Marathon Oil Corp

NYSE:MRO

Earnings Call Transcript 2018-Q1

[Operator]

Welcome to the MRO First Quarter 2018 Earnings Conference Call. My name is Hilda, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Zach Dailey. Mr. Dailey, you may begin.

[Zach Dailey, Marathon Oil Corp.]

Thanks and good morning. Last night, we issued a press release, slide presentation, and investor packet that address our first quarter results. Those documents can be found on our website at marathonoil.com.

Today's call will contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. I refer everyone to the cautionary language included in the press release and presentation materials as well as to the risk factors described in our SEC filings.

With that, I'll turn the call over to Lee Tillman, our President and CEO, who will provide a few opening remarks before we open the call to Q&A.

[Lee M. Tillman, Marathon Oil Corp.]

Thanks, Zach, and thank you to everyone joining us this morning. After a pivotal 2017, 2018 is off to a great start and has continued our returns-focused momentum with our development capital program on track to deliver over 65% annual improvement in corporate cash returns at strip pricing.

Our differentiated multi-basin model delivered strong 9% sequential U.S. oil growth and our asset-level execution underpinned our confidence to raise our full-year 2018 resource-play guidance while also steering to the upper end of our total company guidance. All of these, with our $2.3 billion development capital budget unchanged.

An important point to note is that our first quarter development CapEx is not ratable due primarily to some higher working interest relative to the remainder of 2018 and other timing effects.

Highlights for the quarter were numerous, but I'd like to underscore just a few. We continue to expand the core of our Bakken and Eagle Ford positions through enhanced well performance in the Hector area and Atascosa County respectively, uplifting economics and inventory quality while generating significant free cash flow from both assets.

Bakken grew production 7% sequentially and continued its basin-leading performance, setting new 30-day oil IP records in both the Middle Bakken and the Three Forks. The June and Chauncey wells in West Myrmidon established new records for the basin and oil production with an average IP 30 of almost 3,500 barrels of oil per day. The Arkin well in the Hector area set a new Williston Basin record for the Three Forks formation at an IP 30 of just over 3,000 barrels of oil per day. And just to underscore the compelling economics of this well, the Arkin has already achieved pay out.

Finally, our West Myrmidon well brought to sales late (3:22) in the quarter achieved a remarkable IP 24 of over 10,000 oil equivalent barrels per day but has not yet achieved 30 days of production. In part because we continue to bring on these basin-leading wells, we are proactively managing gas capture to remain in full compliance with all North Dakota requirements, and have the necessary flexibility to ensure no flow assurance issues as we continue to pursue this high-return program.

Eagle Ford held production flat sequentially and delivered results in Q1 that span the entirety of our acreage position. This included 11 outstanding wells in Atascosa County with an average IP 30 of over 1,600 oil equivalent barrels per day at an oil cut of 76%.

The Eagle Ford continued its focus on enhanced completion designs and contributed significant free cash flow through the powerful combination of well performance and strong LLS-based oil realizations that were above WTI.

Oklahoma and Northern Delaware began their shift to primarily multi-well pad drilling that will dominate the remainder of their 2018 programs. In Oklahoma, oil production grew 25% sequentially, primarily from outstanding base performance that included the Tan infill that came online late in the fourth quarter.

We largely completed our STACK leasehold program in the first quarter and expect to be greater than 90% HBP'd in the STACK by year end. Looking ahead, 95% of our remaining 2018 wells to sales in Oklahoma will be in the over-pressured STACK and SCOOP, the majority of which will come from four multi-well infills.

Northern Delaware, though still early in its development cycle, delivered wells across the Malaga, Red Hills and Ranger areas at an average IP 30 of 1,460 oil equivalent barrels per day at 69% oil cut. Late in the quarter, we brought the first two Cypress infill wells online ahead of schedule and we'll report results once we have 30 days of production from the entire pilot.

Additionally, in the last six months, we've added 165 risked gross co-op locations, with an average working interest of 65% through trades and a small bolt-on, and continue to pursue opportunities that increase our working interest, generate more operated sections and provide more extended lateral optionality.

