Earnings Highlights 3rd Quarter Ended September 30 (Dollars in millions, except per diluted share data) 2005 2004 Net income adjusted for special items* $797 $297 Adjustments for special items* (after tax): Loss on long-term U.K. gas contracts (48) (75) Gain on sale of minority interests in Equatorial Guinea LNG Holdings Limited 21 --- Net income $770 $222 Net income adjusted for special items* - per diluted share $2.16 $0.85 Net income - per diluted share $2.09 $0.64 Revenues and other income $17,248 $12,316 Weighted average shares, in thousands - diluted 368,564 346,969 * See page 6 for a discussion of net income adjusted for special items. Key Events Exploration and Production * Production slightly under guidance despite loss of 20,000 barrels of oil equivalent per day (boepd) shut-in due to Gulf of Mexico hurricanes * Sustained minimal damage to key Gulf of Mexico offshore production facilities during recent hurricanes, and have restored more than 90 percent of production * Continued exploration success with Astraea and Hebe discoveries offshore Angola raising year-to-date worldwide total to seven significant discoveries Refining, Marketing and Transportation * Maintained outstanding refinery mechanical reliability and set new refinery throughput record * Resumed operations of Gulf Coast refineries within days of hurricanes * Expansion of Detroit refinery from 74,000 barrels per day (bpd) to 100,000 bpd enters final stages * Speedway SuperAmerica LLC (SSA) achieved 11th consecutive quarter of greater than nine percent same store merchandise sales growth Integrated Gas * Equatorial Guinea liquefied natural gas (LNG) Train 1 project remains on schedule having achieved 58 percent completion at the end of the third quarter
"In the third quarter we saw strong operational performance despite interruptions by two major Gulf of Mexico hurricanes," said Clarence P. Cazalot, Jr., Marathon president and CEO. "Our upstream and downstream operations teams responded well to the challenges of the storms, resuming the majority of our oil and gas production within weeks and all of our refining operations within days of the storms. This quick response enabled Marathon to continue providing much needed crude oil, natural gas and refined products to the markets we serve. Our operations outside of the Gulf Coast area continued to perform extremely well throughout the quarter, and the company continues to make substantial capital investments in all business segments with more than $2 billion spent through the first nine months of 2005."
"While these historic storms continue to have a major impact on our industry, they have taken a much greater toll on the lives of hundreds of thousands of people along the Gulf Coast. Members of the Marathon family have responded during this crisis by providing humanitarian relief totaling more than $8 million. Thankfully, all of our employees are accounted for and none were injured," Cazalot added.
Total segment income was $1.435 billion in third quarter 2005, compared with $760 million in third quarter 2004.
3rd Quarter Ended September 30 (Dollars in millions) 2005 2004 Segment Income (Loss) Exploration and Production United States $397 $244 International 230 107 E&P Segment Income 627 351 Refining, Marketing and Transportation 814 391 Integrated Gas (6) 18 Segment Income** $1,435 $760
** See Preliminary Supplemental Statistics on page 9 for a reconciliation of segment income to income from operations as reported under generally accepted accounting principles.
Exploration and Production (Upstream)
Upstream segment income totaled $627 million in third quarter 2005, compared to $351 million in third quarter 2004. The increase was primarily due to higher liquid hydrocarbon and natural gas prices. Reported sales volumes during the quarter averaged 291,500 boepd compared to production available for sale of 321,000 boepd. This difference is primarily due to timing of international crude oil liftings in the United Kingdom and Equatorial Guinea.
United States upstream income was $397 million in third quarter 2005, compared to $244 million in third quarter 2004. The increase was primarily due to higher liquid hydrocarbon and natural gas prices, partially offset by lower sales volumes. These lower volumes resulted primarily from weather- related downtime in the Gulf of Mexico and natural field declines in the Permian Basin.
International upstream income was $230 million in third quarter 2005, compared to $107 million in third quarter 2004. The increase is primarily a result of higher product prices and liquid hydrocarbon sales volumes, partially offset by higher production taxes in Russia, dry well expenses and lower natural gas production. The lower gas volumes are primarily the result of reduced UK spot gas sales in the third quarter.
3rd Quarter Ended September 30 2005 2004 Key Production Statistics Net Sales United States - Liquids (mbpd) 70.7 80.7 United States - Gas (mmcfd) 561.8 598.0 International - Liquids (mbpd)* 86.3 75.9 International - Gas (mmcfd) 245.0 303.2 Total Net Sales (mboepd) 291.5 306.8
* Reported volumes are based upon sales volumes which may vary from production available for sale primarily as a result of the timing of liftings of certain of Marathon's international liquid hydrocarbon volumes.
Marathon's third quarter production was slightly under guidance despite the loss of 20,000 boepd shut-in due to the hurricanes in the Gulf of Mexico. Other parts of Marathon's business continued to generate production increases, particularly in Equatorial Guinea and Russia. In Equatorial Guinea, Marathon realized the benefits of strong condensate production and the full ramp-up of the recently completed liquefied petroleum gas (LPG) expansion project. During the third quarter, total liquids production available for sale in Equatorial Guinea averaged 45,000 net bpd. In addition, the company continued development activities in the East Kamennoye field in Russia where Marathon has an ongoing drilling program. These activities have driven total Russian production available for sale from an average of 14,000 net bpd during third quarter 2004 to 28,000 net bpd during third quarter 2005.
