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Marathon Oil Corp. Third Quarter 2022 Results

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Marathon Oil Corp. reported third quarter 2022 results.

The company reported net income of $817 million or $1.22 per diluted share, which includes the impact of certain items not typically represented in analysts' earnings estimates and that would otherwise affect comparability of results. Adjusted net income was $832 million or $1.24 per diluted share. Net operating cash flow was $1,556 million or $1,440 million before changes in working capital (adjusted CFO). Free cash flow was $1,126 million or $1,031 million before changes in working capital and including E.G. distributions (adjusted FCF).

3Q Highlights:

• Built on return of capital track record with 82% of adjusted CFO returned to shareholders in third quarter
• Returned $1,176 million to equity holders in third quarter, a record for shareholder distributions, including $1,122 million of share repurchases and $54 million base dividend
• Returned 61% of adjusted CFO to shareholders ($2.6 billion) through first three quarters of 2022
• Executed $3.4 billion of share repurchases since achieving leverage objective in Oct. 2021, reducing outstanding share count by 20% and driving significant per share growth
• Board of Directors increased outstanding buyback authorization to $2.5 billion as of Nov. 2 and raised quarterly base dividend 13%; base dividend raise fully funded by year-to-date share repurchases
• Delivered solid third quarter financial and operational results
• Generated third quarter adjusted free cash flow of $1,031 million at 29% reinvestment rate
• Oil and oil-equivalent production up sequentially to 176,000 net bopd and 352,000 net boed
• Raised 2022 E.G. equity income guidance to $610 million on consistent operational performance and differentiated exposure to higher European natural gas prices
• Raised 2022 capital spending guidance to $1.4 billion on incremental inflation and targeted efforts to protect execution and operational momentum into 2023
• Entered into definitive purchase agreement to acquire Eagle Ford assets of Ensign Natural Resources for cash consideration of $3.0 billion; transaction expected to close by year-end with an effective date of Oct. 1, 2022; separate acquisition press release and presentation available on Marathon Oil website

Chairman, President & CEO Lee Tillman said: "Third quarter results are once again highlighted by strong operations and compelling financial delivery that competes with the best companies in the S&P 500. We returned a record $1.2 billion of capital to our shareholders during third quarter, clearly demonstrating our commitment to provide investors with the first call on cash flow through our unique percentage of operating cash flow framework. Since achieving our leverage objective in October 2021, we have reduced our share count by a peer-leading 20%, driving significant growth in our per share metrics while also funding our latest base dividend increase. We have also entered into a purchase agreement to acquire an Eagle Ford asset that will essentially double our net acreage, is immediately accretive to our key financial metrics and return of capital framework, and is accretive to inventory life with significant inventory that immediately competes for capital - all while maintaining very low leverage. Looking ahead to 2023, while the macro environment will likely remain volatile, our commitment to our Framework for Success is steadfast. Our case to beat is a maintenance capital program that integrates our recently announced Eagle Ford acquisition, as we will continue to prioritize strong corporate returns, sustainable free cash flow generation, significant return of capital to shareholders and ESG excellence."

Return of Capital

Marathon Oil's percentage of CFO framework provides clear visibility to significant return of capital to equity investors and ensures the shareholder gets the first call on cash flow generation. In a $60/bbl WTI or higher price environment, the Company targets returning a minimum of 40% of CFO to equity investors. For 2022 specifically, Marathon Oil expects to exceed 50% of CFO to shareholders.

During third quarter, Marathon Oil returned 82% of adjusted CFO (over 100% of adjusted FCF) to equity investors. Third quarter return of capital totaled $1,176 million, a record for quarterly shareholder distributions, and included $1,122 million of share repurchases and $54 million base dividend. Over the trailing four quarters, the Company has consistently outperformed its minimum return of capital objective, with shareholder distributions accounting for 63%¹ of adjusted CFO (83%² of adjusted FCF). Similarly, Marathon Oil has returned 61% of adjusted CFO to shareholders through the first three quarters of 2022 (83% of adjusted FCF).

