Marathon Oil (NYSE:MRO) has been making a concerted effort in recent years to focus its attention on America's fast-growing shale plays. That decision is starting to pay off as the company finally returned to profitability in the fourth quarter, posting an expectation-beating $56 million, or $0.07 per share, of adjusted net income. Fueling Marathon's improving financial results was the rapidly expanding output from its U.S. resources plays, which rose 10% from the third quarter, with production coming in at the high-end of its guidance range. That sets the company up for continued growth in 2018.

Drilling down into the numbers

Metric

Q3 2017

Guidance or Expectations

Difference

Production

383,000 BOE/D

375,000 to 395,000 BOE/D

-0.5%

Earnings per share

$0.07

$0.02

250%

Data source: Marathon Oil.

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Image source: Getty Images.

While companywide production came in a bit shy of the mid-point of Marathon's guidance range, that was mainly due to the temporary shut-in of the key Forties Pipeline System in the North Sea during the quarter, which caused its international output to slip 5,000 BOE/D versus the third quarter. However, what was more important to see is that higher margin production from the U.S. rose 8% versus the third quarter and came in about 2,000 BOE/D above the mid-point of its guidance range.

Leading the charge was the company's Bakken Shale position where output rose 17% from the third quarter to 69,000 BOE/D, thanks in part to a record selling well that delivered 3,005 barrels of oil per day in its first month online. The company also performed well in the Delaware Basin where output rose 22% to 11,000 BOE/D, thanks in part to two monster wells that delivered an average of 3,265 BOE/D in their first month. Finally, output in the STACK shale play was up 10%, while production in the Eagle Ford rose 4%.

The strong results in the quarter pushed output from Marathon's U.S. resource plays up 31% since the start of the year. That exceeded its guidance range for a 25% to 30% increase this year and was even further above its initial outlook for 23% to 27% growth. What was remarkable is that Marathon funded that growth and paid its dividend to investors with cash flow even though oil only averaged $51 a barrel last year.

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Image source: Getty Images.

A look at what's ahead

Marathon expects to continue living within cash flow this year. The company plans to spend $2.3 billion on capital projects in 2018, which matches the level of cash it can generate if oil averages $50 a barrel. That investment level should boost production to a range of 390,000 to 410,000 BOE/D, or up 12% at the mid-point. The main driver will be the company's U.S. resource plays, where oil output should rise 20% to 25%.

One thing worth noting is that with oil currently around $60 a barrel, Marathon's plan would generate meaningful free cash flow. Further, the company expects to receive a $750 million cash payment next month to complete the sale of its Canadian oil sands position. Add that to the $560 million in cash the company has on the balance sheet, and Marathon's finances are in excellent shape.

That said, unlike most rivals, the company has yet to detail what it plans to do with its excess cash. For example, fellow shale-focused driller Noble Energy (NYSE:NBL) noted this week that it plans to repurchase $750 million in shares. Driving Noble Energy's repurchase program is its strong projected cash flow growth and the expected $710 million in proceeds from a recently announced asset sale. Meanwhile, fast-growing Permian Basin-focused driller Diamondback Energy (NASDAQ:FANG) took its first step toward rewarding shareholders by initiating a quarterly dividend. Further, Diamondback Energy noted that it "will continue to be opportunistic through multiple avenues to maximize shareholder returns," according to CEO Travis Stice, which could lead it to join Noble and others in also repurchasing stock this year. These increasing cash returns to shareholders by rivals could drive Marathon to follow their lead later this year.

Accelerating momentum

Marathon Oil's fourth-quarter results clearly demonstrate that its shale-focused approach is working. The company can now deliver fast-paced growth at $50 oil, which could provide it with a gusher of free cash flow this year if current prices hold up. While the company hasn't decided what it will do with that money just yet, it's a nice problem to have considering how tight things have been for the industry the past few years.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.