Marathon reported first quarter 2009 net income of $282 million, or $0.40 per diluted share. Net income in the first quarter 2008 was $731 million, or $1.02 per diluted share. For the first quarter 2009, net income adjusted for special items was $240 million, or $0.34 per diluted share, compared to net income adjusted for special items of $767 million, or $1.07 per diluted share, for the first quarter of 2008.
"In the first quarter of 2009, Marathon's Exploration and Production segment delivered improved reliability, contributing to strong production growth, while our Refining, Marketing and Transportation segment had a solid financial performance, resulting from high operational reliability in our refineries along with strong refining margins and improved same store retail gasoline sales volume and merchandise sales," said Clarence P. Cazalot, Jr., president and CEO of Marathon.
"While we achieved better than projected production growth in the first quarter, our Exploration and Production, Integrated Gas and Oil Sands Mining segments were negatively impacted by the dramatic decrease in crude oil and natural gas prices, leading to a decrease in combined segment income over the same quarter in 2008. With the strong production performance delivered from the Alvheim/Vilje development in Norway and the Equatorial Guinea complex, Marathon's first quarter 2009 production available for sale from the Exploration and Production and Oil Sands Mining segments increased 14 percent compared to first quarter 2008, and 6 percent compared to fourth quarter 2008. This places us well on track for another full year of significant production growth in 2009, and for our projected top-tier 4 percent compound average production growth rate through 2011.
"Additionally, we continue to strengthen our refining system with the Garyville Major Expansion which is approximately 85 percent complete and on schedule for a fourth quarter 2009 start-up," Cazalot said. "In addition, we're increasing our retail same store and brand marketing gasoline volumes, while delivering added value through our significant pipeline and terminal operations.
"Marathon is managing through this challenging economic cycle, delivering solid business performance and maintaining capital discipline. We're working hard to reduce costs throughout the organization, as well as working with our suppliers, vendors and partners to drive down costs -- and we're already seeing tangible results.
"We continue to maintain a strong balance sheet with solid liquidity. Capturing the benefits of our long-standing financial discipline and competitive cost structure, Marathon is well positioned to continue delivering on our near-, medium- and long-term value-accretive projects that yield the highest rates of return for our shareholders," Cazalot said.
"Today we also announced the signing of agreements to sell a portion of our Permian Basin production assets for $301 million. Including these most recent agreements, we have announced asset sales with transaction values totaling approximately $1.6 billion since launching our asset review and divestiture program in March 2008. It's anticipated this program will generate $2 to $4 billion on a pretax basis, with additional announcements expected by mid-2009," Cazalot said.
Exploration and Production
Exploration and Production (E&P) segment income totaled $100 million in the first quarter of 2009, compared to $684 million in the first quarter of 2008. The decrease was primarily a result of lower liquid hydrocarbon and natural gas price realizations. Sales volumes during the quarter averaged 404,000 barrels of oil equivalent per day (boepd), compared to 378,000 boepd for the same period last year. This 7 percent increase in sales volumes primarily reflects sales from the Alvheim/Vilje development offshore Norway and the Neptune development in the Gulf of Mexico, both of which began production in mid-2008. Natural gas sales in Equatorial Guinea have also increased due to improved reliability at the liquefied natural gas (LNG) and methanol plants which purchase this gas.
Production available for sale in the first quarter 2009 averaged 429,000 boepd, compared to 375,000 boepd in the same period last year, an increase of 14 percent. The difference between first quarter 2009 production volumes available for sale and recorded sales volumes is due to the timing of international liftings, primarily in the United Kingdom and central Africa.
United States E&P reported a loss of $52 million in the first quarter of 2009, compared to income of $244 million in the first quarter of 2008. Revenues decreased 50 percent as a result of lower product price realizations. Depreciation, depletion and amortization (DD&A) expense increased due to the commencement of production from the Neptune development mid-year 2008. A downward revision in proved reserves for Neptune in the first quarter of 2009 further increased DD&A expense and also led to a charge related to unutilized pipeline capacity. The operator is evaluating further development potential that may enhance the project's value. Also contributing to the lower income in the first quarter of 2009 were charges related to the cancellation of drilling rigs and a partial impairment of our investment in a different pipeline in the Gulf of Mexico.
International E&P income was $152 million in the first quarter of 2009, compared to $440 million in the first quarter of 2008. The decrease was primarily a result of lower liquid hydrocarbon realizations. Liquid hydrocarbon sales from the Alvheim/Vilje development had a net favorable impact, partially offset by the DD&A related to the new production. Lower exploration expenses also had a positive impact.
Marathon's Alvheim/Vilje development in Norway achieved strong operational performance throughout the first quarter of 2009, averaging 73,900 net boepd [68,000 net barrels per day (bpd) of liquid hydrocarbons and 35 million net cubic feet per day (mmcfpd) of natural gas]. The Alvheim floating, production, storage and offloading (FPSO) vessel reached a facility record high of 142,000 gross bpd of liquid hydrocarbons during the quarter. Also in Norway, the Volund development continues to progress on schedule toward first production in the fourth quarter of 2009, subject to available processing capacity on the Alvheim FPSO. Marathon has 65 percent operated interests in Alvheim and Volund and a 47 percent outside-operated interest in Vilje.
Marathon made its 29th deepwater discovery offshore Angola with the Leda discovery well on Block 31, announced in March. The Leda discovery well, located about 7 miles southwest of the Marte field, was drilled through salt to access the oil-bearing sandstone reservoir beneath. Marathon holds a 10 percent outside-operated interest in Block 31.
The Company was the apparent high bidder on 16 blocks offered in the Central Gulf of Mexico Lease Sale No. 208 conducted by the Minerals Management Service during the first quarter. Representing total net bids by the Company of approximately $62 million, 10 blocks were bid 100 percent by Marathon and the remaining six blocks were bid in conjunction with partners. The acreage will expand Marathon's significant position in the Lower Tertiary play and add eight well-positioned blocks to its already strong position in the Miocene play.
In February, Marathon began drilling the first of four development wells on its Droshky discovery in the Gulf of Mexico on Green Canyon Block 244, with first production targeted for 2010.
As part of the Company's targeted expansion into key North America resource plays, it continued to increase production in the Bakken Shale play in North Dakota to 8,500 bpd in first quarter 2009 compared to 3,500 bpd in the same quarter last year.
Oil Sands Mining
The Oil Sands Mining (OSM) segment reported a loss of $24 million for the first quarter of 2009 compared to income of $27 million in the first quarter of 2008, primarily driven by a 57 percent decrease in average realizations, although synthetic crude sales volumes increased slightly and operating expenses, primarily those driven by commodity prices, were down.
During the first quarter 2009, the Company sold derivative instruments at an average exercise price of $50.50 per barrel which effectively offset the open crude oil put positions. All derivative instruments related to the OSM segment expire at year-end 2009.
The AOSP Phase 1 expansion is on track and is anticipated to begin operations in the 2010/2011 timeframe. The Phase 1 expansion includes construction of mining and extraction facilities at the Jackpine mine, expansion of treatment facilities at the existing Muskeg River mine, expansion of the Scotford upgrader and development of related infrastructure.
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