Marathon Reports Q4 2009 Results

Marathon has reported a fourth quarter 2008 net loss of $41 million, or $0.06 per diluted share. Net income in the fourth quarter of 2007 was $668 million, or $0.94 per diluted share. The 2008 results include a non-cash $1.4 billion impairment of goodwill related to the Oil Sands Mining segment. For the fourth quarter of 2008, net income adjusted for special items was $1.025 billion, or $1.44 per diluted share, compared to net income adjusted for special items of $500 million, or $0.70 per diluted share, for the fourth quarter of 2007.

Marathon reported 2008 net income of $3.528 billion, or $4.95 per diluted share. Net income in 2007 was $3.956 billion, or $5.69 per diluted share. Marathon reported 2008 net income adjusted for special items of $4.613 billion, or $6.47 per diluted share, compared to net income adjusted for special items of $3.771 billion, or $5.43 per diluted share for 2007.

"2008 was a year of extreme market volatility with record high crude prices at midyear, followed by a rapid and steep decline in crude prices," said Clarence P. Cazalot, Jr., Marathon president and CEO. "Through this cycle of volatility, Marathon delivered solid upstream production growth and continued high downstream operating reliability, resulting in income from our operating segments increasing 59 percent for the fourth quarter and 15 percent for the full year, compared to the fourth quarter and full year of 2007.

"Our upstream business delivered growth again in the fourth quarter with production available for sale increasing 3 percent over the third quarter 2008 and 14 percent over the fourth quarter 2007, resulting in one of the strongest production quarters in the history of the Company. Our year-over-year production growth of over 8 percent is expected to rank us among the leaders in our peer group for 2008.

During the year, we added proved reserves of 110 million barrels of oil equivalent (boe), resulting in a reserve replacement rate of 80 percent for the year which should also compare favorably with our peers. The use of average 2008 prices would have resulted in additional reserve bookings from sanctioned and ongoing projects and would have increased total reserve additions equal to 2008 production.

"We were again able to capture solid operational profitability for the fourth quarter and full year through our fully integrated downstream system, including our seven refineries; extensive pipeline, barge and terminal network; and dual channel marketing assets. In particular, our results benefitted from significant transportation operations and strong retail margins in this period of extreme commodity price volatility. Additionally, we made significant progress in 2008 on the Garyville refinery expansion project, which is now about 75 percent complete and on schedule for start-up in the fourth quarter of this year," Cazalot said.

"We continue to maintain a strong balance sheet, with a year-end cash- adjusted debt-to-capital ratio of 22 percent and $4.3 billion in liquidity comprised of a $1.3 billion cash balance and $3 billion in available credit facility capacity. As we announced with our planned 2009 capital expenditures program, we are committed to maintaining our solid financial position while funding near, medium and long-term value-accretive projects that yield the highest rates of return for our shareholders. Furthermore, having announced asset sales with transaction values totaling $1.3 billion in 2008, we are on track to achieve our goal of $2 to $4 billion in non-core asset sales by midyear 2009," he said.

"As part of our continued focus on enhancing shareholder value, we have evaluated the potential separation of Marathon into two separate companies, one focused on Marathon's upstream, integrated gas and oil sands mining businesses, and the other focused on our downstream business. During our evaluation, the overall business environment has witnessed a period of unprecedented financial and commodity market uncertainty. Given this environment, we have concluded it is in the best interest of our shareholders to remain a fully integrated energy company," Cazalot said.

Exploration and Production

Upstream segment income totaled $264 million in the fourth quarter of 2008, compared to $465 million in the fourth quarter of 2007, primarily as a result of significantly lower liquid hydrocarbon and natural gas realizations, partially offset by higher international liquid hydrocarbon sales volumes and lower exploration expense. For the year 2008, upstream segment income was $2.715 billion, compared to $1.729 billion for 2007, primarily as a result of higher average liquid hydrocarbon and natural gas realizations for the year, and higher international liquid hydrocarbon and natural gas sales volumes.

