Marathon Oil (MRO 0.60%) delivered exceptional operational and financial results in 2018. Not only did its U.S. oil production outperform the midpoint of its initial guidance range by 22.5%, but it also generated a boatload of free cash flow. That strong performance is one of many reasons Marathon CEO Lee Tillman believes his company checks all the boxes for investors. He laid out the case for the company on its fourth-quarter conference call, detailing four reasons Marathon is an ideal oil stock. Here's what he said.

1. We have what investors are seeking

Tillman led off his prepared comments on the call by stating:

We don't believe it's a mystery as to what investors are looking for; it's pretty straightforward. Investors are looking for companies that have the right portfolio of assets, that have the right strategy, putting returns first, generating sustainable free cash flow, and sharing that cash flow with investors, that have a strong balance sheet to weather potential volatility, and that have the capability to execute on their commitments consistently. We believe we screen well on these criteria, and our differentiated performance in 2018 stands as our proof point. For our company, differentiated execution led the way in 2018 and underpins our confidence in 2019 delivery.

Oil pumps with money in the background.

Image source: Getty Images.

Marathon has worked hard to transform into a company that lines up with what investors want to see in an oil producer. It now boasts a balanced portfolio of low-cost, oil-focused assets that enable the company to grow production at a healthy rate at lower oil prices. That also allows Marathon to generate excess cash, the bulk of which it returns to investors. This strategy proved successful last year, which sets the company up for more of the same in 2019.

Check out the latest earnings call transcript for Marathon Oil.

2. We remain committed to being disciplined

Tillman then pointed out: "Capital discipline has been the buzzword in the E&P industry throughout most of 2018, and certainly as we enter 2019. At Marathon, we have a very clear working definition of capital discipline, and it has been our touch-tone as we have successfully transitioned to our differentiated multi-basin US resource play model, it is our framework for success."

Tillman continued by pointing out that Marathon "[s]et a $2.3 billion development capital budget at the beginning of 2018 and never wavered, ending the year as one of the very few E&Ps [exploration and production companies] that never increased their capital spending budget." He continued:

We didn't add activity as oil prices outperformed our plan; we stuck to our conviction when industry discipline broke down, and we successfully managed through an inflationary environment during the first half of the year through harnessing the benefits of our multi-basin portfolio. Our capital budget is not a suggestion, it is a commitment. We got more for every single dollar of capital that we invested.

Marathon was one of the few oil companies that stuck to its budget last year even as oil prices improved, which demonstrated its ability to remain disciplined. As a result, Marathon was able to squeeze more production out of its capital than its peers, which helped it generate significant free cash flow.

3. We produced lots of cash, most of which we returned to investors

Tillman noted that "when oil outperformed our $50 WTI [West Texas intermediate] planning basis, we prioritized free cash flow generation instead of activity acceleration, and delivered $865 million of post dividend organic free cash flow." By resisting the temptation to increase spending, Marathon was able to cash in as crude prices rose above its $50-per-barrel baseline. That enabled the company to return a significant amount of money to shareholders above its $170 million annual dividend, which it did by repurchasing $700 million in stock, helping it return "over 25% of our operating cash flow back to shareholders," according to Tillman. Meanwhile, the excess cash the company retained further strengthened its balance sheet, enabling it "to end the year with $1.5 billion in the bank." As a result, "our foundation for delivery has never been stronger." according to Tillman. 

A drilling rig with a sunset in the background.

Image source: Getty Images.

4. We're positioned for continued success

Tillman then shifted his attention to what lies ahead by stating on the call that: "As we turn our focus to 2019 and beyond, rest assured that our framework for success remains the same. Our two-year outlook provides visibility on the metrics that matter most; it prioritizes returns, free cash flow, and return of capital to shareholders."

Thanks to its low-cost resources base, Marathon Oil can generate enough cash flow on $45 oil to invest the money needed to grow its oil production at a healthy 10% rate in 2019 with room to spare. That positions the company to generate significant free cash flow. Tillman noted: "At $50 flat WTI, we are forecasting cumulative 2019 to 2020 organic free cash flow generation of over $750 million. At $60 flat WTI, our cumulative organic free cash flow generation rises to over $2.2 billion or over 17% of our current market capitalization." 

Given the company's demonstrated ability to remain disciplined as well as its intention to continue returning excess cash to shareholders, Marathon Oil is well positioned to create value for investors over the next couple of years. 

Marathon has a plan to succeed

Marathon Oil believes it has become an ideal oil stock for investors to own in the current market environment. That's because its low-cost asset base enables it to generate enough cash to grow at a healthy rate with plenty to spare at current oil prices while still having ample upside to higher prices. Marathon is thus well positioned to create value, which is why investors will want to take a closer look at this oil stock.