Marathon's Upstream Business Performs Well in Q2
Marathon Oil Corporation has reported second quarter 2008 net income of $774 million, or $1.08 per diluted share. Net income in the second quarter 2007 was $1.550 billion, or $2.25 per diluted share. For the second quarter 2008, net income adjusted for special items was $858 million, or $1.20 per diluted share, compared to net income adjusted for special items of $1.548 billion, or $2.25 per diluted share, for the second quarter 2007.
Marathon's second quarter 2008 results include a non-cash, after-tax mark- to-market loss of $220 million on derivatives intended to mitigate price risk related to future sales of Canadian synthetic crude. The last of these derivatives is set to expire in the fourth quarter of 2009.
"The second quarter 2008, compared to the second quarter 2007, was a challenging quarter financially, particularly as a result of the significantly lower refining and wholesale marketing realized margins in a very difficult downstream environment and the derivatives loss incurred in the Oil Sands Mining segment. However, our Upstream business had a record quarter in profitability and our Integrated Gas segment continues to perform well," said Clarence P. Cazalot, Jr., Marathon president and CEO.
"Operationally, the quarter saw Marathon delivering on our defined profitable growth in the Upstream segment, with production available for sale increasing more than 8 percent over the same period in 2007 and we have had two high-margin major development projects brought online within the last two months.
"The Alvheim/Vilje development offshore Norway achieved first oil in early June and is currently producing from five wells in the Alvheim portion of the development, and the non-operated Neptune development in the Gulf of Mexico began operations just after the quarter ended. Strong production from Alvheim and Neptune, and solid operations across our entire Upstream business will help drive Marathon's production performance for the year and will contribute significantly to Marathon's production growth through 2012.
"While the downstream environment remains challenged with tight margins, Marathon is focused on lowering feedstock costs and increasing efficiency and flexibility by expanding our coking capacity. The 180,000 barrels per day (bpd) refinery expansion at our facility in Garyville, La., is almost 60 percent complete, on budget and scheduled for late 2009 startup. Construction recently started on the Detroit Heavy Oil Upgrading Project, and upon completion in late 2010, it will allow us to refine an additional 80,000 bpd of heavy crude oil," Cazalot said.
Exploration and Production
Exploration and Production segment income totaled $828 million in the second quarter of 2008, which was more than double the $400 million in the second quarter of 2007. The increase was primarily a result of higher liquid hydrocarbon realizations as well as higher natural gas volumes.
Sales volumes during the quarter averaged 350,000 barrels of oil equivalent per day (boepd), compared to 338,000 boepd for the same period last year. Due to timing of a lifting, the sales volumes were lower than the estimate of 356,000 boepd provided in the interim update.
Production available for sale in the second quarter 2008 averaged 374,000 boepd, an increase of more than 8 percent from 345,000 boepd in the same period last year. The difference between production volumes available for sale and the recorded sales volumes is due to the timing of international oil liftings and natural gas held in storage. Production available for sale exceeded estimates provided in the first quarter, primarily due to the deferral of planned plant maintenance in Equatorial Guinea and the better- than-forecast reliability of the Alvheim/Vilje facilities during ramp-up of production. The Company has narrowed its expectations for 2008 production available for sale to be between 380,000 and 400,000 boepd, excluding the effects of any dispositions.
United States upstream income was $359 million in the second quarter of 2008, compared to $173 million in the second quarter of 2007, primarily as a result of higher liquid hydrocarbon and natural gas realizations, partially offset by lower sales volumes.
International upstream income was $469 million in the second quarter of 2008, compared to $227 million in the second quarter of 2007. The increase was primarily due to higher liquid hydrocarbon and natural gas realizations, and higher natural gas sales that included a full quarter of operations at the EG LNG plant, which commenced production in May 2007.
The Alvheim/Vilje development offshore Norway commenced production on June 8, 2008 and to date has achieved an uptime of approximately 80 percent. Currently, there are five wells producing from the Alvheim portion of the development and the Vilje field is expected to come onstream in early August. Based on the results thus far, Alvheim/Vilje is expected to reach a combined production rate of 75,000 net (120,000 gross) boepd before the end of this year. Marathon has a 65 percent operated interest in the Alvheim fields and a 47 percent outside-operated working interest in the Vilje field.
In the Gulf of Mexico, the Neptune development began production on July 6, 2008, and reached full facility oil capacity after only 15 days of operations. While the production did not have an impact on the second quarter results, the field is currently producing from five wells and the sixth well is expected online in early August. Marathon holds a 30 percent outside-operated working interest in Neptune. The facility's design capacity is 50,000 bpd of oil and 50 mmcfd of natural gas.
Marathon continues to ramp up production in the Bakken Shale resource play in North Dakota. The Company currently has seven rigs drilling which are achieving best-in-class drilling performance and continue to improve drilling time and well costs. Marathon expects to drill approximately 65 company- operated Bakken wells in 2008, and will have approximately 100 wells in the play by the end of the year. The Company's net production from the Bakken Shale increased 130 percent from the fourth quarter 2007 rate of 2,170 boepd to the second quarter of 2008 rate of 5,070 boepd, and is currently producing 6,200 boepd.
Offshore Angola, Marathon and its co-venturers received approval to proceed with the first deepwater oil development project on Block 31, comprised of the Plutao, Saturno, Venus and Marte (PSVM) fields. Key contracts are ready to be awarded and construction work is expected to begin later this year. Gross production at a rate of about 150,000 bpd is targeted in 2012. A total of 48 production, gas and water injection plus infill wells are planned for PSVM.
Marathon has participated in three deepwater Angola exploration/appraisal wells that have reached total depth during the year, but for which disclosure of the results is pending receipt of government and partner approvals. The Company is also currently participating in an appraisal well on Block 32. Marathon holds a 10 percent outside-operated interest in Block 31 and a 30 percent outside-operated interest in Block 32.
In early July, Marathon entered into a definitive agreement with Centrica plc, the parent company of British Gas, under which Centrica will purchase Marathon's non-operated interests in the Heimdal infrastructure, related producing fields and associated undeveloped acreage offshore Norway. Total proceeds before closing adjustments are expected to be $416 million. The companies anticipate closing the transaction during the late third quarter or early fourth quarter of 2008.
Oil Sands Mining
The Oil Sands Mining segment reported a loss of $157 million for the second quarter of 2008. This includes a $250 million after-tax loss on derivative instruments, of which $220 million was unrealized. These derivative instruments were put in place by Western Oil Sands Inc. prior to its acquisition by Marathon in October 2007 to mitigate price risk related to future sales of synthetic crude oil. The last of these derivative instruments is set to expire in the fourth quarter of 2009.
Marathon's second quarter 2008 net bitumen production before royalties from the Athabasca Oil Sands Project (AOSP) mining operation was 24,000 bpd. Production was lower than expected due to a revised plan to manage the disposal of tailings that resulted in mining a lower grade ore, as well as planned and unplanned maintenance at the mine. (Tailings consist primarily of water and sediment that remain after the bitumen is extracted from the ore.)
Due in large part to the temporary decrease in ore grade, Marathon has reduced its 2008 Oil Sands Mining production expectations to between 25,000 and 28,000 boepd.
Operates 4 Offshore Rigs
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