Marathon Oil Sees 69% Increase in 3Q Profit



Marathon Oil reported third quarter 2010 net income of $696 million, or $0.98 per diluted share. Net income in the third quarter of 2009 was $413 million, or $0.58 per diluted share. For the third quarter of 2010, net income adjusted for special items was $711 million, or $1.00 per diluted share, compared to net income adjusted for special items of $436 million, or $0.61 per diluted share, for the third quarter of 2009.

"Marathon had another strong quarter, with a continued focus on operational and financial performance across our business segments," said Clarence P. Cazalot Jr., Marathon's president and chief executive officer. "Production available for sale from Exploration and Production (E&P) increased 8 percent over the second quarter of 2010 and 3 percent over third quarter of 2009. These results reflect strong reliability at our major operations in Norway and Equatorial Guinea. Other segments also performed well, with operations at the Jackpine Mine in Canada starting to ramp-up during the quarter, our Garyville refinery continuing to perform at or above expectations, and the continuing strong same store sales growth at our Speedway SuperAmerica retail operations. 

"Given the overall strength of our Upstream portfolio, and in spite of a more rapid than expected production decline at Droshky, we remain confident in our ability to deliver our previously stated goal of 4 percent compound annual growth rate for Upstream production for the period 2008 - 2011," Cazalot said. "In addition, we're now forecasting 5 percent growth in Upstream production from 2011 to 2012. The majority of our expected 2011 and 2012 growth is driven by the advancement of existing oil projects, including the Bakken Shale play in North Dakota, Canadian oil sands mining and our first deepwater Angola development. In addition, we are expanding our opportunity set for growth beyond 2012 with expansions and entries into both resource and exploration plays. We've continued to grow our position in the Bakken and the liquids rich portion of the Anadarko Woodford, recently entered the Niobrara area in southeast Wyoming and northern Colorado, made a major entry into the Iraqi Kurdistan Region, and expanded our large acreage position in the developing shale gas play in Poland. These and other investments have positioned Marathon for continued profitable growth." 

Segment Results - Exploration and Production

The E&P segment income totaled $510 million in the third quarter of 2010, compared to $491 million in the year-ago quarter. The increase was primarily a result of higher liquid hydrocarbon and natural gas price realizations, and higher sales volumes. Included in segment income for the third quarter of 2010 were net pre-tax gains of $13 million related to derivative instruments. 

E&P sales volumes from continuing operations during the third quarter averaged 399,000 barrels of oil equivalent per day (boepd), compared to 366,000 boepd for the same period last year. E&P production available for sale in the third quarter of 2010 averaged 405,000 boepd, at the upper end of previous guidance, compared to 393,000 boepd in the same period last year. The increase from the prior year was primarily the result of the Gulf of Mexico Droshky development coming on production in July 2010 and strong reliability from Marathon's production facilities in Equatorial Guinea and Norway. The difference between production volumes available for sale and recorded sales volumes was due to the timing of international liftings. 

For the first nine months of 2010, both sales volumes from continuing operations and production available for sale averaged 382,000 boepd, compared to 396,000 boepd and 405,000 boepd respectively in the same period last year. Production decreases for the first nine months of 2010 were primarily a result of the sale of a portion of our Permian Basin assets in the second quarter of 2009, maintenance downtime in Equatorial Guinea and the U.K. in the first half of 2010, and normal production declines. 

Marathon estimates fourth quarter E&P production available for sale will be between 410,000 and 425,000 boepd, excluding the effect of any future acquisitions or dispositions. The Company expects its E&P full year 2010 production available for sale will be approximately 390,000 boepd, at the low end of its previous guidance. 

United States E&P reported income of $99 million for the third quarter of 2010, compared to $32 million in the third quarter of 2009. The increase was primarily related to an increase in sales volumes as well as liquid hydrocarbon and natural gas realizations. Depreciation, depletion and amortization (DD&A) expense increased $72 million primarily as a result of Droshky production. 

International E&P income was $411 million in the third quarter of 2010, compared to $459 million in the third quarter of 2009. This decrease in income was primarily related to increased income taxes, offset by an increase in liquid hydrocarbon realizations and sales volumes. During the third quarter of 2009, the Company began to credit certain foreign taxes that were previously deducted resulting in a lower effective tax rate. 

Exploration expenses were $59 million for the third quarter of 2010, compared to $55 million for the year prior.

The Company has acquired more than 120,000 net acres within the Niobrara play, a potentially new unconventional oil play in the DJ Basin of southeast Wyoming and northern Colorado, and expects to commence drilling there in 2011. Marathon has also increased its acreage holdings in the liquids rich portion of the Woodford Shale in the Anadarko Basin of Oklahoma to approximately 75,000 net acres. Existing production operations in this region will facilitate expanded drilling with initial wells currently in progress. 

