Marathon Oil (NYSE:MRO) has become a cash flow machine over the past two years. The oil company has produced free cash flow after funding growth and paying its dividend in each of the last eight quarters. Overall, it has generated $1.3 billion in excess cash during that time frame, $1 billion of which it returned to shareholders via its share repurchase plan.

Marathon expects to continue generating cash and returning it to investors over the next two years, which was the central theme on its fourth-quarter conference call.  

A miniature oil pump and barrel on top of money.

Image source: Getty Images.

A $600 million windfall if oil doesn't improve

CEO Lee Tillman discussed the energy company's strategic plan on the call. "Looking to the specifics of our forward two-year plan, as you would expect, our outlook prioritizes the financial metrics that matter most: corporate returns improvement, and sustainable free-cash-flow generation across a wide range of commodity prices," he said.

Tillman then got into the specifics of the company's free-cash-flow projections:

With improving capital efficiency, we expect an even stronger underlying free-cash-flow profile for 2020 and 2021. At a flat [West Texas intermediate] oil price of $50 per barrel, we forecast around $600 million of post-dividend organic free cash flow over the next two years ... . Our outlook translates to a post-dividend organic free-cash-flow breakeven oil price of $47 per barrel WTI in 2020, with an even lower breakeven in 2021.

As Tillman points out, Marathon only needs oil to average $47 a barrel this year, and even less next year, to finance its planned capital spending and dividend. Because of that, it could produce $600 million in cumulative free cash flow during the two-year time frame if oil averages $50 a barrel, which is right around the current level. It expects to return the bulk of that money to investors via its share repurchase program.

Increasing upside if oil prices bounce back

Tillman also noted that Marathon's plan positions it to generate significantly more cash at higher oil prices because it plans to stick to its capital budget: "At $55-per-barrel WTI, we generate $1.3 billion of post-dividend organic free cash flow over the next two years. At $60-per-barrel WTI, this rises to over $2 billion." While those prices are well above the current level due to crude oil's plunge to start the year, WTI has averaged $61 a barrel over the past two years, even with all its volatility.

During that time frame, Marathon has produced $1.3 billion in post-dividend free cash. That's a noteworthy number. Tillman pointed out on the call that: "On a flat $55 WTI basis, our projected 2020 and 2021 free cash flow is similar to that realized in 2018 and 2019, yet at a WTI oil price that is $6 per barrel lower, along with much lower gas and NGL prices. Our upside leverage to even modest oil price support is significant."

Whatever the amount of cash flow the company ends up producing over the next two years, it will likely return all that money to shareholders via its stock repurchase program. Tillman noted that the company has $1.4 billion remaining on its current authorization after spending $1 billion to retire 7% of its outstanding shares over the past two years. Given where the stock is these days, its remaining amount could allow it to buy back an additional 17% of its outstanding shares. Meanwhile, even if it is only able to generate $600 million in free cash, it could still reduce its share count by another 7%.

Focusing on converting crude into cold, hard cash

Marathon Oil, like many other U.S. oil companies, has shifted gears over the past few years. Instead of reinvesting all its cash flow, and then some, on growing production, the company has transitioned to generating an increasing amount of free cash at lower oil prices and returning it all to investors via dividends and share buybacks. It believes this approach will create significant value for its investors in the coming years, even if oil remains volatile.

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