Marathon Oil Reports Second-Quarter 2004 Results

Marathon Oil Corporation (NYSE: MRO) reported second quarter 2004 net income of $352 million, or $1.02 per diluted share. Net income in the second quarter 2003 was $248 million, or $0.80 per diluted share. No special items were incurred in the second quarter 2004. For the second quarter of 2003, net income adjusted for special items was $263 million, or $0.85 per diluted share. Income from continuing operations in the second quarter 2004 increased $113 million or 48 percent over the second quarter 2003.

     Earnings Highlights
                                                  Quarter ended June 30
     (Dollars in millions, except per
      diluted share data)                         2004             2003

    Income from continuing operations              $348             $235
    Discontinued operations                           4               13

    Net income                                      352              248
    Adjustments for special items (After tax):
      Gain on asset dispositions                    ---               62
      Loss on joint venture dissolution             ---              (77)

    Net income adjusted for special items*         $352             $263

    Income from continuing operations - per
     diluted share                                $1.01            $0.76
    Net income - per diluted share                $1.02            $0.80
    Net income adjusted for special items* -
     per diluted share                            $1.02            $0.85
    Revenues and other income                   $12,592           $9,706

Second-Quarter Key Events

  • Advanced Integrated Gas Strategy
  • Equatorial Guinea liquefied natural gas (LNG) project reaches final investment decision and construction is underway
  • Delivered two LNG cargos under terms of Elba Island LNG terminal regas agreement
  • Realized Continued Exploration Success
  • Two significant discoveries out of three key wells drilled
  • Strengthened Core Areas
  • On track to sanction Norwegian development by year-end
  • Marathon Ashland Petroleum LLC (MAP) Achieves Strong Operational Performance
  • Processed record volumes of crude oil and total throughputs at refineries to meet strong consumer demand
  • Continued strong same store retail merchandise sales growth at Speedway SuperAmerica LLC
  • Progressed Proposed Acquisition of Ashland's Interest in MAP
  • Received notice of early termination of waiting period under the Hart-Scott-Rodino Act

  • "The second quarter was marked by several key achievements. Most notably, we reached final investment decision on the Equatorial Guinea LNG project, the cornerstone of our integrated gas strategy. Construction is already underway on this project, which is on track for first LNG shipments in late 2007," said Marathon Oil Corporation President and CEO Clarence P. Cazalot Jr. "Two significant offshore discoveries also were added to our growing list of exploration successes, while in the downstream segment, MAP delivered strong results during the quarter and logged record refinery throughputs helping to meet increased consumer demand. MAP's record setting operational performance coupled with the results from our upstream operations continues to demonstrate the value that being a fully integrated company brings to our shareholders."

    Overall, Marathon's second-quarter 2004 results were higher than those of the comparable period of 2003 as a result of strong downstream performance and higher natural gas and oil prices. These factors were partially offset by a significant mark-to-market loss on expected future sales under two long-term gas contracts in the U.K., lower production primarily due to asset sales, increased administrative expenses associated with a non-cash charge related to equity-based compensation granted under approved compensation plans and up- front costs related to outsourcing activities. Marathon recently finalized outsourcing of certain accounting and information technology functions to capture industry-leading best practices, efficiencies and technology beyond that which the company could provide on its own.

    Advanced Integrated Gas Strategy
    During the quarter, Marathon; the Government of Equatorial Guinea; and Compania Nacional de Petroleos de Guinea Ecuatorial (GEPetrol), the National Oil Company of Equatorial Guinea; announced that they finalized all of the necessary agreements for the companies' Equatorial Guinea LNG project. This marked the final investment decision for this project, which is expected to begin shipping first cargoes of LNG in late 2007. Preliminary construction work on the plant began in December 2003 and is progressing on schedule. This project is expected to be one of the lowest cost LNG operations in the Atlantic basin with an all-in LNG operating, capital and feedstock cost of approximately $1 per million British thermal units (mmbtu) at the loading flange of the LNG plant. Efforts are underway to expand the utilization of this LNG facility above and beyond the contract to supply 3.4 million metric tons per year to BG Gas Marketing Ltd. for 17 years. Marathon also is seeking additional natural gas supply in the area that could lead to the development of a second LNG train.

