"Marathon's first quarter results were driven by solid operating performances from each of our business segments," said Clarence P. Cazalot, Jr., Marathon president and CEO. "Our focus on execution, along with strong industry fundamentals, has delivered significant shareholder value and is allowing us to continue our substantial capital investment program, increase our quarterly dividend for a fifth time in less than four years and to continue our $2.5 billion stock repurchase program."
Total segment income was $749 million in the first quarter of 2007, compared to $792 million in the first quarter of 2006.
1st Quarter Ended March 31 (Dollars in millions) 2007 2006 Segment Income Exploration & Production (E&P) United States $150 $245 International 235 220 Total E&P 385 465 Refining, Marketing & Transportation 345 319 Integrated Gas 19 8 Segment Income ** $749 $792 ** See Preliminary Supplemental Statistics for a reconciliation of segment income to net income as reported under generally accepted accounting principles.
Exploration and Production
Upstream segment income totaled $385 million in the first quarter of 2007, compared to $465 million in the first quarter of 2006, primarily as a result of lower natural gas sales volumes and realizations, partially offset by higher liquid hydrocarbon sales volumes. Sales volumes during the quarter averaged 339,000 barrels of oil equivalent per day (boepd) and production available for sale averaged 343,000 boepd. This difference is due primarily to the timing of crude oil liftings in Libya.
United States upstream income was $150 million in the first quarter of 2007, compared to $245 million in the first quarter of 2006, primarily as a result of revenue decreases from lower liquid hydrocarbon and natural gas sales volumes and realized natural gas prices. Normal production rate declines, particularly for Marathon's Gulf of Mexico properties, account for the majority of the volume decrease.
International upstream income was $235 million in the first quarter of 2007, compared to $220 million in the first quarter of 2006, primarily due to a slightly lower effective income tax rate. International pretax income was flat as a decrease in exploration expenses and an increase in revenues from higher liquid hydrocarbon sales volumes, primarily in Libya and Equatorial Guinea, were mostly offset by declines in natural gas sales volumes and in realized prices for liquid hydrocarbons and natural gas.
1st Quarter Ended March 31 2007 2006 Key Production Statistics Sales United States - Liquids (mbpd) 69 80 United States - Gas (mmcfpd) 512 561 International - Liquids (mbpd) 129 102 International - Gas (mmcfpd) 337 435 Sales from Continuing Operations (mboepd) 339 348 Discontinued operations (mboepd) --- 29 Total Sales (mboepd) 339 377
Marathon continues to grow its inventory of future production projects with three exploration discoveries announced in deepwater Angola (Caril, Manjericao and Miranda) and the recently announced Droshky discovery in the Gulf of Mexico. The Droshky well encountered approximately 250 feet of net oil pay and a down dip appraisal sidetrack has encountered over 600 feet of net pay. The Company's next operation on Droshky will be to drill a lateral appraisal sidetrack well, which will complete the appraisal process. Marathon has also participated in five wells that have reached total depth in deepwater Angola and more details will be announced upon government and partner approvals.
Marathon continued to progress major projects during the first quarter, including the Neptune development in the Gulf of Mexico, which is 69 percent complete and remains on target for first production by early 2008. Fabrication of the hull, topsides and subsea components is continuing, with offshore installation expected to begin by June 2007.
The Alvheim project has entered the commissioning stage with first production from the Alvheim/Vilje development now expected during the third quarter of 2007. The additional time for completion is a result of both a more difficult hull/topsides integration and lower contractor productivity than originally projected. As a result of this delay and general inflationary pressure, there has been upward pressure on costs. With this revised first production date, this project still represents an industry-leading completion schedule, moving from discovery to first production in only four years. Four wells will be available at first production and drilling activities will continue into 2008. A peak net rate of approximately 75,000 boepd from Alvheim/Vilje is expected in 2008.
Refining, Marketing and Transportation
Downstream segment income was $345 million in the first quarter of 2007 compared to $319 million in the first quarter of 2006. Downstream pretax income increased primarily as a result of increases in the Speedway SuperAmerica (SSA) gasoline and distillates gross margin as well as the merchandise gross margin. The SSA gasoline and distillates gross margin averaged 12.17 cents per gallon in the first quarter of 2007, compared to 10.55 cents per gallon in the first quarter of 2006, while the merchandise gross margin grew to $160 million in the first quarter of 2007 from $148 million in the first quarter of 2006. A decline in the downstream segment effective income tax rate also contributed to the increase in segment income.
The refining and wholesale marketing gross margin averaged 12.46 cents per gallon in the first quarter of 2007, compared to 11.37 cents per gallon in the first quarter of 2006. This increase is primarily the result of the change in accounting for matching buy/sell arrangements effective April 1, 2006, as the sales volumes recognized during the first quarter of 2007 were less than the volumes that would have been recognized under previous accounting practices.
Crude oil refined during the first quarter of 2007 averaged 968,000 barrels per day (bpd), a 70,000 bpd increase over the first quarter of 2006. Total refinery throughputs were 1,195,000 bpd for the first quarter of 2007, four percent higher than the 1,147,000 bpd during the first quarter of 2006.
