Earnings Highlights 2nd Quarter Ended June 30 (In millions, except per diluted share data) 2007 2006** Net income adjusted for special items* $1,548 $1,515 Adjustments for special items* (net of taxes): Gain on sale of discontinued operations 8 243 Loss on long-term U.K. natural gas contracts (5) (10) Loss on early extinguishment of debt (1) - Net income $1,550 $1,748 Net income adjusted for special items* - per diluted share $2.25 $2.08 Net income - per diluted share $2.25 $2.40 Revenues and other income $16,887 $18,290 Weighted average shares - diluted 689 728 * See discussion of net income adjusted for special items noted below. ** Restated for two-for-one stock split on June 18, 2007. See Note 2 below. Key Highlights Exploration and Production -- Announced results of the Droshky discovery and appraisal sidetrack wells in the Gulf of Mexico -- Announced three exploration discoveries in deepwater Angola -- Signed cooperation agreement with Naftogz Ukrainy to study the Dnieper-Donets Basin, Ukraine Refining, Marketing and Transportation -- Set records for quarterly refinery crude and total throughputs -- Achieved same store gasoline sales volume increase of 0.9 percent and merchandise sales revenue increase of 3.4 percent at Speedway SuperAmerica (SSA) -- Received U.S. Environmental Protection Agency Energy STAR awards for energy efficiency at four refineries Integrated Gas -- Delivered first Equatorial Guinea liquefied natural gas (LNG) shipment six months ahead of schedule Corporate -- Repurchased 57 million common shares to-date at cost of $2.5 billion -- Increased quarterly dividend 20 percent, fifth increase in four years -- Completed two-for-one split of the Company's common stock
"Marathon's second quarter was marked by exceptional operating performance in our refineries allowing the Company to achieve a record refinery utilization rate of 110 percent and to realize record crude oil and total refinery throughputs during the quarter. This allowed us to capture the improved refining and wholesale gross marketing margins and stronger pricing seen in the market during the second quarter," said Clarence P. Cazalot, Jr., Marathon president and CEO. "Additionally, Marathon and our partners marked the first LNG delivery from the Equatorial Guinea LNG Train 1 production facility during the second quarter. This project, completed six months ahead of schedule and on budget, earns the distinction of being the fastest LNG facility ever built, from inception to first delivery, while maintaining an outstanding safety performance. The plant not only allows the commercialization of the Alba field's natural gas, but also provides a platform to create a potential regional LNG hub on Bioko Island, Equatorial Guinea."
Total segment income was $1.658 billion in the second quarter of 2007, compared with $1.593 billion in the second quarter of 2006.
2nd Quarter Ended June 30 (In millions) 2007 2006 Segment Income Exploration & Production (E&P) United States $173 $243 International 227 416 Total E&P 400 659 Refining, Marketing & Transportation 1,246 917 Integrated Gas 12 17 Segment Income *** $1,658 $1,593
*** See Preliminary Supplemental Statistics noted below for a reconciliation of segment income to net income as reported under generally accepted accounting principles.
Exploration and Production
Upstream segment income totaled $400 million in the second quarter of 2007, compared to $659 million in the second quarter of 2006. Sales volumes during the quarter averaged 338,000 barrels of oil equivalent per day (boepd) and production available for sale averaged 345,000 boepd.
United States upstream income was $173 million in the second quarter of 2007 compared to $243 million in the second quarter of 2006, primarily as a result of lower liquid hydrocarbon and natural gas sales volumes. Normal production declines and a planned turnaround at the Alaska LNG facility account for the majority of the volume decrease. The impact of higher realized natural gas prices were approximately offset by lower realized liquid hydrocarbon prices.
International upstream income was $227 million in the second quarter of 2007, compared to $416 million in the second quarter of 2006, primarily as a result of lower liquid hydrocarbon sales volumes, lower liquid hydrocarbon and natural gas realized prices, increased exploration expenses and a higher effective tax rate. The lower liquid hydrocarbon sales volumes were due to an overlift of approximately 40,000 barrels of oil per day (bpd) in the second quarter of 2006, while the Company was slightly underlifted during the second quarter of 2007. The increase in Equatorial Guinea natural gas sales volumes due to the start-up of the LNG Train 1 production facility contributed to the decline in the average realized natural gas price.
2nd Quarter Ended June 30 2007 2006 Key Production Statistics Net Sales United States - Liquids (mbpd) 65 79 United States - Gas (mmcfpd) 460 523 International - Liquids (mbpd) 134 180 International - Gas (mmcfpd) 374 278 Net Sales from Continuing Operations (mboepd) 338 392 Discontinued Operations (mboepd) - 20 Total Net Sales (mboepd) 338 412
The Company announced the sidetrack results of the Droshky discovery in the Gulf of Mexico in the second quarter of 2007. Based on the results of the three well penetrations, Marathon estimates the Droshky discovery holds mean recoverable resource of 80 to 90 million gross barrels of oil equivalent. The timing of initial production will be dependent upon delivery of key equipment (i.e., drilling rig and subsea equipment) and regulatory approvals, but could be as early as 2010. Marathon holds a 100 percent working interest in the Droshky discovery.