    Marathon delivered two LNG cargos as part of the company's Elba Island, Georgia, LNG regasification terminal agreement during the quarter. Under the terms of the agreement, Marathon can supply up to 58 billion cubic feet of natural gas (as LNG) per year, for up to 22 years, providing the company with key access to U.S. LNG regasification capacity.

    Exploration Success
    During the second quarter, Marathon continued its exploration success with discoveries in Angola and Equatorial Guinea. Marathon has announced five significant discoveries out of six key exploratory wells drilled during the first half of the year.

    Offshore Angola, Marathon participated in the fourth oil discovery on Block 31. The Venus-1 discovery well announced in early June was drilled to a total depth of 14,784 feet and encountered three pay intervals. The Venus discovery, along with the three nearby discoveries, moves closer the commercial development of the northeast portion of Block 31, in which Marathon holds a 10 percent interest. Currently, Marathon is drilling the Cola prospect on Block 32, in which the company holds a 30 percent interest, and plans to spud one to two additional wells offshore Angola during 2004.

    Offshore Equatorial Guinea, Marathon participated in a natural gas and condensate discovery on the Alba Block (Sub Area A). The Deep Luba well was drilled to a total measured depth of 15,497 feet from the Alba field production platform and encountered 270 feet of net gas/condensate pay. Marathon expects to continue testing the discovery during the second half of 2004. This discovery reinforces the additional resource potential of the Alba field, in which Marathon holds a 63 percent interest. Later this year, the company will spud the Gardenia prospect on the Alba Block (Sub Area B).

    Offshore Nova Scotia on the Marathon-operated Annapolis Block, the Crimson well is drilling and expected to reach total depth late in the third quarter. Marathon holds a 30 percent interest in the Annapolis Block.

    In the Gulf of Mexico, the Kansas #3 exploration well, in which Marathon holds a 46 percent interest, recently completed drilling and was plugged and abandoned. Marathon and its partners are analyzing well data to determine next steps.

    Strengthened Core Areas
    During the second quarter, Marathon and its Alvheim partners continued to move forward with development plans for the area. In April, the Alvheim group submitted an impact assessment to the Norwegian regulatory authorities, and the group intends to submit a plan of development and operation (PDO) by early August. Approval of the PDO is anticipated during the fourth quarter and first production is expected in 2007. Marathon is the Alvheim area operator, holding a 65 percent working interest. Recently, the Alvheim group reached agreement to tie-in the nearby Klegg discovery, in which Marathon holds a 46.9 percent interest, subject to the approval of a Klegg PDO. Production from a combined Alvheim/Klegg development is expected to ramp up to more than 50,000 net barrels per day (bpd) during 2007. Also, the Hamsun discovery, announced early this year, is being examined as another possible tie-back to the Alvheim development.

    MAP Achieves Strong Operational Performance
    In the refining, marketing and transportation (downstream) segment, MAP remained focused on maintaining its top quartile position in the U.S. downstream business and delivered record refinery throughputs and increased retail merchandise sales.

    With the completion of a significant amount of planned refinery maintenance and the Catlettsburg, Kentucky, repositioning project during the first quarter of this year, MAP was able to help meet the strong market demand for transportation fuels during the second quarter resulting in the second best quarterly earnings in MAP's six-year history. MAP set records for total refinery throughput, as well as crude oil throughput during the quarter. During the quarter, MAP refineries crude oil throughput totaled approximately 1.013 million bpd. MAP expects its average crude oil throughput for the total year to be at or above historic levels.

    In the retail segment, Speedway SuperAmerica LLC posted strong same store merchandise sales results during the quarter, up approximately 12 percent when compared to the same period last year.

