Earnings Highlights Quarter ended March 31 (Dollars in millions, except per diluted share data) 2005 2004 Net income adjusted for special items* $357 $250 Adjustments for special items (After tax): Gain (loss) on U.K. long-term gas contracts (33) 8 Net income $324 $258 Net income adjusted for special items* - per diluted share $1.02 $0.80 Net income - per diluted share $0.93 $0.83 Revenues and other income $13,010 $10,693 Weighted average shares, in thousands - diluted 348,645 311,685 * See page 5 for a discussion of net income adjusted for special items. Key First Quarter Events * Strengthened Exploration and Production Business - Petronius back online and at full pre-Hurricane Ivan production rates - Equatorial Guinea condensate expansion project ramped up to full production - Equatorial Guinea liquefied petroleum gas (LPG) expansion project commissioning continues on track for mid-year start-up - Alvheim development offshore Norway on schedule with all remaining major contracts awarded during first quarter - Vilje Plan of Development and Operation (PDO) approved by Norwegian Government - Continued to deliver exploration success with three discoveries * Strengthened MAP Assets - Achieved record first quarter refinery throughput rates - Continued industry leading growth of same store merchandise sales - Recently announced agreement to purchase Ft. Lauderdale, Florida, light products terminal will enhance MAP's refined products distribution network * Advanced Integrated Gas Strategy - Equatorial Guinea liquefied natural gas (LNG) project construction continues on schedule - Integrated Technology Project at Port of Catoosa, Oklahoma, gas-to-liquids (GTL) demonstration plant moving forward to further develop gas commercialization technology
"Our first quarter results were positively influenced by a number of key
factors including continued high oil and natural gas prices, solid production
from our upstream business, record refinery throughputs, and a strong refining
and wholesale marketing margin," said Clarence P. Cazalot, Jr., Marathon
president and CEO. "In addition, each of the business segments within
Marathon's fully integrated structure continued to make progress in executing
our strategies that are delivering sustainable value growth."
Exploration and Production
Upstream segment income totaled $555 million in first quarter 2005, compared to $464 million in first quarter 2004. The increase was primarily due to higher liquid hydrocarbon and natural gas prices, partially offset by lower liquid hydrocarbon and natural gas sales volumes in the current quarter.
United States upstream income was $305 million in first quarter 2005, compared to $306 million in first quarter 2004. Higher liquid hydrocarbon and natural gas prices and business interruption insurance recoveries of $46 million related to Hurricane Ivan storm-related damage claims were offset by lower liquid hydrocarbon and natural gas sales volumes. These lower volumes resulted primarily from storm-related downtime at Petronius and Camden Hills in the Gulf of Mexico and natural field declines.
International upstream income was $250 million in first quarter 2005, compared to $158 million in first quarter 2004. The increase is primarily a result of higher liquid hydrocarbon and natural gas prices.
Marathon continues to estimate its 2005 production available for sale will average between 325,000 and 350,000 barrels of oil equivalent per day, excluding the effect of any acquisitions or dispositions. Reported volumes are based upon sales volumes which may vary from production available for sale primarily due to the timing of liftings of certain of the company's international liquid hydrocarbon volumes.
1st Quarter Ended March 31 2005 2004 Key Production Statistics Sales United States - Liquids (mbpd) 71.6 91.8 United States - Gas (mmcfpd) 570.3 701.4 International - Liquids (mbpd) 91.5 92.1 International - Gas (mmcfpd) 455.2 434.9 Total Sales (mboepd) 334.0 373.3
A key contributor to Marathon's first quarter upstream performance was strong overall production available for sale during the quarter which, at an average of approximately 347,000 boepd, slightly exceeded previous guidance of between 330,000 and 340,000 boepd. Reported crude oil and natural gas sales during the quarter averaged 334,000 boepd. This period's variance between production available for sale and reported sales volumes is primarily attributable to the timing of liquid hydrocarbon liftings from the company's operations in Gabon and the UK.
Also during the first quarter, Marathon's production operations benefited from the restart of the Petronius platform in the Gulf of Mexico following extensive repairs necessitated by damage caused by Hurricane Ivan. Petronius came back online in early March, quickly ramping up to pre-Ivan levels of approximately 25,000 net boepd.
In addition, the company's condensate expansion project in Equatorial Guinea ramped up to full production, with total liquids production averaging approximately 47,000 gross barrels per day (bpd) for the quarter (26,500 net to Marathon), but exiting March at a rate of approximately 62,000 gross bpd (35,000 net to Marathon). Commissioning of the Equatorial Guinea LPG expansion project continued during the first quarter with start-up on schedule for mid-year. With the LPG expansion at full production, total Equatorial Guinea liquids production is expected to exceed 80,000 gross bpd.
Sales volumes in Russia also improved during the quarter averaging approximately 24,000 bpd compared to approximately 16,000 bpd during the same period in 2004. The increase is a result of the East Kamennoye development program.
In Norway, Marathon made progress in advancing the Alvheim development with the award of the two remaining major contracts for conversion of the MST Odin to a floating production, storage and offloading (FPSO) vessel. At this time, all the major contracts for the Alvheim development have been placed. MST Odin hull modifications have been initiated and development drilling will commence in the third quarter of 2005. Project development is on schedule with first production expected in 2007. In addition, the nearby Vilje field received PDO approval from the Norwegian Government. Vilje will be tied back to Alvheim and will also begin producing in 2007.
