle Ford and Bakken were actually year to date, down 12% from where we were in the 2020 average. So what I'd say is while that's probably going to be our starting point for '22. And similar to what you've seen in '21, we'll continue to progress opportunities to improve our cost structure. I think as we noted, we could and we should start to see some inflation in '22.

On the inflation question, maybe a little bit more color there. Let me start with '21. I would characterize that inflation is very much in check for '21. It's been largely confined to steel and OCTG.

And we have fully accounted for that and our capital -- our $1 billion capital budget. As noted, we're working through '22 at the moment and seems reasonable to assume modest inflation. I think I would highlight that we are looking to take some actions. So for example, we've secured some of our rig, frac and frac sand and OCTG requirements for next year.

I think maybe the area where there's quite a bit of uncertainty of labor, but that's probably a broader issue economywide. So as we noted, could see up to 10% inflation. I think that will depend on activity levels. But again, similar to '21, we're going to be working hard to mitigate and offset any of those cost pressures.

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

I think -- yes, Jeanine, maybe just to round out to just for clarity, as I mentioned in my remarks, when you think about the benchmark case being predicated on really $50 WTI and that capital range that we provided that $1 billion to $1.1 billion, I think, kind of applying that kind of up to 10% to that range would at least kind of get you in the correct ZIP code under a maintenance scenario for 2022.

Jeanine Wai -- Barclays -- Analyst

Perfect. Thank you.

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

Thank you, Jeanine.

Operator

Thank you. Our next question comes from Arun Jayaram from J.P. Morgan. Your line is now open.

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

Yeah. Good morning. Mike and perhaps, Lee, I wanted to get your thoughts on how you plan to lean on some of the basins outside of the Bakken and Eagle Ford, obviously, in a lower commodity price environment that you guys have really focused on your core-to-core inventory in both those plays. But how should we think about, in a much better environment for oil, gas and NGLs, kind of the capital allocation to play such as Oklahoma and the Permian?

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

Yeah. Yeah, Arun. This is Lee. I think consistent with how we've talked about in the past, we do expect to be increasing our Oklahoma and Permian allocation up to kind of that 20% to 30% range under again a maintenance scenario for reference.

Those two basins accounted for more like 10% of our allocation in 2021 this year. Clearly, all of the commodity prices are moving in a very constructive direction, which really has the net effect of really lifting all boats, even in our black oil plays of the Bakken and the Eagle Ford. And I think where we're really seeing the benefit of having that strength across the commodity complex is the fact that we have this very balanced portfolio already with about a 50% exposure to oil and a 50% exposure to natural gas and NGLs. So there's no -- our thinking hasn't changed.

We believe there are extremely strong and competitive opportunities in both Permian and Oklahoma the strengthening in NGL and gas has only served to elevate those further, but oil has also elevated the returns in our other basins as well. So we feel the strength of the balanced portfolio gives us that great exposure across the commodity complex.

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

Great. Great. And Lee, my follow-up is maybe just to get some, a bigger picker question for you, on just U.S. resource basins.

Two of your larger peers in the Bakken, Ryan and Harold, have announced large multibillion-dollar transactions in the Permian. And I wanted to get your thoughts on what this says about the Bakken. They're the larger operators in that Bakken -- in that basin, pardon me. And just how you're thinking about portfolio renewal? Pat gave us an update on the REx program, but you do have some other inventory expansion opportunities within your existing basins.

So I wanted to see how you're thinking about portfolio renewal and some of the moves of some of your key peers in the basin.

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

Yeah. Yeah, Arun. First of all, I would just start off by saying any transaction, any M&A, whether it be large or small, we're always going to view that through the lens of our very compelling organic case, our peer-leading financial delivery and really a strict criteria that's predicated on financial accretion. And so that's really the filter that we're going to view any type of opportunity.

The same discipline that we apply to our organic opportunities, we certainly are going to apply in the inorganic space. We believe, obviously, that the Bakken continues to offer exceptional returns. If you look at some of the material within our earnings deck, you will see that certainly in some of the appendix slides just how competitive Bakken is relative to the other plays here in the U.S. But for us, it's really -- anything that we would look at inorganically would have to offer significant value.

It would have to come in and move our full cycle returns in the right direction. And that, quite frankly, is a very high bar today. You could argue that the M&A market has become a little bit more of a seller's market today with the commodity prices that we're experiencing. And with over 10 years of extremely strong inventory, we simply don't see the need to do anything dramatic in the market, certainly, not do anything that would be dilutive to our exceptional financial delivery.

But however, having said that on portfolio renewal, what we have talked about in the past is that embedded in that capital budget that we talk about each and every year, we have kind of up to about 10% of that dedicated to what we consider to be organic enhancement opportunities that could be things like redevelopment opportunities in the Eagle Ford and the Bakken. It could be things like the Texas Delaware oil play that Pat addressed in the opening remarks. And we want to make sure that we continue those programs on a consistent and sustainable basis. As we look out in the out years and make best attempts to continue to replace and replenish our inventory.

