Although never having sat in the CEO chair before, when Lee Tillman was provided the opportunity to lead 127-year-old international exploration and production company Marathon Oil Corp. last August, his wife observed, "It's as if you've been uniquely preparing for this role your entire career."
For more than two decades prior to joining Houston-based Mara- thon, Tillman had but one employer: global energy giant ExxonMobil Corp. During his tenure at ExxonMobil, most recently as vice president of engineering overseeing the global engineering staff, he lived in and worked many of the same regions in which Marathon Oil operates, including Equatorial Guinea, the North Sea, the Gulf of Mexico, and in its Houston and Dallas offices. While at ExxonMobil he touched almost every aspect of the E&P business, from domestic and international operations to corporate environments.
“Unbeknownst to me, I had been charting a course for Marathon Oil for quite some time,” he says. “The preparation over the past 24 years put me in a strong position to step into this role and hit the ground running.”
Tillman hails from the small East Texas town of Teague, some 100 miles south of Dallas, where he graduated valedictorian of his high school class. Before joining ExxonMobil in 1989, he earned a bachelor’s degree in chemical engineering with honors from Texas A&M University and a doctorate in chemical engineering from Auburn University.
Tillman succeeds former chairman and CEO Clarence Cazalot, who over 13 years expanded the company’s international portfolio, entered emerging U.S. resource plays, and spun off its downstream business to lay its foundation as an independent E&P. Chosen by Cazalot before his retirement in December, now it’s Tillman’s turn as president and CEO to put his stamp on the company once owned by John D. Rockefeller.
Marathon Oil, with an enterprise value of $30 billion, holds 2.2 billion barrels of oil equivalent of proved reserves in broad assets across North America, Europe and Africa.
In 2011, the company made a transformational play in the heart of the Eagle Ford Shale in South Texas, acquiring Hilcorp En- ergy’s 141,000-acre position for $3.5 billion, then one of the highest per-acreage metrics paid in the basin. The asset has since become a centerpiece of the company’s growth strategy. Annualized production in the company’s Eagle Ford assets grew approximately 136% in 2013 vs. 2012.
Oil and Gas Investor spoke with Tillman at his Houston office.
Investor: The spinoff of downstream Marathon Petroleum is now almost three years past. Is Marathon Oil’s restructuring to an independent E&P complete?
Tillman: For a healthy company, I don’t think you’re ever done in terms of restructuring, so we’ll never be done with changing and modifying the structure of our business. We made some subtle changes to our leadership team last year to make sure that we had focus on all the unconventional plays under a single leadership structure, to ensure that we could capture synergies and drive best practices. We brought all of our more complex business-—offshore international-—under individual leadership, to again drive those synergies and ensure that we have the right competencies and capabilities in each of those areas. So we’re going to continue to work that. It’s a journey.
Investor: How do you plan to deploy the $5.9 billion allocated for capex in 2014?
Tillman: First and foremost, we’re driving about 60% of our capital budget into our unconventional North American plays, essentially our Eagle Ford, Bakken and Woodford shales. We’ve announced a significant acceleration of rig activity in those resource plays: 20% in- creases in the Eagle Ford and Bakken, and dou- bling our rigs to four in the Oklahoma resource basins. The basis for that acceleration is because we have more resource there.
As we continue to define and delineate our unconventional plays, we’ve doubled the 2P [proved and probable including contingent resources] resource in those three unconventional plays since 2011. We have 2.4 billion oil equivalent barrels of 2P resource available in those resource plays. That’s some 4,500 well locations. So this is a tremendous resource for us going forward.
We’re continuing to invest in our conventional and international business, about $1.4 billion in select opportunities. And finally, we’ve refocused our exploration program. We’re spending around $500 million.
Investor: Discuss your plans for accelerated activity in the Eagle Ford.
Tillman We’re off and running in the Eagle Ford. We’ve already reached our announced increased rig count. The acceleration is largely driven by the 2P resource.