Marathon also announced two discoveries in Angola during the quarter. The Palas-1 and Ceres-1 discoveries are both located on Block 31 offshore Angola and mark the fifth and sixth deepwater discoveries the company has announced on the Block. The Palas-1 and Ceres-1 wells are located approximately 37 and 20 miles southeast, respectively, of the planned Northeast Development Area and provide the potential for a second development area on Block 31. In addition, Marathon is currently participating in a well on the Juno Prospect. Marathon holds a 10 percent interest in Block 31.
In the Gulf of Mexico, Marathon participated in the Stones well, in which it holds a 15% working interest, located on Walker Ridge Block 508. The well has reached total depth and encountered hydrocarbons in the Lower Tertiary section. Marathon and its partners are currently analyzing data from the well to determine next steps.
Refining, Marketing and Transportation
Downstream segment income was $210 million in first quarter 2005 versus segment income of $49 million in first quarter 2004. The improvement was primarily due to a higher refining and wholesale marketing margin and increased refinery throughputs. Marathon Ashland Petroleum LLC (MAP) benefited from wider sweet/sour crude differentials in general and was able to run more sour crudes during the period, taking advantage of the substantial discounts on these feedstocks. In addition, as a result of a relatively light maintenance schedule during the first quarter, MAP crude oil throughput was 17 percent higher than the same 2004 period. During the quarter MAP achieved record first quarter crude runs that averaged 922,200 bpd, with total throughput averaging a first quarter record of 1,093,600 bpd. This strong operating performance positioned the company to help meet rising demand for motor fuels, while capturing the benefits of the strong refining margins in the Midwest and Gulf Coast during the quarter.
During the first quarter, MAP recorded a $73 million charge for crack spread derivative contracts, approximately $61 million of which related to mark-to-market losses on derivative contracts primarily for #2 high sulfur fuel oil crack spreads that expire over the remainder of 2005.
1st Quarter Ended March 31 2005 2004 Key Refining, Marketing & Transportation Statistics Crude Oil Refined (mbpd) 922.2 788.6 Other Charge and Blend Stocks (mbpd) 171.4 196.2 Total Refinery Inputs (mbpd) 1,093.6 984.8 Refined Product Sales Volumes (mbpd) 1,369.7 1,307.3 Refining and Wholesale Marketing Margin ($/gallon) $0.0685 $0.0344
During the quarter, Speedway SuperAmerica LLC (SSA) continued to realize strong same store merchandise sales with an increase of approximately 11.5 percent. SSA also increased same store gasoline sales volume by 1.2 percent when compared to the first quarter of 2004.
MAP continued to make progress on its Detroit refinery expansion project during the quarter. This $300 million project, which remains on schedule for completion during the fourth quarter of this year, will increase the refinery's crude processing capacity from 74,000 bpd to 100,000 bpd and enable it to meet the Federal Tier II low-sulfur fuels regulations which become fully effective in 2006.
MAP also announced an agreement with Motiva Enterprises LLC to purchase a terminal in Ft. Lauderdale, Florida. The 388,000 barrel light product terminal will increase MAP's storage capacity at Ft. Lauderdale by more than 70 percent, enabling MAP to better serve the growing Florida market, improve logistics, and add flexibility to its product sourcing. The transaction is expected to close in June 2005.
Integrated gas segment income was $7 million in first quarter 2005 compared with $15 million in first quarter 2004. The decrease was due to mark-to-market changes in the value of derivatives used to support gas marketing activities, partially offset by increased earnings from Marathon's equity investment in the AMPCO methanol plant in Equatorial Guinea. During the first quarter, the methanol plant operated at a 94 percent on-stream factor and prices have remained strong averaging nearly $260 per ton during the quarter.
Marathon's integrated gas activities during the quarter were marked by continued progress in constructing the company's LNG project in Equatorial Guinea. Project expenditures totaled approximately $675 million as of March 31, 2005. Construction remains on schedule with first shipments of LNG expected in late 2007.
Also during the quarter, Marathon took delivery of two cargos of LNG under its long term delivery rights at the Elba Island (Georgia) regasification terminal. In the second half of 2005, the company will begin taking delivery of LNG at Elba Island under terms of a supply agreement reached with BP Energy Company last year under which BP will supply Marathon with 58 billion cubic feet of natural gas per year, as LNG, for a minimum period of five years.
Following the successful demonstration of GTL technology at Marathon's and Syntroleum Corporation's Port of Catoosa (Oklahoma) GTL facility last year, Marathon intends to further develop this important technology through an Integrated Technology Project (ITP). The ITP, also at the Port of Catoosa, will combine higher efficiency syngas processing and liquid products treatment with the Syntroleum FT reactor. This project will build upon last year's successful demonstration with the objective of producing ultra-clean, low- sulfur fuels from stranded and flared natural gas at a range of economic plant sizes.
Marathon and its partners have been advised by Qatar's Energy Minister that the company's proposed Qatar GTL project will be delayed. The principal reason for the delay is Qatar Petroleum's desire to ensure that they manage the giant North Field gas resources in the most effective manner and they are currently reviewing their long-term gas production delivery plans. In addition, they are examining the industry's capacity to manage the design and construction of the large number of gas projects in a compressed time frame in a single location, which Marathon believes to be a reasonable and responsible approach. Despite this delay, Marathon remains committed to fully exploring the potential of GTL technology. Additionally, the company continues to examine a variety of gas projects to apply the company's GTL technology package, as well as compressed natural gas and methanol processes which are ready for commercial application.
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