I think the Texas Delaware oil play is a great example of something that we were able to get into for a very low entry cost. And now it -- certainly, we see today a very clear path for that to compete for capital allocation. And we still have some work to do in terms of getting some longer-dated production information from the spacing test and we want to drive some learnings into the D&C program, but there's definitely a path there for that asset now to compete, head-to-head, with some of the best in our current portfolio. So hopefully, I addressed all of your questions Arun.

Did I miss anything?

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

Well, just maybe a quick follow-up, Lee. In terms of the Texas Delaware, just on this topic of portfolio renewal, are you aware of any of your peers which are testing the play at this point?

Pat Wagner -- Executive Vice President and Chief Financial Officer Executive Vice President of Corporate Development and Strategy

Hey, Arun. This is Pat. There have been some other tests, specifically to the south of us, there have been some Woodford test, but that area is a little bit lower pressure and not as big. And then on the eastern side of the platform, there's been some Meramec test as well but some of them have been OK.

But again, not as good a pressure as ours. We think we absolutely have the best sweetest spot of the play, where we have both Woodford and Meramec stacked with good separation between them and we've had good results to date, obviously.

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

Great. Thanks a lot.

Operator

Thank you. Our next question comes from Scott Hanold of RBC Capital Markets. Your line is now open.

Scott Hanold -- RBC Capital Markets -- Analyst

Thanks. Good morning, all. I was wondering if you provided some good framework for 2022. And just to clarify a couple of things.

One, obviously, you're having a big uplift in oil production here in 4Q. Should we think about the baseline maintenance cases, your average '21 oil production or should we look more to the exit rate of where you might be this year? And then on the capital spending, concept, can you remind me within that circa $1.1 billion in capex. Where does REx' capital fall within? Is that included in that or would that be in addition?

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

Yeah. First of all, on your first question, Scott, yes, you should think about our maintenance scenario in 2022 being calibrated to our average 2021 oil production. All of us experienced some variability quarter to quarter in our production numbers. It's natural in the short-cycle investments that you see that natural variability.

But again, we'd be looking in a maintenance scenario to drive toward that notional 172,000 barrels of oil per day. Your second question, Scott, around our capital spending number even in the benchmark case of $1.1 billion, that number is all inclusive. It includes all of our investments, including REx as well as any other organic enhancement opportunities just that of the $1 billion budget did this year. I mean one of the reasons that we saw a little bit of peak capex in the third quarter was the impact of bringing the three well pad online in the Texas-Delaware oil play.

So that is -- should be looked at as an all-in number. There's nothing carved out and put on the site.

Scott Hanold -- RBC Capital Markets -- Analyst

OK. That's great. Appreciate that. And kind of pivoting back to shareholder returns, I mean, you guys obviously have a very robust buyback sitting in front of us.

And it seems like that plus cruising up that fixed dividend over time -- the plan. I know the answer is probably going to be, "Let's wait until we actually harvest some of this free cash flow." But as we look forward, even with the increased buyback authorization, I mean, it looks like you're going to eat through that pretty quickly next year if these commodity prices hold out. And as you kind of continue to look forward, is the buyback still going to be your likely primary outlet for that or do you see any other opportunities going forward, such as special or variable dividends in the mix as you look kind of longer term, bigger picture?

Dane Whitehead -- Executive Vice President and Chief Financial Officer

Yeah, Scott. This is Dane. Let me take your first kind of that at least. I think where we sit today, it's kind of a no-brainer when you look at the valuation of our stock and the fact that it's yielding in excess 20% free cash flow that, that's the place to go with the excess distribution to shareholders in its great value.

And if that persists, then that will still be the first call on incremental cash above the base dividend. But we haven't said that's the only thing we'll ever do. I mean to say, over time, you going to have to keep your options open and to manage through this process. The $2.5 billion authorization, there's really no magic to that number.

It was clear to us as of yesterday when that authorization went into place, we had $1.1 billion of remaining authorized capacity and we would chew through a chunk of that getting through this fourth quarter, $500 million that we talked about going to the year pretty light. So we just asked the board to top that up $2.5 billion asset today and that will give us a good running room into next year. And if we need to up that authorization over time, we can certainly do that.

Pat Wagner -- Executive Vice President and Chief Financial Officer Executive Vice President of Corporate Development and Strategy

I do think though, Scott, clearly, when you look at the potential financial delivery in 2022, we have a unique opportunity just as we did in fourth quarter to not only deliver against the minimum of 40% back to equity holders but to actually exceed that. But again, that's going to be calibrated to real-time cash flow from operations. And that will be something that we'll watch closely. I think Dave did a great job of laying out the mechanics.