The Hilcorp acquisition was viewed as a very rich deal for Marathon Oil, in terms of what we paid for the acreage. But as you look at the quality, not only of the lower Eagle Ford, but also the quality of the Austin Chalk and the upper Eagle Ford, the resource potential there is just tremendous. At the time we did the Hilcorp deal, we estimated 2P resources in the 470-million-barrel range; we now have about a billion barrels of 2P resource in the Eagle Ford. That’s not even total resource base. We thought we might peak at around 110,000 to 120,000 barrels per day of production, and now we see that number growing to approximately 150,000 barrels per day. I’m very excited about what we’re seeing in the Eagle Ford.
Investor: How did you achieve that so quickly since entering the play in 2011?
Tillman: It comes down to a focus on execution-—having a fully integrated asset team there, having drilling and completion side-by-side with facilities, making sure that as we drill and complete wells that we’re able to flow those wells. We’re investing in the midstream facilities to ensure that we can get our barrels to market. We look carefully not only at spud-to-TD [total depth] times-—which we’ve driven down to 13 days-—but when do we see first oil actually into the tank?
Investor: How far have you taken downspacing in the Eagle Ford?
Tillman: We started developing the Eagle Ford at 160- and 80-acre spacing. Now, the bulk of our development is on 60-acre or less spacing, and we think a lot of our field is going to be economical at 40-acre spacing and maybe even lower. We’re doing some pilots today that are 30 acres. We know the downspacing works, and now we’re pushing the limits where it makes sense across the play. We’re finding that even though we continue to reduce spacing, the type curves are as good as the more highly spaced wells.
Investor: How is your Austin Chalk pilot program progressing?
Tillman: Beyond the lower Eagle Ford, which is the main play in the Eagle Ford, we’re also looking at co-development scenarios on the same pads in the Austin Chalk and the upper Eagle Ford. And we’re having great success. In fact, some of the initial Austin Chalk wells that we’ve produced are on type curves not dissimilar to our main horizon lower Eagle Ford wells. We’re still early days, but the initial results are very encouraging.
Investor: How are you driving improvements in the Bakken?
Tillman: Similar to the approach we’re using in the Eagle Ford, we’ve downspaced to 320 acres in the bulk of our high-quality Bakken acreage. Also, when we first entered the Bakken in 2006, the industry standard was basic openhole, single-stage fracks. Now, of course, we’ve moved well beyond that and are doing 30-stage fracks, but we have about a 100-well inventory that was done with that older technology.
Now we’re bringing modern-day fracturing techniques to that inventory and running recompletions, which is a lot less expensive than a full-bore redrilling of the well. We can get up to 280,000 or so barrels of incremental recovery and an uptick in IPs [initial production rates], just from going back and applying modern-day completion techniques and resetting the type curve for those.
Investor: How much upside do you see in co-developing your Three Forks opportunity?
Tillman: In 2013, the Three Forks first bench contributed 20% to our Bakken-operated production. Like the 320-acre spacing we’re doing within the middle Bakken, usually putting down four wells, we’re applying that same spacing of four wells in the Three Forks. You end up with a very high-density pad that’s both vertically and horizontally integrated. The next step for us is to extend that to the additional benches in the Three Forks.
Investor: Why are you now pumping additional capex into the Anadarko Basin?
Tillman: We’ve got 210,000 net acres there, so it’s a big position for us. We’re committed to our SCOOP area--the South Central Oklahoma Oil Province. Just this last year, in fact, we increased our SCOOP acreage significantly through a quiet acquisition. In the SCOOP acreage, today we’re drilling what we call “XL” wells, where we’re extending lateral lengths up to two miles. And we’re very encouraged by the early results.
Broader than that, we’re also looking at the other horizons. We’re doing pilot work in the Granite Wash and the Southern Mississippi Trend.
