Exploration and Production
Production sold during the fourth quarter is estimated to be approximately 355,000 barrels of oil equivalent per day (boepd). Revenues are reported based on production sold during the period and can vary from production available for sale primarily as a result of the timing of international crude oil liftings and natural gas sales.
Oil and natural gas production available for sale during the fourth quarter is expected to be approximately 360,000 boepd, within the previous fourth quarter guidance of 350,000 to 370,000 boepd.
The difference between the 360,000 boepd available for sale and the 355,000 boepd of estimated sales was primarily a result of the Company producing and injecting into storage natural gas contracted for future sale in Ireland. As a result, at the end of the fourth quarter, the Company was in a relatively balanced position on a worldwide basis between production available for sale and actual sales.
As shown in the attached table, the West Texas Intermediate (WTI) crude oil market price indicator average was more than $10 per barrel less during the fourth quarter 2006 as compared to the third quarter 2006. As a result of these lower market prices, the Company's liquid hydrocarbon price realizations for October and November 2006 decreased compared to third quarter realizations. The Henry Hub (HH) prompt natural gas market price indicator strengthened 41 cents per million British thermal units during the fourth quarter, while the fourth quarter HH bid week natural gas price indicator remained relatively the same as the third quarter 2006. Marathon's average domestic natural gas price realization declined 66 cents per thousand cubic feet (mcf) in the first two months of the quarter as a result of the Company's production mix. International average gas realizations increased $1.03 per mcf in the first two months of the quarter primarily reflecting seasonally higher spot natural gas prices in Europe. Marathon's actual crude oil and natural gas price realizations vary from market indicators primarily due to product quality and location differentials.
Estimated fourth quarter exploration expense of between $130 and $150 million is lower than past guidance of $135 to $195 million. U.S. exploration expense is now estimated to be between $65 and $75 million, while international exploration expense is also estimated to be $65 to $75 million.
Refining, Marketing and Transportation
Due to seasonality in the refining and marketing business, comparisons to the same period in the previous year provide the best indication of this business' profitability.
The Company currently projects that refined products sales volume will average about 1,385,000 barrels per day (bpd) in the fourth quarter 2006.
Effective April 1, 2006, Marathon adopted EITF Issue No. 04-13, "Accounting for Purchases and Sales of Inventory with the Same Counterparty." As a result, certain types of purchase and sales transactions previously reported separately in revenues and cost of revenues will be reported prospectively on a net basis in cost of revenues. This change in reporting has no impact on reported income. Primarily as a result of this change and the lower refinery production noted below, Marathon's sales volumes in the fourth quarter 2006 are projected to be lower than the sales volumes reported for the same quarter 2005.
Market indicators for refining margins (crack spreads) in the Midwest (Chicago) and Gulf Coast were weaker during the fourth quarter 2006, when compared with the fourth quarter 2005. In addition, crude oil prices decreased more significantly in the fourth quarter 2005 than they did during the fourth quarter 2006. Based on these indicators and other company specific information, the Company projects its refining and wholesale marketing gross margin per gallon during the fourth quarter of 2006 will be approximately 25 percent lower than the fourth quarter 2005.
Crude oil refined during October and November 2006 averaged about 947,000 bpd and is expected to be at approximately that level for the entire fourth quarter 2006. Total refinery throughputs for the fourth quarter 2006 are expected to be approximately the same as the 1,205,000 bpd average for October and November 2006. Speedway SuperAmerica LLC's gasoline and distillate gross margin averaged approximately $0.1133 per gallon during October and November of 2006 and is expected to average approximately that level for the fourth quarter 2006.
Unallocated Administrative Expense and Other Information
Total pre-tax unallocated administrative expense for the quarter is estimated to be $90 to $100 million.
The overall corporate income tax rate, excluding special items, is expected to be approximately 46 to 48 percent. The income tax rate for the Refining, Marketing and Transportation (RM&T) segment is expected to be relatively in-line with that realized during the third quarter 2006 at approximately 38 to 40 percent; Exploration and Production is expected to record a slightly higher tax rate, due to the more international mix of production, and is estimated to accrue an approximately 55 to 57 percent income tax rate for the fourth quarter.
