Marathon Oil Reports Third-Quarter 2004 Results



Marathon Oil Corporation (NYSE: MRO) reported third-quarter 2004 net income of $222 million, or $0.64 per diluted share. Net income in the third quarter 2003 was $281 million, or $0.90 per diluted share. For the third quarter of 2004, net income adjusted for special items was $296 million, or $0.85 per diluted share. For the third quarter of 2003, net income adjusted for special items was $293 million, or $0.94 per diluted share.



     Earnings Highlights

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

    Net income adjusted for special items*              $296           $293
    Adjustments for special items (After tax):
      Loss on U.K. long-term gas contracts                74             12

    Net income                                          $222           $281

    Net income adjusted for special items* - per
     diluted share                                     $0.85          $0.94
    Net income - per diluted share                     $0.64          $0.90
    Revenues and other income                        $12,316        $10,328
    Weighted average shares, in thousands - diluted  346,969        310,404

     


"The third quarter was marked by record high crude oil prices and strong refining and wholesale marketing margins. While these market conditions were favorable, we were not able to fully capture the value of this high crude oil and natural gas price environment due to a number of factors, including the effect of hurricanes and unplanned downtime on our oil and gas production during the quarter," said Clarence P. Cazalot Jr., Marathon president and CEO.

"We continue to make progress in our efforts to focus and execute on our key strategies and projects. Most notably, we recently achieved a significant milestone in Norway with the approval of the plan of development and operation (PDO) for our Alvheim project. In addition, we progressed our integrated gas strategy with a groundbreaking ceremony for the Equatorial Guinea liquefied natural gas (LNG) facility and the signing of a long-term North American LNG supply agreement associated with our delivery rights at Elba Island, Georgia. The progress we have made on these and other key upstream and downstream projects is positioning us to continue to deliver long-term value growth."

Marathon's third-quarter 2004 net income adjusted for special items was slightly higher than in the comparable period of 2003, primarily as a result of higher crude oil and natural gas prices. Partially offsetting these higher prices were reduced oil and gas production levels due to divestitures, normal field declines and downtime related to hurricanes and maintenance. These results exclude the non-cash mark-to-market loss regarding two long-term gas contracts in the U.K. On a per-share basis, net income adjusted for special items decreased from the comparable period during 2003 due to the issuance of 34.5 million shares of common stock during the first quarter of this year. Marathon intends to use the net proceeds from the issuance of these shares to help retire debt it expects to assume in connection with its planned acquisition of Ashland Inc.'s minority interest in Marathon Ashland Petroleum LLC (MAP) or to retire currently outstanding long-term debt.

Exploration and Production
Earlier this month, Marathon and its Alvheim project partners received approval from the Norwegian Ministry of Petroleum and Energy for the companies' PDO of the Alvheim field, located on the Norwegian Continental Shelf. The Alvheim development is expected to begin production in early 2007. Marathon holds a 65 percent interest in Alvheim and serves as operator. Recently, the Alvheim group reached agreement to tie-in the nearby Vilje discovery (formerly known as Klegg), subject to the approval of a Vilje PDO. Marathon holds a 46.9 percent interest in Vilje. Production from a combined Alvheim/Vilje development is expected to ramp up to more than 50,000 net barrels per day (bpd) during 2007. Also, the Hamsun discovery, announced earlier this year, is being examined as another possible tie-back to the Alvheim development. The combined Alvheim/Vilje development is estimated to contain resources of approximately 200-250 million gross barrels of oil equivalent. Marathon expects to have all the major contracts awarded by the beginning of 2005.

In Ireland, the An Bord Pleanala has upheld the Mayo County Council's decision to grant planning permission for the proposed natural gas terminal at Bellanaboy Bridge, County Mayo, which is to be built to bring gas from the Corrib field ashore. This decision represents a major step forward for the Corrib gas project, in which Marathon holds an 18.5 percent interest. The Corrib field is located 47 miles off the West Coast of Ireland in 1,145 feet of water.

