Marathon Oil Corporation (NYSE:MRO) has undergone a dramatic transformation over the past few years, turning itself into a low-cost, fast-growing oil stock. That strategy shift has paid significant dividends for investors: The stock is up nearly 70% over the past year, and has been one of the best-performing oil stocks in 2018. Given that success, expectations are high as the company gears up to report its second-quarter results. Here are a few things to keep an eye on in as the latest earnings report arrives.

See if production met expectations

One of the factors driving Marathon Oil's stock higher in 2018 was the expectation-crushing first-quarter results the company reported in early May. The oil company produced 398,000 barrels of oil equivalent per day (BOE/D) in the quarter, including 284,000 BOE/D in the U.S., which was up 9% versus the fourth quarter. Driving that growth were strong drilling results in three of its four shale regions, led by the STACK shale play in Oklahoma.

Oil pump jacks with sky in the background.

Image source: Getty Images.

Marathon expects production to continue heading higher in the second quarter, and forecasts total output between 395,000 and 415,000 BOE/D, which would be about 2% above the first quarter's average at the midpoint. Meanwhile, it sees production in the U.S. averaging between 280,000 and 290,000 BOE/D, up slightly from the previous quarter, due mainly to well timing. Achieving those targets would keep the company on pace to meet its full-year forecast of growing its U.S. oil production by 25% to 30% -- which is why investors should see if it did indeed hit the mark during the quarter.

Look for any changes to its full-year forecast

As noted, Marathon expects to deliver fast-paced production growth this year. In fact, the company boosted its full-year outlook in the first quarter without raising its $2.3 billion capital spending plan thanks to its strong drilling results. However, two potential problems have emerged in the oil patch over the past few months that could impact its ability to achieve its production growth forecast while remaining on budget.

First, inflation has started to become an issue, not only due to higher costs from rising activity levels, but from the impact of tariffs on imported steel. U.S. oil giant ConocoPhillips (NYSE:COP) noted on its second-quarter conference call that steel tariffs are driving a "fairly significant" cost increase. The company stated that prices for steel used in pipes, valve fittings, and other equipment had already increased 26% in the U.S. since the year started. ConocoPhillips is seeing a noticeable impact because the company spends $300 million per year on these items. That's one reason the company boosted its capex budget from $5.5 billion to $6 billion.

The other issue to watch is the growing pipeline constraints in the Permian Basin. The problem already caused one driller to cut its activity level in the region, while ConocoPhillips noted that it shifted some work to Eagle Ford. Marathon doesn't currently produce much oil from the Permian, but the area is an important growth driver for the company. So, if the oil producer needs to shift gears, it might not grow production as fast as expected this year, especially if inflationary pressures start impacting its budget.

Oil pumps working near a drilling rig.

Image source: Getty Images.

Keep an eye out for what it plans to do with its windfall

While there appear to be some headwinds starting to form for Marathon, the company is benefiting from stronger-than-expected oil prices. The company based its budget on $50 oil, but crude has recently been in the $70s. As a result, it's on pace to produce significantly more cash flow than needed to balance its budget.

Marathon has several options for this money, including boosting its spending level to help offset the other headwinds, or returning some of the money to investors via a higher dividend or share-repurchase activity. Several of its peers, including ConocoPhillips, have chosen the latter option, which has given their stock prices a big boost. While Marathon has already produced strong gains in the past year and doesn't need an additional catalyst, investors should see what the company plans to do with its growing excess cash flow -- its actions could potentially provide an additional boost to the stock price. 

Reassuring calm, or is a storm brewing?

After blasting ahead in the first quarter, Marathon anticipates a much-slower production growth rate in the second quarter due to the timing of its well completions. As long as that's still the case, the stock could continue moving higher. However, if some of the industry's headwinds start impacting Marathon's growth plans, it could quickly cool off this red-hot oil stock. Still, with a gusher of cash flow heading its way, the company has the resources to offset nearly any issue.

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