Marathon Oil Corporation (MRO 1.40%) recently put the wraps on a transformational year by delivering strong fourth-quarter results. Consequently, the company has the wind at its back in 2018. That was apparent in the comments of CEO Lee Tillman on the company's accompanying conference call, where he ran through last year's highlights as well as why 2018 promises to be even better.

Last year was a pivotal one for Marathon

Tillman led off his comments on the call by saying that:

2017 was truly a pivotal year in our ongoing transformation to a U.S. resource play-focused independent E&P. We made progress across every element of our playbook: balance sheet, cost structure, portfolio. And we achieved high return growth within cash flows at moderate oil pricing.

What was most impressive about the company's performance is that it "balanced our 2017 CapEx and dividend with cash flows...while [oil] averaged just above $50" a barrel. Further, the CEO noted that it achieved that aim while production came in "near the top end of our total company production guidance, driven by a strong 31% exit rate from our U.S. resource plays."

A beam of light shining through an oil pump at sunset.

Image source: Getty Images.

Not only did the company operate extremely well, but it did so while ending "2017 with a stronger balance sheet" by reducing debt by $1.75 billion, which will save it $115 million in annualized interest expense. That was just one of the many costs the company drove down in the past year, which helped lower its oil price break-even level and set it up for continued success in the coming years.

We expect more of the same in 2018

Tillman anticipates that the company will build on its success from last year, noting that "our 2018 capital allocation philosophy is fully consistent with how we managed the business in 2017." Like last year, the company plans to "deliver a returns-focused program that balances cash flow with our capex and dividend." In fact, the company can achieve its plan to spend $2.3 billion on capex -- or capital expenditures -- and pay $170 million in dividends as long as oil averages $50 a barrel. Further, that spending level should drive companywide production up 12% from last year after adjusting for asset sales, with oil production from its higher-margin U.S. resource plays growing 20% to 25% this year.

That said, with oil currently around $60 a barrel, Marathon "will generate meaningful free cash flow" this year, with it on pace to produce "incremental $500 million in operating cash flow" at the current oil price, according to Tillman. That led him to state that the company has "multiple options" for this cash, including further balance sheet improvements, leasing more land, making bolt-on acquisitions, and returning additional money to shareholders above the current dividend level.

While Marathon plans on keeping its options open this year, most of its peers are allocating their excess cash to two areas: the balance sheet and increasing cash returns to shareholders. Anadarko Petroleum (APC), for example, can also finance its 2018 capex plan with the cash flow generated at $50-a-barrel oil. Because of that, Anadarko is on pace to produce more than $1 billion in excess cash this year. That led the company to recently announce a $500 million increase in its share buyback plan as well as a five-fold boost to its dividend. Further, Anadarko said it would use its cash on hand to retire another $1 billion in maturing debt over the next two years.

Meanwhile, ConocoPhillips (COP -0.58%) also plans to split its growing free cash flow into several buckets. Not only did ConocoPhillips boost its dividend 7.5%, but the company also added $500 million to its share buyback plan. In addition, the company used some of the cash on its balance sheet to pay off $2.25 billion in debt, and it acquired some oil properties in Alaska from Anadarko. As more peers announce ramped-up cash returns to shareholders this year, it will likely spur Marathon to follow their lead.

Keeping its foot on the accelerator

While shares of Marathon have barely budged over the past year, they're up more than 40% from the low point six months ago thanks to higher oil prices and the noticeable improvement in the company's financial situation. That strong performance could continue in 2018 as the company's growth plan delivers results, with further upside potential possible if it starts returning cash to shareholders, since that's what happened with the stocks of ConocoPhillips and Anadarko after they announced similar plans.