Investor: Considering your own global exploration background, do you plan to carry forward a mix of international and U.S. assets?
Tillman: I have no preconceived notion of the mix. Our portfolio’s going to be driven by profitability and capital allocation, and we’re going to go where the most economic and profitable barrels are. If those happen to be in the U.S., which is the case in 2014, that’s where we’ll invest.
But we think it’s important to look at the full opportunity set that exists for our shareholders. Exploration, just like any element of our business, has to compete for capital allocation. In other words, it has to deliver a return. However, to the extent the international exploration op- portunities can still show a path to profitability, we want to be in that game, because it can pay off in big multiples.
Investor: What exploration opportunities show promise in the near term?
Tillman: The four areas of exploration we’re focused on today are Kurdistan, Gabon, East Africa and the Gulf of Mexico. For exploration, we attempt to deliver on three dimensions: proven emerging basins, oil prone, and being able to add value as the operator. All four fit that criteria.
In Kurdistan, we’ve had discoveries on one operated and two nonoperated blocks. On one nonoperated block we’ve filed a field development plan and we should have first oil in that block in 2015.
In Gabon, we’ve had one joint-interest discovery on the 2.2-million-acre Diaman block. The gas condensate discovery was the first pre- salt discovery in deepwater Gabon and has a tremendous amount of prospectivity. That’s a pretty remarkable event-—not only for the industry, but for us. We’re also high bidder on another very prospective deepwater block, a little bit closer to some of the inboard presalt oil discoveries that have been made.
In East Africa we’re active in Ethiopia and Kenya as a nonoperator with Tullow and Africa Oil. There’s been a high level of success in the industry in the rift plays there—-big basins with a lot of sub-basins. It’s a bit of a long play, but there’s a lot of prospectivity. We’ve had mixed success there, with a couple more key wells we’re drilling now. We’ll let the bit tell us what the answers are there.
For the Gulf of Mexico, we’re bringing in a newbuild drillship this year that will be shared with another operator. We’re drilling the Key Largo well first, which is an inboard Paleogene well. We have a very rich portfolio of inboard Paleogene prospects, and so we committed to this rig with a mindset of testing the potential of our inboard Paleogene portfolio.
Investor: What is the status of your Libya project in North Africa?
Tillman: We’re all disappointed at the situation in Libya. We have excluded Libya from our production guidance for some time now, recognizing the uncertainty and our inability to control what’s going on in-country. The Waha concession is a world-class resource with tremendous growth potential, but the security issues that exist in-country today have to be rectified before we can get back to base operations, and certainly, too, before we would have confidence reinvesting, whether that be in near- term optimization or even further developments there in the concession.
Investor: Marathon Oil has sold or announced sales for $4.8 billion in assets since 2010 with more on the block. How far do you plan to go with portfolio rationalization?
Tillman: Over the past three years, we set a target of $1.5 to $3 billion in divestitures. We’ve exceeded that number. We continue to scrutinize our portfolio to ensure it is, in fact, the most profitable, highest-performing portfolio that we can invest both our human and financial capital into. We have no sacred assets.
Investor: Marathon Oil emphasizes its oil focus. Do you see a need to maintain gas optionality in your portfolio?
Tillman: We do have gas optionality. We have gas opportunities in the leaner parts of the Woodford and in the leaner part of the Eagle Ford. In addition, we have a very large integrated gas business in Equatorial Guinea today. We feel very comfortable, though, with our production at a 70% weighting toward liquids, and we’ve worked hard to achieve that weighting.
Investor: You have an unrealized Formula One dream?
Tillman: Yes, I do—-it’s very unrealized. I grew up in the country around motorcycles and tractors and trucks, and I spent a lot of time messing around with things in the shop. I moved quickly from motorcycles to cars, and did a bit of “gentleman racing.” That just carried on into my later life as well. I do still enjoy getting out on the track periodically. The one time that I don’t think about the E&P business is when I’m on the track.