Earnings Highlights (Dollars in millions, 3rd Quarter Ended Sept. 30 except per diluted share data) 2006 2005 Net income adjusted for special items* $1,544 $797 Adjustments for special items* (net of taxes): Gain (loss) on long-term U.K. natural gas contracts 58 (48) Gain on sale of minority interests in Equatorial Guinea LNG Holdings Limited --- 21 U.K. tax legislation 21 --- Net income $1,623 $770 Net income adjusted for special items* - per diluted share $4.30 $2.16 Net income - per diluted share $4.52 $2.09 Revenues and other income $16,634 $17,151 Weighted average shares, in thousands - diluted 359,368 368,564 * See page 6 for a discussion of net income adjusted for special items. Key Events Exploration and Production * Alvheim development in Norway on schedule for first production by end of first quarter 2007 * Neptune development in the Gulf of Mexico on schedule for first production by early 2008 * Submitted plan of development and operation (PDO) for Volund field offshore Norway * Signed production sharing contract (PSC) for Indonesian deepwater Pasangkayu Block * Announced deepwater discovery (Titania) offshore Angola Refining, Marketing and Transportation * Achieved record quarterly total refinery throughputs * Signed definitive agreement for a 50/50 joint venture to construct ethanol plants * Advanced front-end engineering and design (FEED) for proposed 180,000 barrels per day (bpd) refinery expansion Integrated Gas * Equatorial Guinea LNG Train 1 project 95 percent complete, first shipment expected in mid-2007 * Awarded FEED contract to evaluate possible second LNG train in Equatorial Guinea Corporate * Repurchased 14.4 million common shares at a cost of $1.146 billion, as of the third quarter 2006 * Achieved dramatic results from Bioko Island Malaria Control Project in Equatorial Guinea
"We had a very strong quarter operationally, as well as financially. Our upstream and downstream businesses both performed exceptionally well with the downstream business turning in another record setting performance in refinery throughputs while the upstream delivered a strong production performance," said Clarence P. Cazalot, Jr., Marathon president and CEO. "Additionally, we benefited from strong commodity prices, particularly realized liquids prices in the upstream, and the refining and wholesale margin in the refining business. This strong performance has allowed us to significantly reinvest in value-creating projects around the world while maintaining a strong balance sheet. Marathon's capital spending is up 38 percent when compared to the same quarter last year and our major projects are progressing on schedule and will start providing profitable growth in 2007. This illustrates our continued investment in growth opportunities designed to meet the energy needs of our customers while creating long-term shareholder value."
Effective January 1, 2006, Marathon revised its measure of segment income to reflect the effects of minority interests and income taxes related to the segments. In addition, the results of activities primarily associated with the marketing of the Company's equity natural gas production, which had been presented as part of the Integrated Gas segment prior to 2006, are now included in the Exploration and Production segment. Segment information for all periods presented in this release reflects these changes.
Total segment income was $1.596 billion in the third quarter of 2006, compared with $868 million in the third quarter 2005.
3rd Quarter Ended Sept. 30 (Dollars in millions) 2006 2005 Segment Income Exploration & Production (E&P) United States $218 $247 International 354 126 Total E&P 572 373 Refining, Marketing & Transportation 1,026 473 Integrated Gas (2) 22 Segment Income ** $1,596 $868
** See Preliminary Supplemental Statistics on page 10 for a reconciliation of segment income to net income as reported under generally accepted accounting principles.
Exploration and Production
Upstream segment income totaled $572 million in the third quarter of 2006, compared to $373 million in the third quarter of 2005. The increase was primarily due to higher liquid hydrocarbon sales prices and volumes, partially offset by higher income taxes.
Reported sales volumes during the quarter averaged 362,000 barrels of oil equivalent per day (boepd) compared to production available for sale of 354,000 boepd. The largest sales volume increase for the period was in Libya, where the first crude oil sales occurred in the first quarter of 2006 and where sales volumes totaled 79,000 boepd for the third quarter of 2006. Included in these sales volumes for the quarter were 2.8 million barrels of oil, or 30,000 boepd, produced and sold during the quarter that had been owed to the Company's account upon its resumption of operations.
Marathon estimates 2006 average daily production available for sale to be 360,000 to 370,000 boepd, with fourth quarter production available for sale estimated to be 350,000 to 370,000 boepd. These estimates exclude the Company's former Russian operations, which are reported as discontinued operations, and exclude the impact of any future acquisitions or dispositions.