It's difficult to speak about the Permian without addressing differentials and takeaway. We're currently benefiting from our Midland-Cushing basis swaps and open positions cover us for 10,000 barrels of oil per day at a discount of less than $1 to WTI for the second half of 2018 and all of 2019. Our swaps will help protect over half our forecasted oil production for the remainder of the year.

On takeaway, it is important to stress that today, Northern Delaware accounts for only about 4% of our overall production mix. However, while we anticipate no flow assurance issues, we are planning for future growth and have expanded our oil gathering agreements and are assessing both gas gathering and FT commitments for the longer term. We are also transitioning our water to pipe throughout the year, which will reduce unit operating costs for the basin.

In addition to our four U.S. resource plays, we continue to generate value from our world-class integrated gas development in E.G. which contributed $124 million of EBITDAX for the quarter despite a turnaround at the LNG plant. This unique gas infrastructure, LNG plant, gas plant and methanol plant is well-positioned to not only deliver free cash flow today but also capture additional equity and third-party gas as the natural point of aggregation in the region.

Our financial flexibility is at the top of our peer group and was further strengthened by receipt of proceeds from Libya and our final Canadian oil sands payment. This flexibility allows us to pursue multiple high-return uses of free cash. But we are taking a disciplined approach and we are not considering large-scale M&A.

Repurchasing shares is an option and we have a $1.5 billion authorization already in place and we can also look at our already-competitive $170 million annual dividend. We have enjoyed higher pricing for just over a quarter but as our confidence in sustainable free cash flow generation continues to grow, we will consider returning additional capital to shareholders and it is a topic of ongoing discussion with our board.

Our objective is to strike the right balance between additional direct return of capital and accretive, opportunistic, low-entry cost resource capture. Specifically, we have successfully added quality-operated locations in the Northern Delaware through trades and a small bolt-on, and have captured over 250,000 acres across multiple onshore exploration plays including a material position in the emerging Louisiana Chalk at less than $900 an acre.

We recognize that these unique resource capture opportunities are episodic and challenging to forecast. We spent $94 million in Q1 and expect another $150 million in Q2, but they offer the potential to generate outsized full cycle returns.

We now expect to grow our resource plays 25% to 30% year-over-year, up from 20% to 25% for both oil and boe with our development capital budget unchanged. And we expect our total company annual growth to be toward the upper end of our guidance, also for both oil and boe. But growth is simply an outcome of our returns-focused capital allocation.

Thank you. And with that, I'll hand it back to the operator to begin the Q&A.

[Operator]

Thank you. We have a question from Guy Baber from Simmons & Company (sic) [Simmons Piper Jaffray & Co.].

[Guy Baber, Simmons Piper Jaffray & Co.]

Good morning, everybody, and congrats on the strong results.

[Lee M. Tillman, Marathon Oil Corp.]

Thank you, Guy. Good morning.

[Guy Baber, Simmons Piper Jaffray & Co.]

I wanted to start with the Bakken but it looks like you continue to be successful in expanding the core of your footprint there, so really impressive well results from Hector in particular. Can you talk about how that's influencing your view of the depth and the quality of your inventory there? I know you all recently highlighted over 12 years of inventory in the Bakken at this year's pace. But can you put some additional context around that? Just trying to better understand to what degree that inventory is economic, how it will compete because the wells you're drilling right now are obviously very, very impressive.

[Lee M. Tillman, Marathon Oil Corp.]

Yeah. Guy, maybe just to affirm for everyone on the call, we have talked about the Bakken having a forward inventory at kind of current activity levels of just over 12 years. And the way I think about our success in the Hector today is that we're continuing to delineate across an acreage position there, that's about 115,000 net acres. We have had very strong early success there, record-setting wells there, but we're still marching across that acreage position. And I view this as thus far really providing us an opportunity to uplift the intrinsic value and economics of that 12 years of inventory as we elevate the inventory that resides within the Hector area. Additionally, we are still looking to test other areas this year in the Bakken including Elk Creek as well as the Ajax area as we continue to apply the same workflows that started in West Myrmidon, transition then into Hector. We're looking to apply those as well in these other areas.