In Equatorial Guinea, production from Marathon's Phase 2A condensate expansion project is continuing to ramp up, with current liquids production of approximately 44,000 gross bpd. Phase 2A will increase total liquids production to approximately 57,000 gross bpd (32,000 bpd net to Marathon). The Phase 2B liquefied petroleum gas (LPG) expansion project is on schedule for start-up in the second quarter of 2005. To date, all major equipment has been installed and 90 percent of construction is complete. Upon completion of Phase 2B, gross liquids production will increase to approximately 79,000 bpd (44,500 bpd net to Marathon).

In addition to production activities in Equatorial Guinea, Marathon currently is drilling an exploration well on the Gardenia Prospect, which is located on the Alba Block (Sub Area B). Once the Gardenia well reaches total depth, the drilling rig will move to the previously announced Deep Luba discovery to perform additional well testing. Marathon is operator and holds a 63 percent working interest in both the Gardenia and the Deep Luba wells.

Offshore Angola, Marathon and its partners have completed drilling the Cola prospect on Block 32, in which the company holds a 30 percent interest. The results of the Cola well are expected to be announced later this year. Marathon currently is participating in two wells offshore Angola, the Palas well on Block 31, in which the company holds a 10 percent interest, and the Gengibre well on Block 32. One additional exploration well is expected to be spud on Block 31 during 2004.

Refining, Marketing and Transportation
In the refining, marketing and transportation (downstream) segment, MAP remained focused on maintaining its strong position in the U.S. downstream business, including increasing retail merchandise sales.

MAP was challenged during the third quarter by the dramatic increase in crude oil prices. The approximate 35 percent increase in crude prices resulted in a significant tightening of margins and a deceleration in consumer demand for motor fuels.

Speedway SuperAmerica LLC continued to post strong same store merchandise sales results during the quarter despite reduced demand for motor fuels. Same store merchandise sales were up approximately 10 percent during the quarter when compared to the same period last year.

Integrated Gas
On July 1, Marathon and its partner, GEPetrol, the National Oil Company of Equatorial Guinea, held a groundbreaking ceremony for the construction of an LNG project on Bioko Island that will deliver a contracted offtake of 3.4 million metric tons per year. Marathon and GEPetrol continue to progress construction, including ordering all key equipment, nearing completion of site preparation and constructing tank foundations. The $1.4 billion project, in which Marathon currently holds a 75 percent interest, expects to ship first cargos of LNG beginning in late 2007. This project will 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/mmbtu at the loading flange of the LNG plant. Marathon also is seeking additional natural gas supply in the area to extend the life and annual output of this plant and possibly lead to the development of a second LNG train.

Earlier this month, Marathon signed an agreement with BP Energy Company under which BP will supply Marathon with 58 billion cubic feet (bcf) of natural gas per year, as LNG, for a minimum period of five years beginning midyear 2005. Marathon will take delivery of the LNG at the Elba Island, Georgia, LNG regasification terminal, where the company holds rights to deliver and sell up to 58 bcf of natural gas per year. Pricing of the LNG will be linked to the Henry Hub Index. This supply agreement with BP enables Marathon to capture the full value of the company's rights at Elba Island during the period of this agreement, while affording Marathon the flexibility to commercialize other stranded gas resources in the longer term. Marathon is continuing to actively seek additional cargos prior to the start of deliveries from BP.

Status of Marathon's Acquisition of Ashland's Interest in MAP
The acquisition of Ashland's 38 percent interest in MAP continues to move forward. The transaction is subject to several previously disclosed conditions, including approval by Ashland's shareholders, consent from Ashland's public debt holders and receipt of a favorable private letter ruling from the Internal Revenue Service (IRS) with respect to the tax treatment.

Marathon and Ashland have filed registration statements and proxy materials with the U.S. Securities and Exchange Commission and are responding to comments. In addition, the companies submitted a request for a private letter ruling to the IRS on the tax-free status of the proposed transaction. Marathon and Ashland continue to discuss the complex tax issues related to this transaction with the IRS. The companies have not resolved all issues with the IRS and are exploring alternatives for the unresolved issues.

Marathon continues to believe that the transaction will close. With respect to the timing of closing, it is possible that the transaction will close by year end, but it is more likely that the transaction will close in the first quarter of 2005.