United States upstream income was $218 million in the third quarter of 2006, compared to $247 million in the third quarter of 2005, primarily as a result of lower natural gas prices and sales volumes partially offset by higher liquid hydrocarbon prices.
International upstream income was $354 million in the third quarter of 2006, compared to $126 million in the third quarter of 2005. The increase was primarily a result of higher liquid hydrocarbon sales volumes due to the resumption of production in Libya and higher hydrocarbon prices. This increase was partially offset by higher international income taxes, higher operating costs, and increased depreciation, depletion and amortization (DD&A) due to higher sales volumes in Libya, the United Kingdom and Equatorial Guinea.
3rd Quarter Ended Sept. 30 2006 2005 Key Production Statistics Net Sales United States - Liquids (mbpd) 72 71 United States - Gas (mmcfpd) 522 562 International - Liquids (mbpd) 170 59 International - Gas (mmcfpd) 197 245 Net Sales from Continuing Operations (mboepd) 362 264 Discontinued Operations (mboepd) --- 27 Total Net Sales (mboepd) 362 291Throughout the third quarter of 2006, Marathon continued to advance its major projects including the Alvheim development offshore Norway. At the end of the third quarter of 2006, the project was 73 percent complete and on target to deliver first production by the end of the first quarter of 2007. All subsea equipment is in place and hydrotesting has commenced. Module installations on the floating production, storage and offloading (FPSO) vessel have been completed and work is progressing with the integration of the new equipment with the existing hull systems. Marathon holds a 65 percent interest in Alvheim and serves as operator.
Also in Norway, Marathon submitted the PDO for the Volund development during the third quarter of 2006. Government approval is expected by the end of November 2006. Volund will consist of subsea completions which will be tied-back to Alvheim. Marathon holds a 65 percent interest in Volund.
The Neptune development in the Gulf of Mexico was 55 percent complete at the end of the third quarter of 2006. Development drilling continued throughout the quarter and will continue through first oil. Marathon holds a 30 percent interest in Neptune which remains on target to deliver first production by early 2008.
Marathon signed a PSC with the Government of Indonesia during the third quarter of 2006. The Company was awarded a 70 percent interest and operatorship in the Pasangkayu Block offshore Indonesia as part of Indonesia's 2005 Regular Tender. Current exploration plans call for collection of geophysical data in 2007, followed by drilling in 2008 and 2009.
Marathon is currently participating in three deepwater wells in Angola. The Company recently announced the Titania discovery in Angola Block 31. The Titania discovery is located in the central part of Block 31 and reinforces the potential for multiple developments on this block. Two additional wells have reached total depth in deepwater Angola and their results will be announced upon government and partner approvals. Marathon holds a 10 percent interest in Angola Block 31 and a 30 percent interest in Angola Block 32. In the Gulf of Mexico, Marathon is currently drilling the Blackwater prospect in Green Canyon Block 246 in which it holds a 40 percent working interest and serves as operator.
Refining, Marketing and Transportation
Downstream segment income was $1.026 billion in the third quarter of 2006, compared to $473 million in the third quarter of 2005.
The key driver of the increase in segment income was the Company's refining and wholesale marketing gross margin which averaged 32.71 cents per gallon in the third quarter of 2006 versus 17.74 cents in the comparable 2005 quarter. While the average WTI 6-3-2-1 crack spreads declined in the Midwest (Chicago) and Gulf Coast markets in the third quarter of 2006 compared to the third quarter of 2005, the Company's average refined product sales realizations achieved during the third quarter of 2006 increased more than the refined product spot market prices when compared to the third quarter of 2005. In addition, the refining and wholesale marketing gross margin was enhanced by favorable realizations in the Company's ethanol blending program. The Company's refining and wholesale marketing gross margins included a pretax gain of $384 million in the third quarter of 2006 and a pretax loss of $271 million in the third quarter of 2005 related to derivatives that are utilized primarily to manage price risk.
Crude oil refined during the third quarter of 2006 averaged 1,031,000 barrels per day (bpd), 51,000 bpd higher than during the third quarter of 2005. In addition, total refinery throughputs averaged a record 1,249,000 bpd for the third quarter of 2006, 4.5 percent higher than the 1,195,000 bpd during the third quarter of 2005. Marathon was able to achieve this throughput record primarily as a result of the expansion of its Detroit refinery from 74,000 to 100,000 bpd that was completed during the fourth quarter of 2005.