So, right now, it's a great outcome. All credit to the team there for their innovation. They are competing strongly at the very top of the portfolio with these kinds of results.

[Guy Baber, Simmons Piper Jaffray & Co.]

Thanks, Lee. And then for my follow-up, I wanted to talk a little bit about the resource play leasing and exploration program. But you've obviously been successful in adding new acreage to the portfolio at low cost. I know you characterize the spending there as episodic and I'm sure you'll be opportunistic, but how should we be thinking of the size or materiality of that program over time? Is there any framework that you could share? I'm really just curious as to how you instill a sense of discipline into the organization there to ensure that you're maximizing the full cycle return potential of the dollars that you're spending in that program as you highlighted.

[Lee M. Tillman, Marathon Oil Corp.]

Yeah. Well, I think you said it well, Guy. It's very difficult for us to forecast in this area because typically these unique opportunities are what we would classify as potential lost opportunities, meaning that if we don't act upon them they're likely going to move away or at least the low-cost entry element of them will move away from us. So, it is difficult for us to forecast. That's one of the reasons why we at least attempted to provide some visibility into the next quarter for you all. So that was an important element.

I think as we consider the scope of it and ensuring that we do apply discipline to this element of our business just like all other elements of our business, it starts with return and capital allocation. When the REx team brings in an opportunity, it has to compete on a similar basis as our other opportunities, meaning that there has to be a path there to achieve economics, full-cycle economics that are competitive with our existing portfolio. These are still exploration plays with a finite chance of success, but we have to be able to see materiality, quality and a value proposition, meaning that they can come in and compete for capital allocation.

The other point that I would make just on the spend question is that as you think about the framework, although we're very excited about the greenfield leasing that we've accomplished, bear in mind that the real work comes after the leasing occurs. We have to get in there then and go through appraisal, delineation, and what we hope is ultimately predevelopment. And all of those activities will require capital allocation. So, as we look forward in time, we have to also consider those future capital needs that are beyond just greenfield leasing.

[Guy Baber, Simmons Piper Jaffray & Co.]

Very helpful. Thank you very much.

[Lee M. Tillman, Marathon Oil Corp.]

Thank you, Guy.

[Operator]

The next question comes from Arun Jayaram from JPMorgan.

[Arun Jayaram, JPMorgan Securities LLC]

Yeah. Good morning. Lee, if the strip is broadly correct, I just wanted to get your thoughts on potentially recommending to the board to return cash to shareholders and just your views on do you think the stock is undervalued and if that's a good use of money just given the strong balance sheet, and the strong free cash flow generation of the company?

[Lee M. Tillman, Marathon Oil Corp.]

Yeah. Thank you, Arun. Yeah. First of all, I want to emphasize that return of capital to shareholders is and has been an ongoing dialogue with our board. We'd obviously discuss our dividend which is very competitive in our space with our board each and every quarter. So that concept of return of capital to shareholders and the constructive tension with other investment opportunities is front and center with the leadership, and with our board each and every time we sit down to discuss it.

What I would say is that going back to my opening comments that repurchasing shares is definitely an option. We have an authorization of $1.5 billion already in place. We can also consider the level of our dividend although at $170 million annually, it's very competitive. That also needs to go into the calculus and you're right. I mean, we've – certainly as we look ahead, we absolutely see the opportunity to get into a mode of sustainable cash – free cash flow generation. And I think as we move through that, returning additional capital to shareholders will feature in that forward dialogue.

I would maybe mention though just a few things there is that first of all, we feel that we need kind of a minimum cash balance to run our business given the scale and scope of it of around $750 million of cash on hand and that's plus or minus. I would also point out that all companies are at different stages in their respective business models. We have addressed our balance sheet very clearly last year. We've also largely completed our major portfolio dispositions, meaning that we don't expect additional near-term material proceeds.