Sales volumes averaged 417,000 boepd for the fourth quarter of 2008, an 18 percent increase over 354,000 boepd for fourth quarter 2007; and 381,000 boepd for the full year 2008, a more than 8 percent increase over the 351,000 boepd in 2007. Production benefited from a full year of sales to the Equatorial Guinea liquefied natural gas (EG LNG) facility, and beginning midyear, from both the Alvheim/Vilje development offshore Norway and the Neptune development in the Gulf of Mexico.

Production available for sale averaged 402,000 boepd for the fourth quarter of 2008 and 385,000 boepd for the year, compared to 352,000 boepd and 353,000 boepd respectively for the same periods in 2007. Production available for sale differs from average sales primarily due to the timing of international liquid hydrocarbon liftings and natural gas sales. During the month of December, both Equatorial Guinea and Alvheim experienced several days of unplanned downtime that adversely affected production volumes for the fourth quarter. During the first half of January 2009, production available for sale averaged 425,000 boepd.

Marathon estimates 2009 production available for sale will be between 390,000 and 410,000 boepd, which excludes production from the announced sale of Marathon Oil Ireland Limited (MOIL) expected to close in the first quarter 2009 and excludes the effect of any acquisitions or additional dispositions. This compares to 2008 production available for sale, excluding the MOIL and Heimdal area production, of 372,000 boepd, for an expected production growth range of between 5 and 10 percent.

United States upstream reported a loss of $19 million in the fourth quarter of 2008, compared to income of $153 million in the same period of 2007, primarily due to lower liquid hydrocarbon and natural gas realizations. Also contributing to the decrease were slightly lower natural gas sales volumes, increased depreciation, depletion and amortization (DD&A) and higher operating expenses. This increase in expense was partially offset by lower exploration expenses and income taxes, with slightly higher liquid hydrocarbon sales volumes. U.S. upstream income was $869 million for the full year 2008, compared to $623 million in 2007. The majority of the increase year-over-year was due to overall higher average liquid hydrocarbon and natural gas realizations with relatively flat sales volumes. Partially offsetting the benefits of higher prices were increases in production taxes, operating expenses, DD&A, and income taxes. Domestic exploration expenses were $65 million in the fourth quarter of 2008 and $238 million for the year, significantly lower than the same periods of 2007, primarily as a result of lower exploration dry well expense.

International upstream income was $283 million in the fourth quarter of 2008 compared to $312 million in the same period of 2007, primarily due to significantly lower liquid hydrocarbon realizations and higher DD&A expense associated with increased production in Norway. Liquid hydrocarbon sales volumes were 42 percent higher in the fourth quarter 2008 compared to the same period last year as a result of production from the Alvheim/Vilje fields in Norway. International upstream income was $1.846 billion for the year, compared to $1.106 billion in 2007, primarily as a result of higher average liquid hydrocarbon realizations and higher sales volumes for both liquid hydrocarbons and natural gas, partially offset by slightly lower natural gas realizations. The increase in Equatorial Guinea natural gas sales volumes due to a full year of sales to the EG LNG facility contributed to the decline in the average realized natural gas price. Operating expenses and DD&A, associated with production from new developments, and income taxes increased during this period.

In Norway, first production was achieved from the Alvheim development in June 2008 and from the nearby Vilje development in August 2008. Both developments produce through the Alvheim floating production, storage and offloading (FPSO) vessel, and peak production of 85,800 net boepd was achieved in early November. The Company has completed a total of 12 producing wells as part of Alvheim/Vilje drilling program. The Volund development continues to progress on schedule toward first production in the fourth quarter of 2009, and will be tied back to the Alvheim infrastructure. Marathon has a 65 percent interest in Alvheim and Volund and a 47 percent interest in Vilje.
In the Gulf of Mexico, the Neptune development achieved first production in July 2008, and reached full facility oil capacity of 15,000 net boepd after only 15 days of operations. Fourth quarter 2008 production averaged 9,400 net boepd, down from peak production due to the field's natural decline curve. Marathon has a 30 percent interest in Neptune.

