Marathon Oil Releases Third Quarter 2009 Results

Alvheim FPSO
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Marathon has reported third quarter 2009 net income of $413 million, or $0.58 per diluted share. Net income in the third quarter 2008 was $2.064 billion, or $2.90 per diluted share. For the third quarter 2009, adjusted net income was $436 million, or $0.61 per diluted share, compared to adjusted net income of $1.963 billion, or $2.76 per diluted share, for the third quarter of 2008.

"Marathon's strong and balanced portfolio of businesses performed well in the third quarter, despite ongoing uncertainties throughout the global economy," said Clarence P. Cazalot, Jr., president and CEO of Marathon. "In our Exploration and Production segment, production available for sale rose 5 percent from the year-ago quarter, and the Company made progress on development projects in Norway, the Gulf of Mexico and elsewhere. Our Refining, Marketing and Transportation segment once again out-performed its peers in the domestic market that saw significantly lower gross margins versus a year ago. Another bright spot was our Speedway SuperAmerica LLC business, which recorded higher same-store gasoline sales volumes and merchandise sales in the third quarter of 2009 from the year-ago period. The Garyville Major Expansion project is nearing completion, and we look forward to an on-schedule startup by year's end."

Segment Results

Total segment income was $687 million in the third quarter of 2009, compared to $1.993 billion in the third quarter of 2008.

Exploration and Production

Exploration and Production (E&P) segment income totaled $491 million in the third quarter of 2009, compared to $869 million in the third quarter of 2008. The decrease was primarily a result of lower liquid hydrocarbon and natural gas price realizations, partially offset by lower operating expenses.

Reflecting Marathon's continued focus on controlling costs, the Company achieved a 10 percent reduction in operating costs per barrel of oil equivalent (boe) for the first nine months of 2009 compared to the same period in 2008, excluding production taxes and depreciation, depletion and amortization (DD&A).

Third quarter 2009 sales volumes, which exclude the Company's Gabonese operations now reported as discontinued operations, averaged 366,000 barrels of oil equivalent per day (boepd). Production available for sale was up 5 percent to 393,000 boepd from 375,000 boepd in the same quarter of 2008. The primary difference between recorded sales volumes and production volumes available for sale is due to the timing of international oil liftings.

For the first nine months of 2009, production available for sale from continuing operations averaged 405,000 boepd, up 11 percent compared to 365,000 boepd in the same period last year. Production increases for the third quarter and the first nine months of the year were primarily a result of the Alvheim/Vilje developments in Norway, which started production in mid 2008.

Including production from Gabon, as it was in the Company's interim guidance, total volumes available for sale were 399,000 boepd in the third quarter 2009, at the top end of the Company's previous guidance of 380,000 to 400,000 boepd. For the first nine months of 2009, total volumes available for sale were 413,000 boepd, a 9 percent increase over the same period in 2008. The Company has narrowed its full year 2009 projection for production available for sale to be between 405,000 and 410,000 boepd, from its previous guidance of 390,000 to 410,000 boepd. Both the current and the previous guidance include almost 6,000 boepd of production from Gabon, now reported as a discontinued operation.

International E&P income was $459 million in the third quarter of 2009, compared to $584 million in the third quarter of 2008. While international volumes were up, the decrease in income was primarily the result of lower price realizations - 42 percent lower for liquid hydrocarbons and 55 percent lower for natural gas. These decreases were partially offset by lower operating and exploration costs. Additionally, during the third quarter of 2009, the Company began to credit certain foreign taxes that were previously deducted. Partially offsetting this positive effect was a valuation allowance recorded on certain deferred tax assets that the Company does not expect to realize.

U.S. E&P reported income of $32 million in the third quarter of 2009, compared to income of $285 million in the third quarter of 2008. The decrease was primarily the result of lower price realizations - 43 percent lower for liquid hydrocarbons and 53 percent lower for natural gas - partially offset by reduced operating costs due to lower ad valorem and severance taxes. Additionally, exploration expenses decreased $45 million from the same period of 2008.

During the quarter, Marathon announced with its partners that the Volund development off the coast of Norway achieved first production ahead of schedule, marking completion of Marathon's next major field development project in Norway, which complements the Alvheim/Vilje developments. Due to the exceptional utilization of the Alvheim floating, production, storage and offloading (FPSO) vessel, the first Volund well is functioning as a swing producer until there is some natural decline in the Alvheim fields. The Volund field is expected to reach peak oil production of approximately 25,000 bpd (16,000 bpd net to Marathon), the timing of which is subject to available processing capacity on the Alvheim FPSO. Marathon holds a 65 percent working interest in Volund and serves as operator.

Also in Norway, Marathon and its partners announced the Marihone discovery, which is the first of several prospects near the Alvheim FPSO with tieback potential. The Marihone oil discovery is located in license PL340, about 12 miles south of the Volund and Alvheim fields. Marathon holds a 65 percent working interest in Marihone and serves as operator.

The Company also announced the deepwater Tebe discovery well on Block 31 offshore Angola. The well test results confirmed a flow rate in excess of 5,000 bpd. Marathon holds a 10 percent outside-operated working interest in Block 31.

In the Gulf of Mexico, the Company continued to make progress on well completions for its Droshky development on Green Canyon Block 244. Work is under way to install flowlines that will tie back the Droshky wells to the third-party operated Bullwinkle platform. First production from Droshky, in which Marathon holds a 100 percent operated working interest, is targeted for mid-2010.

Marathon currently has three rigs running in its Bakken program with plans to add a fourth rig late in the fourth quarter of 2009. Net production at the end of the third quarter amounted to approximately 11,000 boepd, compared to 7,300 boepd at the end of the third quarter 2008. Marathon's total Bakken leasehold in North Dakota is approximately 335,000 net acres.

As part of the Company's targeted expansion into key North America resource plays, Marathon spud its first well in the Marcellus Shale play in West Virginia during the third quarter of 2009. The Company plans to spud three additional wells in the Marcellus play by the end of the year. In the Marcellus Shale play, Marathon currently holds approximately 70,000 net acres in West Virginia and Pennsylvania.

Oil Sands Mining

Oil Sands Mining (OSM) segment income was $25 million for the third quarter of 2009 compared to $288 million in the third quarter of 2008 that included a $190 million after-tax gain on derivative instruments. Income was adversely affected by a 45 percent decrease in average synthetic crude oil realizations, partially offset by lower blendstock and energy costs.

The Athabasca Oil Sands Project (AOSP) Expansion 1 is on track and anticipated to begin mining operations in the second half of 2010, and upgrader operations in late 2010 or early 2011. The AOSP Expansion 1 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.

In October, the Government of Canada and Government of Alberta jointly announced their intent to partially fund AOSP's Quest Carbon Capture and Storage (CCS) project. Under the terms of their Letters of Intent, the Government of Alberta would contribute CAD$745 million and the Government of Canada would provide CAD$120 million toward the project's development. A final investment decision on the Quest CCS project will be made at a later date, and is subject to regulatory approvals, stakeholder engagement, detailed engineering studies, as well as a final joint venture partner agreement. Marathon has a 20 percent interest in AOSP along with partners Shell Canada (60 percent and operator) and Chevron Canada Limited (20 percent).


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