As I was just chatting about with Guy, we also recognize that leasing cost is just the first step in capturing some of these low entry cost opportunities. So, we must consider those future capital needs as well. All that to say is that the bottom line is that all of these factors go into our considerations for pursuing what is the best – what are the best options for long-term value creation through the use of free cash and I view it it's not an either/or proposition. We see multiple uses for that including enhancing our direct return of capital. All of that can be accommodated.

[Arun Jayaram, JPMorgan Securities LLC]

Thanks for that. And just a follow-up, just want to talk a little bit about the Louisiana Austin Chalk opportunity. Obviously in the late 1990s the industry tried to move into Louisiana with no success there. But I was just wondering if you could talk about this opportunity and obviously EOG has an interesting discovery well, the Eagle Ranch number 1 and if you could talk about maybe the proximity to some of the EOG acreage?

[Lee M. Tillman, Marathon Oil Corp.]

Yeah. Well, we plan to provide many more details, Arun, as we move through the year. But obviously the Louisiana Austin Chalk as you mention did go through a bit of a development phase. It was with very early technology designs on the completions side and relatively short lateral lengths as well. We see this, as you know, a natural extension of kind of this Austin Chalk megatrend that goes from Mexico across South Texas all the way over to East Louisiana. And having been one of the leaders in the development of the Austin Chalk and South Texas, we think we're well equipped to get in here and appraise and understand the potential of this.

But I want to stress again that this is exploration. And until we are able to get out in the field, do the necessary technical work, and get some wells down, we don't really know what we have here in terms of forward inventory or resource. But it's exciting and I won't get into where we are on the map, Arun, because we're still obviously active in the play today and so I don't think it's prudent for us to talk those specifics at this present time.

[Arun Jayaram, JPMorgan Securities LLC]

All right. Thanks for your comments, Lee.

[Lee M. Tillman, Marathon Oil Corp.]

Yes. Thank you.

[Operator]

The next question comes from Doug Leggate from Bank of America.

[Doug Leggate, Bank of America Merrill Lynch]

Hi. Thanks, everybody. Good morning. Lee, I wonder if I could kick off with the relative capital allocation across the plays. The Bakken obviously continues to impress in terms of incremental well results. So, I'm just curious as to within your stable capital spend for the year, how are you seeing incremental spending in the event the oil prices did stay at these elevated levels?

[Lee M. Tillman, Marathon Oil Corp.]

Yeah. Doug, we are – as we've said before, we have calibrated our development capital program at a level that we're comfortable with. We believe it strikes the balance between generating those very strong material improvements and corporate level returns that we talked about early on, on a strip deck. We can – we see cash return on invested capital improving year-over-year by about 65%.

We will always be looking to, I would say, adjust our capital allocation based on new information throughout the year. But our $2.3 billion development capital spend, that is our spend for the year regardless of where commodity prices tend to track for the rest of the year.

[Doug Leggate, Bank of America Merrill Lynch]

I guess, to be clear what I was really – it probably wasn't obvious from my question, what I was really getting at was the relative oil cut in the Bakken relative to the rest of the portfolio. Would the higher oil price impact your decision as to where your relative investment shifts within that stable budget?

[Lee M. Tillman, Marathon Oil Corp.]

Yeah.

[Doug Leggate, Bank of America Merrill Lynch]

Do you have any plans to step up in the Bakken I guess is what I'm asking.

[Lee M. Tillman, Marathon Oil Corp.]

Yeah. No, I got it, Doug. The beauty I think in our portfolio today in our multi-basin model is, Doug, is that we are already biased very heavily toward oil opportunities. And you're right, the Bakken offers a very high crude cut. But I would also point out that even in Atascosa County, we're running upwards above 75% C&C, crude oil cut there as well. So, that does go in.

We look at obviously the product mix, but we're more driven by making sure that we're deploying to the correct overall economic value proposition.

And today, when you look at our relative capital allocation that we described earlier in the year, it's not surprising that a big component of our capital allocation is flowing to both the Bakken and the Eagle Ford while we progressed the early development phases from a strategic standpoint certainly in both Northern Delaware and Oklahoma.