Marathon continued its exploration success in deepwater Angola, having announced one discovery on Block 31 (Cordelia) and two discoveries on Block 32 (Cominhos and Louro) during the second quarter of 2007. To date, Marathon has announced 24 discoveries on Blocks 31 and 32. Marathon has also participated in two additional wells that have reached total depth in deepwater Angola and results will be announced upon government and partner approvals. Three dry wells were drilled in deepwater Angola during the quarter. Marathon has a 10 percent interest in Block 31 and a 30 percent interest in Block 32.
Marathon signed an agreement with Naftogz Ukrainy to study the northern part of the Dnieper-Donets Basin, Ukraine. The results of these studies could lead to future joint exploration and production activities in Ukraine.
Marathon continued to progress major projects during the second quarter. On the Neptune development in the Gulf of Mexico, the mini-tension-leg platform hull has been installed and the topsides were set in June. Subsea equipment installation, topsides hook-up and facility commissioning are in progress. First production remains on schedule for early 2008.
Commissioning of the Alvheim floating production, storage and offloading (FPSO) vessel continues. The difficult market conditions for skilled labor and additional work-scope identified during integration of the ship and topsides systems has delayed first production to the fourth quarter of 2007. Even with this delay, the Alvheim/Vilje project continues on a track to achieve an industry-leading completion schedule, moving from discovery to first production in four years. Production from Alvheim/Vilje is expected to achieve a peak net rate of approximately 75,000 boepd in 2008.
Marathon's previous 2007 production available for sale guidance was calculated based on Alvheim/Vilje achieving first oil in the first quarter of 2007. While all other areas of Marathon's production remain within initial guidance, Marathon now expects its 2007 production available for sale to be between 350,000 and 375,000 boepd. Despite the impact of this project delay, Marathon's strong portfolio of development opportunities continues to underpin the Company's estimated 2006 though 2010 compound average annual production growth rate of 6 to 9 percent.
Refining, Marketing and Transportation
Downstream segment income was $1.246 billion in the second quarter of 2007, compared to $917 million in the second quarter of 2006, primarily as a result of improvement in the refining and wholesale marketing gross margin, which averaged 39.25 cents per gallon in the second quarter of 2007 compared to 29.78 cents per gallon in the second quarter of 2006. This margin improvement was consistent with the relevant indicators (crack spreads) in the Midwest (Chicago) and Gulf Coast markets. Crude oil refined averaged 1,072,000 bpd during the second quarter of 2007, 34,000 bpd higher than the average for the same period of 2006 and a quarterly record. Total refinery throughputs were 1,280,000 bpd for the second quarter of 2007, also a quarterly record, and three percent higher than the 1,245,000 bpd during the second quarter of 2006.
Speedway SuperAmerica's (SSA) gasoline and distillate gross margin averaged approximately 10.29 cents per gallon during the second quarter of 2007, up from the 10.19 cents per gallon realized in the second quarter of 2006. SSA increased same store merchandise sales by 3.4 percent over the same quarter last year.
2nd Quarter Ended June 30 2007 2006 Key Refining, Marketing & Transportation Statistics Crude Oil Refined (mbpd) 1,072 1,038 Other Charge and Blend Stocks (mbpd) 208 207 Total Refinery Inputs (mbpd) 1,280 1,245 Refined Product Sales Volumes (mbpd) 1,426 1,461 Refining and Wholesale Marketing Gross Margin ($/gallon) $0.3925 $0.2978
Progress continued on the projected $3.2 billion Garyville, La., refinery expansion, which will increase the refinery's 245,000 bpd capacity to 425,000 bpd. Construction crews are clearing the site and driving piles that will be used to support the foundation for the equipment that will be constructed at this site over the next two years. When completed in late 2009, this expansion will enable the refinery to provide an additional 7.5 million gallons of clean transportation fuels to the market each day.
Construction also continues to progress on the Company's 110-million- gallon-per-year 50/50 joint venture ethanol facility in Greenville, Ohio. The project remains on target to be operational in the first quarter of 2008.
Also during the second quarter of 2007, the U.S. EPA awarded five refineries, including four of Marathon's refineries (Garyville, Canton, Ohio, St. Paul Park, Minn., and Texas City, Texas) with the Energy STAR award in recognition of their achievements in energy efficiency.
Integrated gas segment income was $12 million in the second quarter of 2007 compared to $17 million in the second quarter of 2006. Increased income from Equatorial Guinea LNG Holdings (EGHoldings), as a result of the first LNG deliveries from the Train 1 production facility during the second quarter of 2007, was offset by a decline in income from domestic integrated gas activities due to a planned turnaround at the Company's Alaska LNG facility, as well as increased research and development costs and increased income taxes.