In the Bakken Shale in North Dakota, the Company continues to achieve best-in-class drilling and completion performance, and improved drilling time and well costs. Marathon increased its year-over-year Bakken production by 215 percent, with a December 2008 production rate of 8,200 net boepd, compared to 2,600 boepd at the end of 2007.

Marathon continues to increase its inventory of future growth opportunities:
In Angola, on Block 31, Marathon announced the deepwater Portia and Dione discoveries in 2008. Additionally, Marathon participated in three other deepwater Angola exploration wells on Blocks 31 and 32 that reached total depth during the year, but for which disclosure of the results is pending government and partner approvals.

Marathon and its co-venturers announced approval from Sociedade Nacional de Combustiveis de Angola - Sonangol E.P. to proceed with the first deepwater oil development project on Angola Block 31, comprised of the Plutao, Saturno, Venus and Marte (PSVM) fields. PSVM will be the first of multiple developments anticipated in Block 31. Key contracts were awarded and construction work began on PSVM in the second half of 2008. First production is targeted for 2012 with a design capacity of about 150,000 bpd. Marathon holds a 10 percent working interest in Angola Block 31.

The Company sanctioned two deepwater Gulf of Mexico major projects in 2008, the Droshky and the Ozona developments. Marathon holds a 100 percent working interest in Droshky and a 68 percent working interest in Ozona. Additionally, Marathon was awarded an additional 15 deepwater blocks and announced a deepwater discovery on the Gunflint prospect (Mississippi Canyon Block 948). The discovery well encountered more than 550 feet of net hydrocarbon-bearing sands. The Company holds a 12.5 percent working interest in the block. The Company also participated in a sidetrack to the successful Stones appraisal well on Walker Ridge Block 508, and is determining next steps for this Lower Tertiary discovery that extends across eight Gulf of Mexico blocks.

Marathon was awarded a 49 percent interest and operatorship in the Bone Bay Block offshore Indonesia. This block is approximately 1.23 million acres and located predominantly offshore southern Sulawesi Island. It is a high potential, under-explored area with water depths ranging between 165 to 6,500 feet. The Bone Bay Block is about 200 miles southeast of Marathon's Pasangkayu Block. The Company is continuing seismic processing for the Pasangkayu block, in which it holds a 70 percent interest, and expects to drill its first exploration well on the block in 2010.

Development plans are underway for the North Sea Gudrun field, which contains both oil and natural gas. The development concept, announced by the operator in January 2009, includes a fixed processing platform with seven production wells that would be tied back to StatoilHydro's existing facilities at Sleipner. A final decision on the development is expected in 2009. Marathon holds a 28 percent working interest in Gudrun.

Marathon announced in December that it had entered into a definitive agreement with Star Energy Group, a wholly owned subsidiary of Petroliam Nasional Berhad (Petronas), under which Star Energy Group will purchase Marathon's wholly owned subsidiary Marathon Oil Ireland Limited for $180 million, before cash on hand and closing adjustments. The companies expect to close the transaction during the first quarter of 2009, subject to completion of the necessary administrative processes with Irish authorities.

During 2008, Marathon added net proved liquid hydrocarbon and natural gas reserves of 110 million barrels of oil equivalent (mmboe), excluding dispositions of 3 mmboe, while producing 137 mmboe, resulting in a reserve replacement ratio of 80 percent. Year-end 2008 net proved reserves totaled 1,195 mmboe, excluding the Company's proven bitumen reserves of 388 million barrels at the Athabasca Oil Sands Project (AOSP) in Alberta, Canada, which are reported separately in the Oil Sands Mining segment. The use of average 2008 prices would have resulted in additional reserve bookings from the approved projects in Angola and the Gulf of Mexico as well as planned step-out activity in North Dakota, and would have increased total reserve additions to equal 2008 production.

For the three-year period ended Dec. 31, 2008, Marathon added net proved liquid hydrocarbon and natural gas reserves of 344 mmboe, excluding dispositions of 48 mmboe, while producing 396 mmboe, resulting in an average reserve replacement ratio of 87 percent.
 

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