So, we feel that we have already accommodated that, not only the oil cut, but the overall economics that we see in the Bakken in our capital deployment. But again as we get new data, we can always look at adjusting and redeploying within our multi-basin model but I want to stress that the $2.3 billion is the development capital that we'll be working within.

[Doug Leggate, Bank of America Merrill Lynch]

I appreciate the full answer, my follow-up hopefully a quick one. Last quarter, Lee, you talked about reevaluating the black oil Meramec. I'm just curious if you've got any updates for us this quarter you can share? And I'll leave it there. Thanks.

[Thomas Mitchell Little, Marathon Oil Corp.]

Yeah. Hey, Doug, this is Mitch. I'll see if I can address that for you and then carry on if I'm not hitting what you're looking for. But maybe I'd start with breaking down our STACK position a little bit just for context and we put it in the slides, but 70% of our operated DSUs in the STACK are in the over pressured window and about 30% in the normally pressured. And you'll note that for the remainder of 2018, our focus is really in the over pressured areas.

How I would describe it is we completed our first phase of infills in the normally pressured window. The last one of course was the Cerny, the most recent one which we did a multi-horizon test there including Meramec, Osage and Woodford.

We've obtained a massive data set of production, subsurface and intentional data acquisition. We're now integrating that into the same kind of internally developed workflow – multidiscipline integration workflow that we've applied in places like the Eagle Ford and Bakken to drive the results that you're seeing from us there. I would note and just kind of keep in mind in those two basins, we've got about on the order of 1,500 infills whereas in the normally pressured window, we've got 19 infill locations so far.

[Doug Leggate, Bank of America Merrill Lynch]

Sure.

[Thomas Mitchell Little, Marathon Oil Corp.]

At a different phase, we have taken a few very significant learnings thus far and continue to optimize while we focus in the over pressured area and come back. But certain of the Meramec wells were delivered about $700,000 completed well cost lower than the Eve's and through the first 60 days, we're seeing oil cums that are comparable, so no degradation in performance there.

And we believe we can take cost down even further. We were currently evaluating the design that's more in the $3.5 million completed well cost range. So, continue to advance our learnings, more optimization to do, and while we're in that integration and compilation phase, we're going to shift our focus more into the over pressured area.

[Doug Leggate, Bank of America Merrill Lynch]

Mitch, I'd appreciate if you'd answer, maybe just tag on a quick follow-on to that. Just, the prior operator had obviously put up some pretty aggressive wells with some pretty aggressive fracs, is there any consequences of that in terms of your ability to optimally develop it or do you feel as if that's not going to be an issue? (27:25) over stimulated the prior rog (27:27) if you like.

[Thomas Mitchell Little, Marathon Oil Corp.]

Sure, Doug. I wouldn't characterize it the way you – in the way you last stated it. But what I would say is, as we look at the ultimate development plan here, as with all other operators you have to consider the history of that DSU and frankly the surrounding DSUs. And so, the majority of our DSUs do have a parent well or direct offset. That would be true for our industry as well.

The best we can tell, our position there is not too dissimilar from the rest of industry if you consider parent Meramec, Osage or Woodford wells across the STACK normally pressured area in particular.

[Doug Leggate, Bank of America Merrill Lynch]

Great. Appreciate the answers, guys. Thank you so much.

[Lee M. Tillman, Marathon Oil Corp.]

Thanks, Doug.

[Operator]

The next question comes from Ryan Todd from Deutsche Bank.

[Ryan Todd, Deutsche Bank Securities, Inc.]

Great. Thanks. In the Eagle Ford, you mentioned that your results are expanding the core. Can you give a little more color on what you've seen, how you see the core evolving whether this is kind of improving the economics and the quality of your existing inventory or whether it's actually expanding the inventory this year going forward?

[Thomas Mitchell Little, Marathon Oil Corp.]

Yeah. Sure, Ryan. This is Mitch again. I think if you look back over the past three or four quarters, we've been highlighting in addition to the core Karnes area our activities out in Atascosa, which don't have – don't benefit from the same quality of rock and necessarily same fluid mix. But we, in taking that multi-disciplined approach that I described earlier, have gotten down to a pretty refined state where we're actually designing the combination of well spacing and completion style sub-regionally and in some cases down to the DSU.

