Slumping oil prices over the past year are negatively impacting most oil producers. Marathon Oil (NYSE:MRO), however, is not in that category, which was quite clear in its third-quarter results.

While the price the energy company captured for the oil it sold fell nearly 20% compared to the year-ago period, Marathon still generated a gusher of free cash flow, all of which it sent back to its investors. That was one of several highlights in the company's third-quarter report.

A deeper look at Marathon Oil's third-quarter results


Q3 2019

Guidance or Expectations

Total production

426,000 BOE/D

410,000 to 430,000 BOE/D

Production from U.S. shale

339,000 BOE/D

330,000 to 340,000 BOE/D

Earnings per share



Data source: Marathon Oil. BOE/D=Barrels of oil equivalent per day.

Marathon's production came in toward the top end of its guidance range. Overall, its total output rose 6.5% over the past year, fueled by a 13% year-over-year surge from three of its four U.S. resource plays:

Marathon Oil's production by resource play in the third quarter of 2018 and 2019.

Data source: Marathon Oil. Chart by the author.

The Bakken led the way during the third quarter, as output jumped 28% year over year and nearly 5% from the second quarter. The driver was the 30 new wells the company brought online during the quarter, highlighted by the four-well Herbert pad that produced an average of 1,720 BOE/D apiece during their first month online.

Marathon's output also grew in the Oklahoma STACK region, as well as the northern part of the Delaware Basin. STACK production jumped 15% year over year, as the company continues to complete high-rate wells in that region. Meanwhile, production in the northern Delaware leaped more than 40% year over year as the company ramped up its drilling activities in that emerging region.

Those growing areas helped offset declining output in the Eagle Ford, which has fallen 7% in the past year, including 2% over the previous quarter. Driving that decline is Marathon's disciplined approach: favoring earning high returns and producing free cash over drilling more wells just so that it can grow production.

That approach paid big dividends during the quarter as Marathon was able to overcome slumping oil prices to generate expectation-crushing adjusted earnings. Aside from focusing on drilling its highest return wells, the company also continues to drive down its costs. That helped the company produce another $81 million of free cash flow after paying its dividend during the quarter, marking the seventh straight quarter it produced excess cash.

The oil company has now generated $298 million in free cash after paying its dividend this year, all of which it returned to investors via its share repurchase program. The company has now repurchased $1 billion in stock since it started buying back shares last year, which has retired 7% of its shares outstanding.

A drilling rig with a bright sunset in the background.

Image source: Getty Images.

A peek at what's ahead for Marathon Oil

Marathon's high-end performance during the third quarter now has it on track to grow its U.S. oil production by 13% this year, up from 12% previously. Even better, the company anticipates delivering that faster growth while sticking with its $2.4 billion spending plan. The company's ability to grow at a quicker pace while keeping spending within its budget is a testament to its operational strength.

Marathon expects this success to continue in 2020. CEO Lee Tilman stated in the earnings release that:

Looking ahead to 2020, our framework for success will not change: corporate returns first, free cash flow at conservative pricing, and return of capital back to shareholders. We expect our 2020 planning basis to be set on $50/bbl WTI with an enterprise free cash flow break-even below that level. With our focus on delivering financial outcomes competitive with the broader market, we're planning for capital spend to decrease year-over-year and accordingly for our U.S. oil growth to moderate.

In other words, Marathon anticipates reducing its budget next year and growing at a bit slower pace, which makes sense given that the oil market has more than enough supply. This conservative approach will enable the company to generate even more free cash next year if oil remains around its current level in the mid-$50s. That would allow it to buy back even more shares.

Doing very well on weaker crude prices

As Marathon Oil's third-quarter results demonstrate, it can prosper at lower oil prices. Thanks to its four low-cost U.S. resource plays, it can generate enough cash to keep growing production with ample excess to return to shareholders. That trend appears poised to repeat in 2020, which is good news for Marathon's investors.

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