Segment Results
Total segment income was $631 million in the third quarter of 2004, compared with $720 million in the third quarter of 2003. Included in segment income are $129 million and $21 million respectively of non-cash mark-to- market derivative losses related to long-term gas sales contracts in the U.K. Segment income excluding these losses would have been $760 million in the third quarter of 2004 and $741 million in the third quarter of 2003.

Exploration and Production
Worldwide upstream segment income totaled $222 million in the third quarter of 2004, compared to $348 million in the third quarter of 2003. United States upstream income was $244 million in third quarter 2004, compared to $301 million in the third quarter of 2003. The decrease was due to lower liquid hydrocarbon and natural gas volumes primarily resulting from base decline, weather related downtime in the Gulf of Mexico and the sale of the Yates field partially offset by higher liquid hydrocarbon and natural gas prices. Further, derivative losses totaled $58 million in the third quarter of 2004, compared to $9 million in the third quarter of 2003.

International upstream income (loss) was $(22) million in the third quarter of 2004, compared to $47 million in third quarter 2003. The decrease primarily was a result of significantly higher non-cash derivative losses and higher exploration expense, partially offset by higher liquid hydrocarbon and natural gas prices. Derivative losses totaled $146 million in the third quarter of 2004, compared to $26 million in the third quarter of 2003. Derivatives included non-cash mark-to-market losses of $129 million in the third quarter of 2004, compared to a $21 million loss in the third quarter of 2003, related to two long-term gas contracts in the U.K.

Marathon estimates its fourth-quarter 2004 production will average approximately 325,000 barrels of oil equivalent per day (boepd) and approximately 335,000 boepd for the full year 2004, excluding the effect of any acquisitions or dispositions, compared to the previous full year 2004 estimate of approximately 360,000 boepd. This reduction is primarily due to hurricane impacts in the Gulf of Mexico and delays associated with Marathon's liquids expansion projects in Equatorial Guinea. Marathon is assessing damage to the Petronius platform in the Gulf of Mexico due to Hurricane Ivan.

Refining, Marketing and Transportation
Downstream segment income was $391 million in the third quarter of 2004 compared to $394 million in the third quarter of 2003. Although crude oil prices were high in the third quarter of 2004, refining and wholesale marketing margins were relatively strong. Margins were strong initially due to concerns about the adequacy of gasoline supplies during the prime driving season and later in the quarter due to concerns about the adequacy of distillate supplies heading into winter. In addition, since approximately 60 percent of MAP's crude oil inputs consist of sour crudes, the widening in the price differential between sweet and sour crude oil in the third quarter 2004 compared to the third quarter 2003 positively impacted MAP's refining and wholesale marketing margin. However, due to the dramatic increase in crude oil prices during the quarter, wholesale margins, especially on non-gasoline and non-distillate refined products, were compressed compared to the third quarter 2003 partially offsetting the positive crude oil differentials and WTI 3-2-1 crack spreads impact on third-quarter results. This is primarily due to the fact that the prices for other refined products do not change as quickly or as frequently as spot gasoline and distillate prices. Operationally MAP's refining system ran very well during the quarter averaging 977,000 barrels of crude oil throughput per day or 103 percent of average system capacity. The 2003 third quarter also included $34 million of gains from the sale of certain interests in refined product pipelines.

Integrated Gas
Integrated gas segment income was $18 million in the third quarter of 2004 compared with segment loss of $22 million in the third quarter of 2003. The increase was primarily the result of higher margins from gas marketing activities, including recognized changes in the fair value of derivatives used to support those activities, higher income from LNG operations, and increased earnings from Marathon's equity investment in the Atlantic Methanol Production Company LLC (AMPCO) methanol plant in Equatorial Guinea. Methanol plant operations in 2004 have been operating at a 94 percent on-stream factor and prices have remained strong in 2004 averaging nearly $221 per ton through September 2004. Also in the third quarter 2003, Marathon recorded an impairment charge of $22 million on an equity method investment.

Unallocated Administrative Expenses
Unallocated administrative expenses in the third quarter were higher due to a $24 million non-cash charge related to equity based compensation, primarily as a result of an increase in Marathon's common stock price during the quarter, and transition 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. The third quarter of 2004 also included net settlement and curtailment losses on employee benefit plans of $10 million primarily resulting from workforce reductions related to outsourcing and business transformation efforts.
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