SSA achieved same store gasoline sales volume growth of 2.6 percent during the first quarter of 2007 and increased same store merchandise sales by 6.2 percent during the same period.
1st Quarter Ended March 31 2007 2006 Key Refining, Marketing & Transportation Statistics Crude Oil Refined (mbpd) 968 898 Other Charge and Blend Stocks (mbpd) 227 249 Total Refinery Inputs (mbpd) 1,195 1,147 Refined Product Sales Volumes (mbpd)*** 1,343 1,417 Refining and Wholesale Marketing Gross Margin ($/gallon)*** $0.1246 $0.1137 *** 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 than would have been reported under the previous accounting practices.
Construction has commenced on Marathon's projected $3.2 billion Garyville refinery expansion, which will increase the refinery's 245,000 bpd capacity by 180,000 bpd. When completed in late 2009, this expansion will enable the refinery to provide an additional 7.5 million gallons of clean transportation fuels to the market each day.
Front-end engineering and design (FEED) for a potential heavy oil upgrading project at the Company's Detroit refinery is on schedule with the FEED cost estimate expected in the fourth quarter of 2007.
Construction also continues to progress on the Company's 110 million gallon per year joint venture ethanol facility in Greenville, Ohio. The facility is expected to be operational in the first quarter of 2008.
Integrated gas segment income was $19 million in the first quarter of 2007 compared to $8 million in the first quarter of 2006, primarily as a result of increased income from Atlantic Methanol Production Company LLC (AMPCO). AMPCO's average realized methanol prices were 48 percent higher in the first quarter of 2007 than in the comparable quarter of 2006.
The Equatorial Guinea LNG Train 1 commissioning activities continued to progress. As of the end of the first quarter of 2007, construction is essentially complete and first LNG shipments are projected to begin in the second quarter of 2007.
Marathon has completed those portions of the FEED for a possible second LNG train on Bioko Island, Equatorial Guinea, required to support the near- term efforts for this project. The Company expects a final investment decision in 2008.
Marathon's Board of Directors approved a 20 percent dividend increase on April 25, 2007. Since July 2003, Marathon has increased the quarterly dividend five times resulting in a 109 percent increase during this period. Additionally, since January 2006, the Company's Board of Directors has authorized the repurchase of up to $2.5 billion of Marathon's common stock. To date, the Company has repurchased approximately $2.2 billion in Marathon shares.
Marathon's Board of Directors recently declared a two-for-one split of Marathon's common stock. The stock split will be effected in the form of a stock dividend distributed on June 18, 2007, to stockholders of record at the close of business on May 23, 2007. Stockholders will receive one additional share of Marathon Oil Corporation common stock for each share of common stock held as of the close of business on the record date.
Marathon has two long-term natural gas sales contracts in the United Kingdom that are accounted for as derivative instruments. Changes in the valuation of these contracts must be recognized in current period income. In the first quarter of 2007, the non-cash after-tax mark-to-market gain totaled $11 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 the first quarter of 2007, Marathon extinguished a portion of its outstanding debt at a premium and recognized a $1 million after-tax loss. This loss has been excluded from "net income adjusted for special items."
Earnings Highlights 1st Quarter Ended March 31 (Dollars in millions, except per diluted share data) 2007 2006 Net income adjusted for special items* $707 $739 Adjustments for special items (net of income taxes): Gain on long-term U.K. natural gas contracts 11 45 Loss on early extinguishment of debt (1) --- Net income $717 $784 Net income adjusted for special items* - per diluted share $2.04 $2.01 Net income - per diluted share $2.07 $2.13 Revenues and other income $13,002 $16,539 Weighted average shares, in thousands - diluted 346,826 368,380 * See discussion of net income adjusted for special items. Key Highlights Exploration and Production -- Announced three exploration discoveries in Angola -- Announced the Droshky discovery in the Gulf of Mexico -- Progressed the Neptune deepwater Gulf of Mexico development -- Continued commissioning of Alvheim/Vilje project in Norway Refining, Marketing and Transportation -- Commenced construction of the Garyville, La., refinery expansion -- Continued construction of the 110 million gallon per year joint venture ethanol facility in Greenville, Ohio -- Achieved same store gasoline sales volume increase of 2.6 percent and merchandise sales revenue increase of 6.2 percent at Speedway SuperAmerica (SSA) Integrated Gas -- Continued commissioning activities on the Equatorial Guinea LNG Train 1 project, first shipment expected second quarter 2007 -- Completed portions of the front-end engineering and design (FEED) required to support the near-term efforts for a second LNG train on Bioko Island, Equatorial Guinea Corporate -- Repurchased approximately 5 million common shares during the first quarter at a cost of $452 million, bringing the total common shares purchased as part of expanded share buyback program to 25.8 million shares at an approximate cost of $2.2 billion -- Increased quarterly dividend by 20 percent from 40 cents per share to 48 cents per share on a pre-split basis -- Initiated a two-for-one split of the Company's common stock
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