2nd Quarter Ended June 30 2007 2006 Key Integrated Gas Statistics Net Sales LNG (metric tonnes per day) 1,997 1,106 Methanol (metric tonnes per day) 1,107 1,068
The EG LNG Train 1 production facility, in which Marathon holds a 60 percent interest, delivered its first cargo of LNG in May 2007, six months ahead of schedule. A total of three LNG cargoes were sold during the second quarter of 2007. As scheduled, Train 1 production was shutdown in June for a performance test, which confirmed the plant's capacity of 3.7 million metric tonnes per annum (mmtpa). The plant was shut down for commissioning maintenance in early July and has since returned processing levels to full capacity.
In January 2006, Marathon announced a share repurchase program, which was increased in January 2007 and May 2007, for total authorized repurchases of $3 billion. Through the second quarter of 2007, Marathon has repurchased approximately 57 million of its common shares, on a split adjusted basis, at a cost of $2.5 billion. This program may be changed based on the Company's financial condition or changes in market conditions and is subject to termination prior to completion.
On April 25, 2007, Marathon announced a two-for-one split of its common stock. The stock split was effected in the form of a stock dividend distributed on June 18, 2007, to stockholders of record at the close of business on May 23, 2007. Stockholders received one additional share of Marathon Oil Corporation common stock for each share of common stock held as of the close of business on the record date. Common share and per share information for all periods presented has been restated throughout this release.
Also on April 25, Marathon's board of directors declared an eight-cent per share, or 20 percent, increase in the first quarter dividend payable on Marathon Oil Corporation common stock, resulting in a new quarterly dividend rate on a post-split basis of 24 cents per share. Since July 2003, Marathon has increased the quarterly dividend five times resulting in a 109 percent increase during this period.
Marathon's board of directors has approved an increase in the capital, investment and exploration spending for 2007, excluding major acquisitions, from $4.2 billion to $4.7 billion. Total upstream spending is now projected at $2.6 billion, an increase of $400 million, while downstream spending is expected to increase by approximately $200 million to $1.7 billion. Integrated gas spending is now expected to be $200 million less than the original estimate of $331 million while capitalized interest and corporate spending will be approximately $100 million higher than originally anticipated.
2007 Estimate (In millions) Original Revised Change Capital, Investment and Exploration Spending**** Exploration & Production $2,231 $2,614 $383 Refining, Marketing & Transportation 1,464 1,666 202 Integrated Gas 331 122 (209) Corporate and Capitalized Interest 216 281 65 Total $4,242 $4,683 $441
**** See reconciliation of Capital, Investment and Exploration Spending to Capital Expenditures as would be reported under US generally accepted accounting principals.
The upstream increase is roughly evenly divided between an increase in the cost of the Alvheim/Vilje project and general inflationary pressures. The increase in the downstream spending is largely due to the acceleration of certain aspects of the Garyville refinery expansion, while the projected total for the Garyville expansion remains unchanged at $3.2 billion. The decrease in the Integrated Gas segment is mainly a result of EGHoldings, the entity that owns EG LNG Train 1, being accounted for under the equity method upon the start of production. Capitalized interest has increased as a result of the delay of the Alvheim/Vilje project.
Marathon has two long-term natural gas sales contracts in the United Kingdom that are accounted for as derivative instruments. Mark-to-market changes in the valuation of these contracts must be recognized in current period income. During the second quarter of 2007, the non-cash after-tax mark- to-market loss on these two long-term natural gas sales contracts related to Marathon's North Sea Brae natural gas production totaled $5 million. Due to the volatility in the fair value of these contracts, Marathon consistently excludes these non-cash gains and losses from net income adjusted for special items.
Marathon sold its Russian oil exploration and production businesses in June 2006. During the second quarter of 2007, adjustments to the sales price were substantially completed and an additional $8 million after-tax gain on the sale was recognized. This gain has been excluded from net income adjusted for special items.
In the second quarter of 2007, Marathon extinguished a portion of its outstanding debt at a premium and recognized a $1 million after-tax loss. This loss has been excluded from net income adjusted for special items.
In addition to net income determined in accordance with generally accepted accounting principles, Marathon has provided supplemental "net income adjusted for special items," a non-GAAP financial measure which facilitates comparisons to earnings forecasts prepared by stock analysts and other third parties. Such forecasts generally exclude the effects of items that are considered non-recurring, are difficult to predict or to measure in advance or that are not directly related to Marathon's ongoing operations. A reconciliation between GAAP net income and "net income adjusted for special items" is provided in a table on page 1 of this release.
"Net income adjusted for special items" should not be considered a substitute for net income as reported in accordance with GAAP. Management, as well as certain investors, uses "net income adjusted for special items" to evaluate Marathon's financial performance between periods. Management also uses "net income adjusted for special items" to compare Marathon's performance to certain competitors.
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