What that's translated to, as we've modified our designs, is a significant upgrading or uplifting of the inventory outside of core Karnes County, and that's why we keep sort of highlighting the results from Atascosa. So, in general, I would say the pressure is on upgrading the returns. The focus is on value optimization, not a significant change to overall inventory.

[Ryan Todd, Deutsche Bank Securities, Inc.]

Okay. Thanks. That's helpful. And then, maybe in the Permian, I mean, during the quarter you added 165 risked gross locations which is a pretty significant number there via small bolt-ons and an acquisition. I mean, how do you – how would you characterize the ability to continue to high-grade the portfolio in this way either through swaps or small bolt-ons? Is there a decent amount of running room?

[Lee M. Tillman, Marathon Oil Corp.]

Yeah. I think – this is Lee, Ryan. I believe that there remains an incentive for all operators to continue to drive toward more contiguous positions particularly in Eddy and Lea County and Northern Delaware. I think that the progress that the team made over the last six months since we really closed those deals is very solid. But this is going to take time. Particularly, when you start discussing trades, you have to get to the point where you get to an equivalent value proposition with another party, so the incentive may be there.

But, as I like to tell people, no one likes to say they have the ugly baby in the trade. And so it just takes time. And a lot of times, those trades are going to come in smaller bits as well, but we have a dedicated team that is focused on this. We believe it is important for that asset going forward in time to continue to block up what we believe is a great acreage position in Northern Delaware. And we'll keep you all posted. But again, it is going to be – it's going to come in probably fits and starts and probably in small parcels particularly on the trade side. But it's something that our asset team and our land team are squarely focused on today.

[Ryan Todd, Deutsche Bank Securities, Inc.]

Outside the swaps, are you seeing – in terms of ability for bolt-ons, is there much stuff there or are there pretty limited opportunities?

[Lee M. Tillman, Marathon Oil Corp.]

Yeah. I think for us, the key thing that made that small bolt-on in fourth quarter very attractive was it was essentially a lay-down on our Malaga area, so there was great synergy. It ticked all the boxes for us. It converted non-op locations to co-op locations. It raised our working interest. It gave us more optionality for extended laterals.

So, it was really almost the poster child for what we're trying to do and that's going to be a small group of opportunities that can tick all those boxes and really be a synergistic and accretive add to our position. So, we're going to be very selective. These are going to be smaller in scale. We obviously are not looking at any large transactions here. But to the extent that we find other transactions and that transaction in 4Q is kind of a $60 million deal, we're going to evaluate those and if it fits, we're going to move on them. And that's one of the advantages of having the financial flexibility that we do today.

[Ryan Todd, Deutsche Bank Securities, Inc.]

Okay. Thanks, Lee. Great quarter.

[Lee M. Tillman, Marathon Oil Corp.]

Thank you, Ryan.

[Operator]

The next question comes from Bob Morris from Citi.

[Robert Scott Morris, Citigroup Global Markets, Inc.]

Good morning, Lee, and very nice quarter.

[Lee M. Tillman, Marathon Oil Corp.]

Thank you, Bob.

[Robert Scott Morris, Citigroup Global Markets, Inc.]

I'm looking at the two very big West Myrmidon wells that had 24-hour IP rates of almost 11,000, 8,000 barrels per day. Can you give us a little bit of color around how much of that strong performance was being better able to identify sweet spots or landing zones, and how much of it is just the continued evolution of your completion designs here? And part of what I'm trying to determine is how repeatable is that in that performance curve on slide 8 continuing to move up and looking at how that is going forward?

[Thomas Mitchell Little, Marathon Oil Corp.]

Sure. Thanks, Bob. Let me come back to a couple of points I made earlier and then I'll expand on that a little bit. But I hope you will understand we're not going to reveal sort of the full detailed recipe of how we're doing and what we're doing. But I'll say it starts with the tremendous technical database that we've developed. The team that we have there, really refining the multi-disciplined integration of that and the reservoir characterization, that allows us to then design a completion that takes advantage of the local characteristics.