    Status of Marathon's Acquisition of Ashland's Interest in MAP
    During the quarter, the Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Act for the proposed acquisition of Ashland Inc.'s minority interest in MAP. Also, Marathon and Ashland submitted a request for a letter ruling to the Internal Revenue Service (IRS) on the tax-free status of the proposed acquisition. The company is on schedule to complete the transaction by year-end, subject to the satisfaction of the remaining conditions including the receipt of a favorable tax ruling from the IRS and Ashland shareholder approval of the transaction.

    Segment Results
    Total segment income was $912 million in second quarter 2004, compared with $597 million in second quarter 2003, an increase of nearly 53 percent.

    Exploration and Production
    Worldwide upstream segment income totaled $343 million in second quarter 2004, compared to $312 million in second quarter 2003.

    United States upstream income was $285 million in second quarter 2004, compared to $244 million in second quarter 2003. The increase was primarily due to higher liquid hydrocarbon and natural gas prices partially offset by lower liquid hydrocarbon volumes primarily resulting from the sale of the Yates field. Derivative losses totaled $23 million in second quarter 2004, compared to $21 million in second quarter 2003.

    International upstream income was $58 million in second quarter 2004, compared to $68 million in second quarter 2003. The decrease is primarily a result of significantly higher non-cash mark-to-market derivative losses, partially offset by higher liquid hydrocarbon prices and volumes and higher natural gas prices. The higher liquid hydrocarbon volumes are mainly attributable to the acquisition of Khanty Mansiysk Oil Corporation (KMOC) in Russia. Derivative losses totaled $104 million in the second quarter of 2004, compared to $11 million in the second quarter of 2003. Derivatives included non-cash mark-to-market losses of $95 million in the second quarter of 2004, compared to a $10 million loss in the second quarter of 2003, related to expected future sales under two long-term gas contracts in the U.K. For additional information on U.K. gas contracts.

    Marathon estimates its 2004 production will average approximately 360,000 barrels of oil equivalent per day (boepd), excluding the effect of any acquisitions or dispositions, compared to previous estimates of approximately 365,000 boepd. This reduction is primarily a result of delays associated with the company's liquids expansion projects in Equatorial Guinea. The Phase 2A offshore development and condensate expansion project will begin increasing condensate production in July and is expected to reach full capacity of 54,000 bpd in the third quarter of 2004. The Phase 2B liquefied petroleum gas expansion project is expected to start-up in the first half of 2005. The estimated combined peak liquids production rate of 79,000 bpd (44,500 bpd net to Marathon) is expected to be achieved in the first half of 2005.

    Refining, Marketing and Transportation
    Downstream segment income was $577 million in second quarter 2004 compared to $258 million in second quarter 2003 primarily reflecting a higher refining and wholesale marketing margin due initially to the market's concerns about refiners' ability to supply the new Tier 2 low sulfur gasolines which were required effective January 1, 2004 and, more recently, due to concerns about the adequacy of distillate supplies heading into winter, resulting in a strong 3-2-1 crack spread in both of MAP's markets during the second quarter 2004.

    Integrated Gas
    Integrated gas segment loss was $8 million in second quarter 2004 compared with segment income of $27 million in second quarter 2003. The decrease was primarily the result of $18 million of gross start-up costs associated with the LNG project in Equatorial Guinea and lower income due to reduced gas marketing activities, including mark-to-market changes in derivatives used to support those activities. These were partially offset by increased earnings from Marathon's equity investment in the Atlantic Methanol Production Company LLC (AMPCO) methanol plant in Equatorial Guinea. Plant operations in 2004 have been operating at a 93 percent on-stream factor and prices have remained strong in 2004 averaging nearly $213 per ton through June 2004.

    Unallocated Administrative Expenses
    Unallocated administrative expenses in the second quarter were higher than expected due to a $24 million non-cash charge related to equity based compensation, primarily as a result of an increase of more than $4.00 per share in Marathon's stock price during the quarter, and up-front costs related to outsourcing activities. These outsourcing activities are a part of Marathon's and MAP's ongoing business transformation efforts to make the companies more efficient, improve business focus and reduce costs beginning in 2005.

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