Since achieving its leverage objective in Oct. 2021 and stepping up return of capital to equity investors, Marathon Oil has repurchased $3.4 billion of its common stock (157 million shares), driving a 20% reduction to its outstanding share count and contributing to significant growth in all per share metrics. The Board of Directors increased Marathon Oil's outstanding share repurchase authorization to $2.5 billion as of Nov. 2, underscoring the Company's ongoing commitment to its return of capital program.

Marathon Oil also raised its quarterly base dividend by 13% to $0.09/sh, with the per share increase funded through the year-to-date share count reduction from the Company's stock buyback program. This represents the sixth base dividend increase in the last seven quarters for a cumulative increase of 200% since the beginning of 2021.

3Q22 Financials

CASH FLOW AND CAPEX: Net cash provided by operations was $1,556 million during third quarter or $1,440 million before changes in working capital. Third quarter cash additions to property, plant and equipment totaled $430 million, while capital expenditures (accrued) totaled $413 million.

FREE CASH FLOW: Free cash flow was $1,126 million or $1,031 million of adjusted free cash flow before changes in working capital and including E.G. distributions.

BALANCE SHEET AND LIQUIDITY: Marathon Oil ended third quarter with $1,109 million in cash and cash equivalents, essentially flat with the prior quarter cash balance. In July, the Company extended its revolving credit facility by three years to 2027 and amended the capacity to $2.5 billion.

ADJUSTMENTS TO NET INCOME: The adjustments to net income for third quarter increased net income by $15 million, primarily due to dry well expense and impairments associated with onshore exploration partly offset by the income impact associated with unrealized gains on derivative instruments.

3Q22 Operations

UNITED STATES (U.S.): U.S. production averaged 295,000 net barrels of oil equivalent per day (boed) for third quarter 2022. Oil production averaged 166,000 net barrels of oil per day (bopd). The Company brought a total of 70 gross Company-operated wells to sales during third quarter, in comparison to guidance for approximately 60 to 70 wells to sales. U.S. unit production costs increased to $6.40 per boe during third quarter due to inflation, including higher commodity prices, and an elevated level of high-return workover activity.

Marathon Oil's third quarter production in the Eagle Ford averaged 90,000 net boed, including 61,000 net bopd of oil, with 48 gross Company-operated wells to sales, above guidance of 40 to 45 wells to sales. In the Bakken, production averaged 118,000 net boed, including 75,000 net bopd of oil, with 9 gross Company-operated wells to sales. In Oklahoma, production averaged 54,000 net boed, including 12,000 net bopd of oil. Northern Delaware production averaged 24,000 net boed, including 13,000 net bopd of oil, with 13 gross Company-operated wells to sales, the highest number of quarterly wells to sales for the asset since 2019. Third quarter Northern Delaware wells to sales included 8 extended laterals (~10,000 feet) with an average 30-day IP rate of 2,740 BOED (72% oil).

INTERNATIONAL: Equatorial Guinea production averaged 57,000 net boed for third quarter 2022, including 10,000 net bopd of oil. Unit production costs averaged $3.55 per boe. Net income from equity method investees totaled $190 million and total cash distributions from equity method companies amounted to $150 million during third quarter in the form of dividends and return of capital.

2022 Guidance

Marathon Oil raised its E.G. equity income guidance to $610 million at the midpoint from prior guidance of $540 million, due to strong operational performance and the Company's differentiated exposure to the increase in European natural gas pricing. The Company has raised its 2022 capital spending guidance to $1.4 billion from prior guidance of $1.3 billion, due to incremental inflation and targeted efforts to protect execution excellence and operational momentum into 2023. The Company forecasts a 2022 reinvestment rate of approximately 25%³ at recent forward curve commodity pricing, among the lowest in the E&P sector.