Supplement that with the culture that we've been building over the last few years which is never to be satisfied with yesterday's results, and what it's taken us to is an approach that allows us to customize to a very sub-regional level. And if you'll look at our completion details across the basin, you'll very clearly see that we don't have a one size fits all approach, we custom design to take advantage of what we understand about local characteristics.

The Hector – record Three Forks well from Hector, the two West Myrmidon wells you mentioned, those records weren't delivered by accident. It's true that there was good rock to start with, but our completion designs were tailored to take advantage of the characteristics there. And so, it's a value optimization focus that drives it and a really refined multi-discipline integration of the large database that we have.

[Robert Scott Morris, Citigroup Global Markets, Inc.]

Okay. Great. Obviously, that's working extremely well. Follow-up just quickly on the Cerny pilot. On the three Meramec wells there, was there already an unvented parent well on that section? And then also, did you see vertical communication between the Osage and the Woodford formations in that pilot?

[Thomas Mitchell Little, Marathon Oil Corp.]

Sure. The Cerny did have a parent well, and so just as a reminder, we drilled three additional Meramec wells across two landing zones in a half section there, and then we drilled one Osage well and one Woodford well. The solution out here as we've talked about several times is going to be, again, fairly regional and fairly specific down to the DSU level in some cases.

In this particular case, we did see some communication between Osage and Woodford but not between Meramec and those intervals. I wouldn't say that that result is necessarily translatable across long distances. We're going to need to do more multi-horizon tests to fully understand that and to optimize the solution.

[Robert Scott Morris, Citigroup Global Markets, Inc.]

Okay. Great. Thank you very much. That's helpful.

[Operator]

The next question comes from Brian Singer from Goldman Sachs.

[Brian Singer, Goldman Sachs & Co. LLC]

Thank you. Good morning.

[Lee M. Tillman, Marathon Oil Corp.]

Good morning, Brian.

[Brian Singer, Goldman Sachs & Co. LLC]

I think you're pretty clear that the $2.3 billion budget looks like it's going to hold here almost regardless of the commodity environment. It's kind of back to the question on activity levels in the Eagle Ford and Bakken whether now or even into 2019. Are there constraints that you see to increasing activity relative to what your existing plans are from either ability to get things done, prospective inflation or just erosion of efficiency or productivity gains or do you view the decision to be fixed in the $2.3 billion in the areas you're at as purely a capital discipline choice decision?

[Lee M. Tillman, Marathon Oil Corp.]

Yeah. Well, I certainly believe that the $2.3 billion is a capital discipline and returns-driven choice that we are making. There's nothing intrinsic in either basin that is limiting us today from an activity standpoint. Obviously, we look to drive maximum efficiency, i.e., running our frac crews 24/7, et cetera. All of those things come into play. But when I – I think the way, again, to think about 2018 for both of those basins is Bakken is absolutely on a growth trajectory but is also going to generate free cash flow this year.

Eagle Ford, we are managing to a more or less flat production profile in order to take advantage of its capital efficiency and ability to generate free cash flow to drive other elements of our portfolio. I think on your question around, you mentioned inflation. Thus far, we feel that the inflation assumptions that were implicit in our original $2.3 billion plan are still holding true. And so we – although it's something that our teams not only look to manage, but actually look to offset each and every day we feel very comfortable at this stage that we have that accounted for fully in our $2.3 billion development capital budget.

2019 is something that we're really not talking about quite yet. But obviously, the Bakken and the Eagle Ford, as well as our other basins will all be part of a multi-basin optimization as we go into 2019 and we'll allocate capital based on the best available data when we go through our planning cycle. So, nothing is locked in. There are no constraints around the Bakken and the Eagle Ford today that would not allow us to flex those assets up or down.

[Brian Singer, Goldman Sachs & Co. LLC]

Thank you. My follow-up is with regards to Oklahoma. There's been some talk here about the STACK area. Any update of note or learnings or key milestones ahead on the SCOOP side of the equation?

[Thomas Mitchell Little, Marathon Oil Corp.]