But I also want to just stress one thing we've been really clear on, we developed our framework to really give the investor confidence in the quantum, the quantum of cash we were going to get back to shareholders. And we knew that, that would be a competitive and sustainable base dividend plus something else. That's something else clearly today is share repurchases. But we didn't -- we purposely and intentionally didn't limit ourselves to a potential delivery mechanism.

We wanted to keep that flexibility going forward. But as Dane said, in the current environment, the impact of a steady and ratable share repurchase program going forward makes the absolute most sense today.

Scott Hanold -- RBC Capital Markets -- Analyst

OK. I agree. Thanks for that color.

Operator

Thank you. Our next question comes from Doug Leggate from Bank of America. Your line is now open.

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

Good morning, guys. Thanks for getting me on the call this morning. I want to ask you about how the inventory view has changed given the backdrop in the commodity? What I'm thinking is, given gas in particular, mid-continent, does that compete better? Does it change the view of capital allocation? What I'm really trying to get to is going back to your comments at the beginning of the year, I think it was Mike actually that talked about in the maintenance scenario you would drill half your high-quality inventory in five years because at the end of the day, that's ultimately what's going to dictate how the market perceives your free cash flow yield.

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

Yeah. Well, I think stepping back from the inventory, when we had talked about the greater than a decade of capital-efficient, high-return inventory, Doug, it's really been based on kind of nominally our $50 WTI kind of mid-cycle view. As actual prices move around that planning basis, clearly, that has an impact on the tiering of those opportunities and may, in fact, even bring additional opportunities into the economic window. So it is a very dynamic thing.

But we set that planning basis on conservatively so we could give a very conservative and strong view of just how our inventory can deliver in a more modest pricing environment. To your question around how does the commodity strengthening, particularly in the secondary products of gas and NGL alter our investment decision, look, we're a return-driven company. As we look at individual opportunities, we're going to be driven by economics. I won't say we're completely agnostic to the product mix.

But at the end of the day, it's not about barrels, it's about dollars. And we're going to be driven by selecting the most economic opportunities across all of our core plays and then putting those into our business plan and executing efficiently against them. So it's strictly an economic decision. And although I'm thrilled that gas and NGL has recovered, I'm equally thrilled that oil was sitting at above the $80 mark as well because that tends to uplift really all of our portfolio.

Because although we have an oil-weighted portfolio, it is a very balanced portfolio. And so we are, in essence, taking advantage of those secondary product pricing at a portfolio level, but our individual capital allocation decisions are going to be driven by economics.

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

I appreciate that. Maybe just a quick footnote to that, Lee, for Guy perhaps. I think a dynamic inventory, some visibility on that would be really, really helpful because it would get a lot of folks away from the idea that there's an inventory challenge. If you can show how that changes with the commodity deck just maybe a footnote? But my follow-up real quick is on Slide 7 and you've been early and very clear about your views on the business model.

And again, I congratulate you on leading the market on that on a couple of your peers. But nevertheless, on Slide 7, you still talk about in a greater than $60 WTI environment. Our production growth cap that underscores the commitment to discipline. The issue is the 5% growth is not part of your rhetoric today.

So when do you decide is the right time to go back to growing production?

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

Yeah. I think that, that was simply, as you stated, a way for us to set a bright line on the framework that there is a very, very high hurdle for growth. I mean we will always be informed by the macro. But at the end of the day, it's all about delivering outsized financial metrics when we're above $60.

To the extent that we see that some moderate growth would fit into that financial framework, it would become a consideration. But it still remains more of an output of our financial model as opposed to an input. And I think given, I think, the past history of the sector, it's very important for us to demonstrate clearly that in a very constructive oil price environment, that we can deliver outsized financial outcomes relative to alternative investments because the reality is that we know there will be future volatility and we have to be able to, within that volatility, offer competitive returns when prices are lower. So it was really just set there to really put it in the framework, acknowledge it.

I think today, we would say the need to drive to a number even in that 5% range, we just don't see that today. And it's hard to see it even in the near future.

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

Thanks so much, Lee.

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

Thank you, Doug.

Operator

Thank you. Our next question comes from Neal Dingmann from Truist Securities. Your line is now open.

Neal Dingmann -- Truist Securities -- Analyst

Good morning, all. My question has kind of been asked, I want to ask about just on the plan for next year. Does that basically assume as far as total activity about the same percentage of Eagle Ford and Bakken activity. I know you've kind of run those two consistent here for the last few quarters and I'm wondering if that's still kind of the plans for next year.

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

Yeah. Neal, obviously, we have not released our budget for next year. I mean we're kind of still speaking in hypothetical terms around a maintenance budget. But when you consider the fact that we will have incremental capital flowing to Oklahoma and Permian, we would expect, obviously, that some of that capital would be coming out of Eagle Ford and the Bakken to make room for that.