Speedway SuperAmerica's (SSA) gasoline and distillate gross margin averaged 14.10 cents per gallon during the third quarter of 2006, up from the 12.32 cents per gallon realized in the third quarter of 2005. SSA's same store merchandise sales increased 6.7 percent during the same period.
3rd Quarter Ended Sept. 30 2006 2005 Key Refining, Marketing & Transportation Statistics Crude Oil Refined (mbpd) 1,031 980 Other Charge and Blend Stocks (mbpd) 218 215 Total Refinery Inputs (mbpd) 1,249 1,195 Refined Product Sales Volumes (mbpd)*** 1,434 1,467 Refining and Wholesale Marketing Gross Margin ($/gallon)*** $0.3271 $0.1774
***On April 1, 2006, Marathon changed its accounting for matching buy/sell arrangements as a result of a new accounting standard. This change resulted in lower refined product sales volumes and a higher refining and wholesale marketing gross margin in subsequent periods of 2006 than would have been reported under the previous accounting practices. See Selected Notes to Consolidated Financial Statements on page 9.
Marathon and its partner, The Andersons Inc., recently announced that the companies have signed a definitive agreement forming a 50/50 joint venture, which will construct one or more ethanol plants. As a part of the agreement, The Andersons Inc. will provide day-to-day management of the ethanol plants, as well as corn origination, and distillers dried grain and ethanol marketing services. Marathon is one of the nation's leading blenders of ethanol in gasoline and this venture will enable the Company to maintain the reliability of future ethanol supplies. Site selection for the venture's initial plant is expected to be finalized soon and is contingent upon several factors including access to adequate corn supply, proximity to ethanol and distillers dried grain customers, infrastructure and transportation. Decisions related to the construction of any additional ethanol plants will be dependent upon a variety of market conditions and other relevant factors.
Marathon continues to work on the FEED for the proposed 180,000 bpd expansion of its Garyville, La., refinery. The Company expects a final investment decision and permitting to be complete by year-end. Marathon's expenditure commitments for the Garyville expansion project in 2006 will total approximately $170 million including both FEED costs and the procurement of certain long-lead time process unit components.
The Integrated Gas segment reported a loss of $2 million in the third quarter of 2006, compared to income of $22 million in the third quarter of 2005. Income from the Company's equity method investment in Atlantic Methanol Production Company LLC (AMPCO) was down partially due to a compressor repair which resulted in a shut-down of the plant for part of the quarter.
The Equatorial Guinea LNG Train 1 project remains ahead of schedule with LNG shipments expected to start in mid-2007. At the end of the third quarter of 2006, the project was approximately 95 percent complete. Marathon holds a 60 percent interest in Equatorial Guinea LNG Holdings Limited.
Marathon and its partners have awarded a FEED contract to Bechtel for work related to a potential second LNG train in Equatorial Guinea. The FEED work is expected to be completed by the end of the first quarter of 2007.
In January 2006, Marathon announced a $2 billion share repurchase plan. During the first nine months of 2006, Marathon has repurchased approximately 14.4 million of its common shares at a cost of $1.146 billion. Marathon currently anticipates repurchasing $1.5 billion of its common stock by December 31, 2006, with the balance of the $2 billion authorized program to be completed in 2007. This program may be changed based on the Company's financial condition or changes in market conditions and is subject to termination prior to completion.
Marathon and its project partners have achieved dramatic results during the second year of the five-year, approximately $13 million Bioko Island Malaria Control Project (BIMCP) in Equatorial Guinea. Year two results include a 95 percent reduction in malaria transmitting mosquitoes and a 44 percent reduction in the presence of malaria parasites in children. These results further demonstrate that the BIMCP is steadily eradicating the transmission of a disease that poses the most significant health threat to the citizens of Equatorial Guinea.
Marathon has two long-term natural 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 of 2006, the non-cash after-tax mark- to-market gain on these two long-term natural gas sales contracts related to Marathon's Brae natural gas production totaled $58 million. Due to the volatility in the fair value of these contracts, Marathon excludes these non- cash gains and losses from "net income adjusted for special items."
In July 2006, the U.K. supplemental corporation tax rate was increased from 10 percent to 20 percent effective January 1, 2006. The $21 million impact of this tax rate change on the applicable net deferred tax assets as of January 1, 2006 has been excluded from "net income adjusted for special items."
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