The cost of storm-related repairs in the Gulf of Mexico is not expected to be significant. Work continues to restore the remaining operated and non- operated production. Current Gulf of Mexico production is more than 90 percent of pre-storm levels. The restart of remaining oil and gas production is primarily dependent upon restoration of production from Marathon's royalty interest at the Shell-operated Ursa platform. Despite the negative effects of the hurricanes on third quarter production levels, Marathon estimates 2005 average daily production available for sale to be 340,000 to 350,000 boepd, excluding the impact of any acquisitions or dispositions.
Marathon continued its exploration success with the Astraea and Hebe discoveries on Block 31 offshore Angola. Marathon has also participated in an appraisal well on the Gengibre discovery on Angola Block 32, and results of this well will be released upon partner and government approvals. Marathon's continued success offshore Angola has underscored the significant resource potential of this region. Marathon holds a non-operated 10 percent interest in Block 31 and a non-operated 30 percent interest in Block 32.
In other activity, Marathon is currently participating in an appraisal well on the Plutao discovery on Angola Block 31, an exploration well on the Mostarda Prospect on Angola Block 32, a deep shelf exploration well on the Aquarius prospect (South Pass 86 block) in the Gulf of Mexico, an exploration well on the Davan prospect in the United Kingdom, and an appraisal well on the Gudrun discovery offshore Norway.
Refining, Marketing and Transportation (Downstream)
Downstream segment income was $814 million in third quarter 2005 compared to segment income of $391 million in third quarter 2004.
The increase was primarily due to a higher refining and wholesale marketing margin realized in the third quarter due to the impact that Hurricanes Katrina and Rita had on refined product margins. The extraordinary performance of employees allowed the Garyville, Louisiana, and Texas City, Texas, refineries to safely return to operation with a minimum amount of downtime. These refineries sustained minimal damage during these storms and were able to be brought back on-line within days after the hurricanes, thus allowing the company to meet the demand for transportation fuels during this period of reduced supply.
While spot market gasoline and distillate prices peaked at all time highs during the third quarter, downstream prices and realizations were constrained by competitive pricing at the wholesale and retail levels.
Refinery crude runs during the third quarter 2005 averaged 979,600 bpd, with total throughput averaging 1,194,800 bpd. This record throughput was achieved despite the loss of approximately 40,000 bpd of refinery capacity due to the hurricanes. These rates are lower than what would have been achieved due to the temporary complete shut-down of the Garyville, Louisiana, and Texas City, Texas, refineries in preparation for Hurricanes Katrina and Rita, respectively. In addition, the company also experienced minor reductions in throughputs at some of its Midwest refineries due to the temporary closure of crude oil pipelines originating in the U.S. Gulf Coast after Hurricane Katrina. The repair cost associated with these hurricanes was not significant.
During the quarter, SSA continued to achieve strong same store merchandise sales which increased approximately 11 percent compared to the third quarter 2004. This was the 11th consecutive quarter of greater than nine percent same store merchandise sales growth for SSA. In addition, SSA increased its same store gasoline sales volume during the third quarter by approximately five percent compared to the same quarter last year.
3rd Quarter Ended September 30 2005 2004 Key Refining, Marketing and Transportation Statistics Crude Oil Refined (mbpd) 979.6 977.1 Other Charge and Blend Stocks (mbpd) 215.2 146.3 Total Refinery Inputs (mbpd) 1,194.8 1,123.4 Refined Product Sales Volumes (mbpd) 1,466.8 1,436.2 Refining and Wholesale Marketing Margin ($/gallon) $0.1774 $0.0900
The company's $300 million, 26,000 bpd Detroit refinery crude oil throughput expansion and Tier II low sulfur fuels project is in the final stages of completion. The refinery was shut-down on September 29 to accommodate the installation and integration of key project components and other related work. The refinery is expected to restart in mid-November with a total crude processing capacity of 100,000 bpd. The expansion will add much needed capacity to help meet market demand, particularly for transportation fuels, in the upper Midwest. The expansion also will enable the Detroit refinery to produce the low sulfur gasoline and ultra-low sulfur diesel fuel required by the U.S. Environmental Protection Agency in 2006.
The Integrated Gas segment incurred a loss of $6 million in the third quarter of 2005 compared to $18 million income in the third quarter of 2004. The decrease was primarily the result of mark-to-market changes in the fair value of derivatives used to support gas marketing activities.
During the third quarter, the AMPCO methanol plant in Equatorial Guinea realized solid earnings as a result of a 100 percent on-stream factor and continued strong posted index prices for methanol.
The Equatorial Guinea LNG Train 1 project made continued progress during the quarter and remains on-track to begin first shipments of LNG in 2007. As of the end of the third quarter, the Train 1 project was approximately 58 percent complete on an engineering, procurement and construction (EPC) basis and gross expenditures totaled approximately $1 billion of the total estimated project cost of $1.4 billion. Marathon holds a 60 percent interest in Equatorial Guinea LNG Holdings Limited (EG Holdings). Also, the Equatorial Guinea LNG project partners continue to explore the feasibility of adding a second LNG train in an effort to create a regional gas hub that would commercialize stranded gas from various sources in the surrounding Gulf of Guinea region.
Marathon has two long-term 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 third quarter 2005, the non-cash mark-to-market loss on these two long-term gas sales contracts related to Marathon's Brae gas production totaled $82 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."
During the third quarter, Marathon sold an interest in Equatorial Guinea LNG Holdings Limited for a pre-tax gain of $23 million. Following the closing of the transaction on July 25, 2005, Marathon now holds a 60 percent interest in this company.
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