But I would just say stay tuned. We'll get into a lot more detail at an asset level of allocation when we get out to the budget release in February.

Neal Dingmann -- Truist Securities -- Analyst

OK. No, good to assume that. And then just to follow up really encouraged and I like the comments on that Slide 14 about the resource play. I'm just wondering maybe could you comment for you one of the guys as far as how much further do you think you could push this in terms of pad size, completions, some other things? Obviously, the results -- early results are very encouraging, especially as you all pointed out when you compare it to some of the Delaware.

I'm just wondering sort of where we go from here?

Pat Wagner -- Executive Vice President and Chief Financial Officer Executive Vice President of Corporate Development and Strategy

Hi, Neal. This is Pat. A primary objective of this pad test was spacing. And so right now, we drilled this in a spacing of four wells per zone.

We drilled two in the Woodford and one in the Meramec. So far, we're seeing no interference at all between those because the 700-foot thickness between the two. So we're going to get some more longer-term production on this pad and see how these wells perform. And if so, then we'll probably four or five development scenario.

However, I think we have some opportunities to test that even further. We've obviously drilled nine wells now. So we've had a lot of learnings on the drilling and completion side. We will try to give any details on that, but we continue to refine our approach to that.

I think we'll continue to drive our cost down, as I mentioned in our prepared remarks. So as we go into '22, we'll continue to progress our learning more and see what else we need to do to take this thing.

Neal Dingmann -- Truist Securities -- Analyst

Very good. Thanks, Pat. Thanks, Lee.

Operator

And our final question comes from Scott Gruber from Citigroup. Your line is now open.

Scott Gruber -- Citi -- Analyst

Yes. Good morning. The EG equity income was raised, which is great to see expected, but it's so good to see. Cash dividends from EG were $47 million, but I believe those lagged the booking of income.

Can you speak to how we should think about cash move back to Marathon from your equity interest in EG in the quarters ahead in terms of both pace and magnitude.

Dane Whitehead -- Executive Vice President and Chief Financial Officer

Hey, Scott. This is Dane. Yes, so for our EG investments that are accounted for on the equity method. I think over time, it's fair to expect that cash dividends match equity income.

Quarter to quarter, they don't always match that timing can vary, especially in periods where you have significant changes like a big run-up in prices that we saw in Q3. And so in this case, dividends lagged earnings fairly significantly in Q3. We expect that to catch up in the reasonable near future. So I think when you're modeling it, it's probably just -- they're going to be equal, pretty much equal over time, but you can expect to see some variability quarter to quarter.

Scott Gruber -- Citi -- Analyst

Got you. Got you. Would there be a point where cash dividends at least in the near term exceed equity income or is it just kind of on a lag basis? Is there a catch-up thing?

Dane Whitehead -- Executive Vice President and Chief Financial Officer

Yeah, yeah. We certainly can see a catch-up where the dividends exceed equity earnings in the next period.

Scott Gruber -- Citi -- Analyst

Got you. And then just thinking about cash taxes. You guys have a large NOL. But can you remind us, do you have U.S.

cash taxes ramping up within your five-year outlook and given better earnings now at the front end, to the five-year outlook for cash taxes change materially?

Dane Whitehead -- Executive Vice President and Chief Financial Officer

Yeah, it's a good question. I'm glad that you asked this. So we do have significant tax attributes in the form of NOLs. That's the big one, $8.2 billion and then foreign tax credits as well both of which, of course, will be used to offset future taxes.

Our outlook, even if forward pricing doesn't have us paying federal income taxes until the latter part of the decade and that really hasn't changed. The outlook is durable. We tested against commodity prices, higher corporate tax rates, changes to the IDC tax treatment really don't have a meaningful impact on accelerating cash taxability. So I think that answer hasn't changed over the past few quarters.

Scott Gruber -- Citi -- Analyst

Got it. Appreciate the color.

Dane Whitehead -- Executive Vice President and Chief Financial Officer

You bet.

Operator

That concludes our question-and-answer session. I will now turn the call back to Lee Tillman for final comments.

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

Thank you for your interest in Marathon Oil and I'd like to close by again thanking all of our dedicated employees and contractors for their commitment to safely and responsibly deliver the energy the world needs each and every day. Thank you.

Operator

[Operator signoff]

Duration: 62 minutes

Call participants:

Guy Baber -- Vice President of Investor Relations

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

Mike Henderson -- Executive Vice President of Operations

Dane Whitehead -- Executive Vice President and Chief Financial Officer

Pat Wagner -- Executive Vice President and Chief Financial Officer Executive Vice President of Corporate Development and Strategy

Jeanine Wai -- Barclays -- Analyst

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

Scott Hanold -- RBC Capital Markets -- Analyst

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

Neal Dingmann -- Truist Securities -- Analyst

Scott Gruber -- Citi -- Analyst

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