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Marathon Oil's fiscal discipline impresses investors despite Q2 profit miss

Even though Marathon Oil Corp. posted a second-quarter profit that missed earnings estimates, the company's plans to increase production while keeping its capital budget steady helped push shares higher Aug. 2.

Marathon reported $126 million, or 15 cents per share, in adjusted income for the second quarter. The S&P Capital IQ consensus normalized earnings estimate called for a 21-cent-per-share adjusted profit. Shares of Marathon were up nearly 2.5%, to $20.81, in late afternoon trading Aug. 2.

Marathon announced Aug. 1 that it would increase its 2018 production guidance from a range of 390,000 to 400,000 barrels of oil equivalent per day to a new range of 400,000 to 415,000 boe/d. Its $2.3 billion budget, however, remained unchanged.

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"Our outstanding operational execution, coupled with our capital discipline and higher oil prices, enabled us to generate about $250 million of organic free cash flow during the second quarter, building upon our already peer-leading financial flexibility," CEO Lee Tillman said during the company's second-quarter earnings call Aug. 2. "This developing trend enhances our confidence in sustainable free cash flow and gives us ample room to progress multiple high-return uses of cash."

Marathon reported oil production growth in both the Bakken and Eagle Ford shales during the second quarter. Tillman said oil production in the Bakken region of North Dakota grew 14% sequentially, with new wells setting record 30-day production totals for the Three Forks formation. Eagle Ford production in south Texas grew 2% sequentially, with 39 new wells brought online during the second quarter. Production in the Permian Basin of West Texas and the SCOOP and STACK plays in Oklahoma were up 7% over the first quarter.

"The second quarter has again demonstrated the strength of our returns-driven, multi-basin business model. We have the flexibility to take advantage of opportunities without being forced to accelerate into headwinds," Tillman said.

The company is also moving into another basin. Tillman said Marathon spent $250 million in the first half of the year leasing acreage in the Louisiana segment of the Austin Chalk play. The CEO said the company could spend as much as $150 million more on the Austin Chalk in the second half the year, when its first exploratory well is expected to be spud.

Raymond James Financial Inc., which reiterated a "strong buy" rating for Marathon stock, credited the company for increasing production while keeping a disciplined fiscal approach. "Notably, guidance is up despite the sale in July of several small assets," the investment firm said. "We project $1.1 billion of free cash flow — the highest since 2011."