In the North Dakota Bakken Shale play, the Company added a sixth operated rig during the third quarter, having begun the year with four rigs. Current net production amounts to approximately 14,000 boepd. For the first nine months of 2010, Bakken production averaged 12,000 boepd compared to 9,000 boepd for the same period last year. Marathon has also achieved a net increase in its acreage in North Dakota over the past 12 months, from 336,000 to 385,000 acres, including actions to high-grade the overall acreage position. 

Early in the third quarter, Marathon's deepwater Gulf of Mexico Droshky development [Green Canyon Block 244, 100 percent working interest (WI) and operator] began production and reached a peak of 45,000 net boepd. Three of the four wells are currently producing, with production from the fourth well delayed due to an equipment issue. Marathon plans to re-enter the fourth well in the first quarter of 2011 to make the necessary repairs. Production declines have been steeper than anticipated due to reservoir compartmentalization and lack of aquifer support. 

The Alvheim floating, production, storage and offloading (FPSO) vessel in Norway achieved strong operational performance and reliability, with production available for sale averaging 81,000 net boepd for the first nine months of 2010, compared to 72,000 net boepd for the same period last year. Marathon has 65 percent operated interests in Alvheim and Volund and a 47 percent outside-operated interest in Vilje. 

In October, Marathon announced it had acquired a position in four exploration blocks in the Iraqi Kurdistan Region for a total entry cost of $156 million plus a pro rata share of historic costs estimated to be $20 million. The transaction provides Marathon with access to a total of approximately 295,000 net acres. The Company holds an 80 percent ownership in two open blocks northeast of Erbil, Harir and Safen, and the Kurdistan Regional Government holds a fully carried 20 percent interest. Additionally, Marathon has been assigned working interests in two blocks north-northwest of Erbil, Atrush (20 percent WI) and Sarsang (25 percent WI). Marathon has committed to a seismic program and to drilling one well on each of the two open blocks during the initial three-year exploration period. The Atrush and Sarsang blocks each have a well currently drilling. 

Marathon added an eleventh onshore exploration license with shale gas potential in Poland in September, increasing its total acreage position to approximately 2.3 million net acres. The Company is currently conducting geologic studies to be followed by the acquisition of seismic in 2011, with plans to initiate drilling by the fourth quarter of 2011. Marathon has a 100 percent interest and is operator of all 11 blocks. 

In Libya, Phase II of the Faregh project began commissioning during the third quarter and first production is anticipated later in November. Marathon has continued its successful exploration program in Libya with six discoveries during 2010. 

In Indonesia, Marathon began its deepwater exploration drilling program in the Pasangkayu block (70 percent WI and operator) in August, and is currently targeting the Bravo and Romeo prospects. The Bravo exploration well is expected to reach total depth in the fourth quarter while the Romeo prospect is expected to be reached during the first half of 2011. 

Oil Sands Mining

The Oil Sands Mining (OSM) segment reported income of $18 million for the third quarter of 2010, compared to $25 million in the third quarter of 2009. The decrease was primarily the result of unrealized losses associated with crude oil derivative instruments, which amounted to a net pre-tax loss of $8 million in the third quarter of 2010 resulting from a $15 million realized gain and a $23 million unrealized loss. The impact of derivatives on the 2009 period was not significant. 

Marathon's third quarter 2010 net synthetic crude production (upgraded bitumen excluding blendstocks) from the Athabasca Oil Sands Project (AOSP) mining operation was flat year over year at 27,000 barrels per day (bpd), but above previous guidance for the quarter. 

For the first nine months of 2010, net synthetic crude production averaged 21,000 bpd, compared to 27,000 bpd for the same period last year. The decrease was largely due to AOSP turnaround activities that began March 22, 2010 and halted production until a staged resumption of operations in May. 

Marathon expects fourth quarter net synthetic crude production will be between 28,000 and 34,000 bpd, with anticipated full-year net synthetic crude production estimated to be approximately 23,000 bpd.

In the third quarter of 2010, the AOSP Expansion 1 project began a phased start-up of the Jackpine Mine operations, which will add capacity of 100,000 gross bpd to the existing Muskeg River Mine capacity of 155,000 bpd. The expanded upgrader operations are on schedule for a phased start-up beginning in late 2010 and extending into early 2011. Marathon holds a 20 percent working interest in the AOSP. 

The AOSP operator announced that it has identified up to 85,000 gross bpd of debottlenecking potential at the existing and soon-to-be expanded AOSP assets that is planned to be implemented in the future.

Total segment income was $854 million in the third quarter of 2010, compared to $687 million in the third quarter of 2009.


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