Yeah. Hey, Brian, this is Mitch again. I guess, we've got the remainder of 2018 focused on over pressured infills across STACK and then some infill down in the SCOOP area as well. And we've highlighted those I think on slide 11 if I recall.

[Brian Singer, Goldman Sachs & Co. LLC]

Yes. That's right.

[Thomas Mitchell Little, Marathon Oil Corp.]

And so, we will have some inflow of information with a couple infills down there but nothing to report today.

[Lee M. Tillman, Marathon Oil Corp.]

And I think just as a reminder, Brian, because the SCOOP is clearly HBP'd, we have had the optionality to not necessarily drive activity there until we were ready to do so. But we will have some multi-well infill drilling there this year in 2018 and it will continue on, on that path.

[Brian Singer, Goldman Sachs & Co. LLC]

Thank you.

[Lee M. Tillman, Marathon Oil Corp.]

Yeah. Thank you, Brian.

[Operator]

The next question comes from David Heikkinen from Heikkinen Energy Advisors.

[David Martin Heikkinen, Heikkinen Energy Advisors LLC]

Just one quick question, you talked about progressing and exiting Kurdistan. Can you provide an update there?

[Lee M. Tillman, Marathon Oil Corp.]

Yeah. Absolutely. This is Lee, David. We are – we have – as a reminder, David, for everyone on line, we have two non-operated blocks in Kurdistan, Sarsang and Atrush. We have a small working interest in both of those. Sarsang, there is already an executed sales agreement in place and we are looking to again move that toward close. I would say that we continue to progress agreements around the Atrush block as well. So it is certainly reasonable to expect ultimately a full and complete exit from Kurdistan.

[David Martin Heikkinen, Heikkinen Energy Advisors LLC]

Cool. That's helpful. And then about your comments on the needed cash balance were pretty interesting and talk to the scale needed to really prosecute a development program in the multi-well development mode. Have you talked or thought about or talked about in the past the amount of capital needed from initial well spud to last well put on production. Just thinking about the amount of working capital that's getting put in the ground and that need, as you think about the next couple of years, by the STACK or the Delaware or the Bakken really?

[Dane E. Whitehead, Marathon Oil Corp.]

Yeah. David, this is Dane Whitehead. I spend a lot of time thinking about working capital. The way you frame that question is a little bit different to me, but let's take you back to the $750 million. I think within a given month and we kind of saw some of that this month, you can see an interim month working capital swing of north of $400 million, maybe up to $500 million, especially when commodity prices go up like they have, it really influences things.

And so, that's really kind of an important – a very important data point now we can calibrate that $750 million. Plus it's nice to have a little extra flexibility in there in the event a little bolt-on comes along or something like that.

[David Martin Heikkinen, Heikkinen Energy Advisors LLC]

Okay.

[Lee M. Tillman, Marathon Oil Corp.]

I would also maybe add, David, this is Lee, that the point you raised though around, as you get more toward multi-well pad drilling and as the number of wells on pad increases, these traditional kind of short cycle investments do start looking more like medium to long cycle investments and you need to plan that within your budget cycle and how you approach capital allocation.

And it also presents, I believe, even some forecasting challenges, particularly when you look at quarterly results because, clearly, if you have a large pad that moves out with the quarter, it can have dramatic results within the quarter, but not necessarily within the calendar year.

[David Martin Heikkinen, Heikkinen Energy Advisors LLC]

No, that's definitely the challenge of near-term versus intermediate- and longer-term perspective. And great results in the first quarter. Thanks for taking the question.

[Lee M. Tillman, Marathon Oil Corp.]

Thank you, Dave. Appreciate it.

[Operator]

We have no further questions at this time. I will like to turn the call over to CEO, Lee Tillman, for final remarks.

[Lee M. Tillman, Marathon Oil Corp.]

Thank you, Hilda. I'd like to end by just thanking all of our dedicated employees and contractors for their efforts in the quarter and certainly their efforts going forward. At the end of the day, they are our sustainable competitive advantage. I want to say thank you for your interest in Marathon Oil, and that concludes our call.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.