The Company continued its $2 billion share repurchase program during the quarter, reducing the quarterly average diluted share count to an estimated 354 million common shares outstanding for the period. The Company purchased approximately 6.3 million shares of its common stock during the fourth quarter, at a cost of approximately $550 million. At year-end 2006, the Company has repurchased almost 21 million shares at a total cost of approximately $1.7 billion.
Earnings Release Date and Conference Call Information
Marathon will report its fourth quarter 2006 results on February 1, 2007. The Company will also conduct a conference call and webcast that same day at 3 p.m. EST. The call will cover fourth quarter 2006 financial results and may include forward-looking information. Interested parties can listen to this call and view associated slides by accessing the Marathon Oil Corporation Web site at www.marathon.com and clicking on the Fourth Quarter 2006 Financial Results Conference Call link. Replays of the conference call will be available on the Web site through February 15, 2007. Financial information, including earnings releases and other investor-related material, also is available online.
Select Operating and Financial Data (unaudited) 4Q 3Q Oct - Nov 4Q 2005 2006 2006 2006 Actual Actual Actual Actual Exploration and Production Net Sales (1) Domestic - Liquid Hydrocarbons (MBPD) 78 72 75 -- Domestic - Natural Gas (MMCFD) 599 522 532 -- International - Liquid Hydrocarbons (MBPD)(2) 116 170 139 -- International - Natural Gas (MMCFD) (3) 406 197 280 -- MBOED(2) 362 362 349 -- Market Prices NYMEX prompt WTI oil price ($/BBL) 60.05 70.54 59.27 60.17 HH prompt natural gas price ($/MMBTU) 12.88 6.18 6.47 6.59 HH bid week natural gas price ($/MMBTU) 13.00 6.58 5.68 6.56 Average Realizations(4) Liquid Hydrocarbons: Domestic ($/BBL) 48.78 60.37 47.07 -- International ($/BBL) (2) 50.99 64.07 53.95 -- Natural Gas: Domestic ($/MCF) 8.30 5.62 4.96 -- International ($/MCF) 5.92 4.10 5.13 -- Refining, Marketing and Transportation Chicago 6-3-2-1 crack spread ($/BBL) 8.37 9.19 6.49 5.49 Gulf Coast 6-3-2-1 crack spread ($/BBL) 7.10 7.33 4.98 4.39 Chicago 3-2-1 crack spread ($/BBL) 12.92 15.33 10.72 9.78 Gulf Coast 3-2-1 crack spread ($/BBL) 11.57 13.06 9.04 8.63 Sweet/sour Differential ($/BBL) (5) (12.17) (10.24) (10.53) (10.48) Refinery Runs: Crude oil refined (MBPD) 980 1,031 947 -- Other charge & blend stocks (MBPD) 259 218 258 -- Total (MBPD) 1,239 1,249 1,205 -- Crude oil capacity utilization (%) 102 106 97 -- Refined products sales volumes (MBPD) (6) 1,504 1,434 1,400 -- Refining & wholesale marketing gross margin ($/gal) (7) 0.2184 0.3271 -- -- SSA gasoline and distillate sales (MMGal) 834 867 557 -- SSA gasoline and distillate gross margin ($/gal) 0.1400 0.1410 0.1133 -- SSA merchandise gross margin ($million) 158 178 110 -- BBL - barrel MBPD - thousand barrels per day MMCFD - million cubic feet per day MMBTU - million British Thermal Units MBOED - thousand barrels of oil equivalent per day MCF - thousand cubic feet MMGal - million gallons (1) Amounts reflect sales after royalties, except for Ireland where amounts are before royalties. (2) Excludes Russian operations sold in June 2006 that are reported as discontinued operations. (3) Includes natural gas acquired for injection and subsequent resale. (4) Excludes gains and losses on traditional derivative instruments and the unrealized effects of long-term U.K. natural gas contracts that are accounted for as derivatives. (5) 15% Bow River, 15% Maya, 35% Kuwait, 35% Arab Medium. (6) Total average daily volumes of all refined product sales to wholesale, branded and retail (SSA) customers. (7) Sales revenue less cost of refinery inputs, purchased products and manufacturing expenses, including depreciation.
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